As future Secretary of Health and Human Services Robert Kennedy Jr. said, “a revolution is coming,” in reference to Trump’s election in the recent U.S. election. Depending on one’s political perspective, such a “revolution” is either music to the ears or “American-style fascism.” Nothing will change the polarized views of those who have already chosen a camp, right or left (or derogatory).
On the other hand, what we do know is that the change that is coming is this: despite the impressive rise in the dollar index (which is important), the U.S. currency will weaken over the next four years. Why?
Both Trump and Harris made this clear during their campaigns. And despite Jerome Powell’s debunked narrative of “higher for longer” (i.e., in favor of the dollar) interest rates in 2022-2023, even Janet Yellen and Jake Sullivan are covertly working toward a weaker dollar.
Because a weaker U.S. currency is the only realistic way for America to get out of its debt trap. Historically, whenever a nation has been in a debt trap, it has been forced to choose between its currency and the bond market, and the currency has always been sacrificed.
The Alternative View
Contrary views, such as the “Dollar Milkshake” Theory, argue that the high demand for dollars in global markets is preventing a decline in the dollar index, despite the intensifying dedollarization.
This explains why the BRICS+ countries are seeking a gradual revaluation of the dollar, rather than a sudden collapse. The BRICS+ and other countries are not seeking to destroy or replace the dollar, but to reprice it.
The same will be true for the Trump White House. In this regard, it is worth saying that although the Fed cut interest rates, the US currency was not negatively affected – on the contrary, it soared. One might reasonably ask “why”: The easy answer is that investors expect a recession, characterized by desperately low interest rates and anemic growth.
This makes the dollar more expensive, overseas. The rise in the dollar index, in fact, is similar to 2001 when a new President (Bush) was triumphantly ushered into the White House. That same year, the Greenspan Fed was cutting interest rates furiously.
That same year, the dollar index jumped from 108 to 121, despite six consecutive rate cuts. In short, the rise in the DXY has nothing to do with the Fed’s increasingly weak rate cuts or the election of Trump, but with the rising cost of the Eurodollar (due to tight offshore lending conditions) in a world that sees what no one in Washington wants: a recession coming.
The fall of the Indian rupee and the fall of the South Korean won, both facing the highest euro risk premiums in global markets, are simply the most “obvious (and recent) canaries in the coal mine” in a recession. Essentially, the US desire to weaken the dollar clashes with the rising Eurodollar cover charge for the same currency, meaning that we cannot ignore the rise of the “Milkshake Theory” dollar index nor the Realpolitik need to devalue the dollar.
It is worth noting/reminding, however, that a relatively stronger dollar does not inherently mean stronger purchasing power for American currency – it simply means that the dollar is the better horse in the global arena, which is nice for Americans spending, say, dollars in Argentina or Turkey, but doesn’t help Americans buying milk and eggs in, say, America…
Trump’s Goals
The fact that Elon Musk and Vivek Ramaswamy (in the new Department of Efficiency or “DOGE”) have been tasked with cutting $2 trillion in spending by 2026 is just a small foretaste of the Revolution to come.
Such a goal, if achievable, is to be applauded, but we’ll see. Trump also seeks to restore jobs and industries that were moved to China around 2001, when American “capitalism” quietly chose to sacrifice/trade millions of US jobs for cheaper foreign labor. This was done to achieve higher profit margins (and executive salaries determined by stock prices) in an initiative to Re-Made the American Dream in China at the expense of American labor.
Equally plausible—at least on the surface—are Trump’s promises to expand U.S. oil production, cut red tape, and reduce—at least a little—American deficits. But given that Trump’s “face” is behind such goals, at least half the world will mock the message along with the messenger, regardless of the substance. This is politics. This is America today.
The Fed’s latest threat
At the same time, the infamous Fed is being targeted.
Now there’s talk of making it less “independent” (i.e., even more political). This is an interesting title, but the real question/problem is not its independence but that it is illegitimate – despite its forced “legalization” in 1913.
However, given its enormous power and systemic reach, the snake will have a hard time getting out of its hole. Notably, despite the large extent of the yield curve inversion over the decades, the Fed has not been able to sell a clean 10-year IOU since 2010.
In contrast, central banks clearly prefer real gold.
In short, if real supply and demand (i.e., capitalism) were allowed to speak, the narrative of American exceptionalism would be extinguished in less than 60 seconds.
America’s “exceptionalism” is based on debt and is supported entirely by fake liquidity from a fake (i.e., not so “federal”) Federal Reserve. In short, and as currently orchestrated by the Fed, the US government debt market (and the dollar tied to it) is objectively and mathematically trapped with no other way out than to inflate. All of these factors make the long-term direction of gold geopolitically clear.
Gold is rising in response to dedollarization and increasing demand from central banks, who now prefer gold over US bonds.
The game is simple: when debt rules, gold reigns, as “rock” always beats “paper.”
Trump’s Immediate Options
Regardless of Trump’s “reevaluation” of the Fed’s independence, Trust Economics shares Luke Gromen’s view of the obvious but near-ideal options available for managing the US debt:
1. Weakening the dollar enough to allow for a “catalytic adjustment” to the balance sheet to “boost” growth, inflation, markets and, consequently, tax revenues.
(The math behind such a plan is simple; the weaker the dollar index, the lower the deficit, which is Trump’s goal.)
2. Recapitalizing (i.e., “re-leveraging”) Fannie & Freddie Mac to buy the otherwise unloved and toxic MBS “assets” from the Fed’s Chernobyl-like balance sheet.
3. Amending the regulatory rules to favor “supplemental leverage ratio” exemptions that would allow banks to effectively do their own version of QE off the Fed’s balance sheet.
4. The Gold Bazooka Option, There is, of course, another Bazooka option, one that Gromen and others have been slowly bringing up and that we certainly cannot ignore. Namely, Trump could ask the US Treasury to order the Fed to officially (and overnight) revalue “Uncle Sam’s” gold supply.
Based on official data, every $4,000/oz appreciation in US gold would mean $1T in new liquidity for the Treasury General Account, making it much easier to pay off larger portions of “Uncle Sam’s” $35.8T public debt.
Such a move, at first glance tempting, would have dramatic consequences for the dollar’s status as the world’s reserve currency and a stunning global reshaping of economic power and influence. Ultimately, under such a revaluation option, the nation that holds the most gold wins, and it is still not clear to many exactly who holds what and the most…
To that end, the national gold reserves reported by the World Gold Council are likely not even accurate, so any “revaluation” of gold in the US may well give more power to the East than to the West.
The accumulation of physical gold by Eastern central banks, for example, suggests that such a revaluation possibility has been regularly and strategically on their minds. Whether such goals and promises (or even gold revaluations) will be realized is a matter of time, mathematics, and politics, the last of which is the least reliable. For now, at least, the markets and the dollar, along with the oil correlation, appear to be firmly on the rise, while both the dollar and oil are falling relative to gold.
As for the math, we can also agree, regardless of political bias, that re-boosting US industry and jobs while simultaneously raising tariffs on major countries like China will be costly and therefore inflationary (despite a deflationary recession or a stock market re-mean).
We also know that Trump will only have one term to “revolutionize” and given the fact that the midterm elections in the House are less than 2 years away, he will want and need to act quickly. In any case, difficult times are ahead internationally.
