Urban Riots and the Value of the Dollar
This was posted yesterday.
If the fiat dollar is based on the strength of the government, and if our election becomes a big mess where each side thinks they won and their followers agree, and there's violence, instability, etc... could this cause the dollar to significantly weaken? If so, would it recover? What could happen? And how does one hedge against this possible scenario?
Let's go through these hypothetical scenarios one by one.
First, and by far the most important, the dollar has been a fiat currency ever since August 15, 1971. On that day, Nixon unilaterally abandoned the Bretton Woods agreement, severing the dollar from gold.
Second, despite this, the dollar has remained the world's reserve currency ever since. These are the latest figures.
Third, all currencies are fiat currencies.
Fourth, it is unlikely that there is going to be any violence. Biden is going to be declared the winner. Trump's supporters will not turn to violence.
Fifth, if there is violence, that will be because Trump is re-elected. Trump can stamp it out simply by sending in the Marines.
Sixth, what happens in inner cities run by Democrat mayors has nothing to do with Federal Reserve policy.
Seventh, the Federal Reserve dramatically increased the monetary base in April, and the dollar has gone down slightly. The Federal Reserve is now in monetary base stabilization mode. There is no reason why the dollar is going to fall any further unless the Federal Reserve begins to inflate again. But the FED's decision will have nothing to do with ZIP Code-contained riots in Democrat-controlled cities.
Eighth, if there are riots, and if somehow this pushes the dollar down, it will rebound. There's a reason for this. Americans are the greatest consumers of imported goods. Foreign central banks will continue to buy dollar-denominated assets in order to subsidize the export sectors of their economies. That is why the dollar is the world's reserve currency. Central banks hold the dollar because they want to keep its value high. That means that Americans will buy more goods from the exporting nations. So, the dollar always rebounds. There has been no exception to this for over 50 years.
So, there is no reason to worry about the international value of the dollar. There surely is no reason to worry about it in relationship to riots in inner cities. Inner cities have no influence on Federal Reserve policy, economic productivity, or the overall economy. Inner-city riots are economically irrelevant except for the businesses that get their buildings burned to the ground, and for insurance companies that insure them. Riots make inner cities poorer. That has been their result ever since the Watts riots of 1965. Inner cities have almost no importance at all in the overall economy.
If large cities see the exodus of rich residents who are capable of working from home, and are surely capable of investing from home, that's bad news for the mayors of these cities. But it won't reduce American productivity at all. It therefore will have no effect on the international value of the dollar.