When I moved to California, you could by a cheap carton of greasy fried rice from a Chinese greasy spoon for about $1.00 – $1.50. Now the Chinese greasy spoons are extinct or gentrified, and a bowlful of fried rice cost $10 to $20 per.
Meanwhile, reading and listening, occasionally even watching people (or AIs) pontificate about the current situation as if this is something that suddenly appeared through this latest Middle-Eastern war seems a bit surreal. The problem with US dollar started long time ago, probably longer than I have been alive, but I will here just ramble a bit based on my own fallible memories. Any factual errors are mine and I blame them on my small and feeble brains.
I’ll start with Bush Jr. Having arrived after the voting ended and then following the discussions about hanging and pregnant chads, anthrax letters and finally 9/11 which set the tenor until the banking crisis. For USD, 9/11 is significant because using that as a pretext for Iraq war allowed United States to mess up global oil markets, causing price per barrel, and thus the demand for dollars to buy the more expensive oil, to shoot up. This allowed the Greenspan Moderation, which inflated the credit bubble – everyone got a housing loan and the subprime loans were then baked into collateralized debt obligations or CDOs. Michael Lewis wrote a book about The Big Short which was later adapted into a hilarious movie. Although the movie may have been less funny for the hundreds of thousands of people who lost their homes when the adjustable credit rates started moving up.
The implosion of the credit bubble during 2007 and 2008 was something awesome/awful to behold. I remember picture of Ben Bernanke, the Treasury Secretary on his knees in front of Nancy Pelosi, the Speaker of the House, begging for congress to pass a bailout package. One of the many that bailed out banks, the newly homeless regular folks, notso mucho. Occupy Wall Street was born and Obama got elected.
After which the Quantitative Easings continued to stabilize the banking system, people were left to survive. I don’t remember exactly what happened to dollar during Euro Crisis 2011, which I think was triggered when Soros publicly doubted Greece’s ability to pay back all the loans they had taken. The doubts spread like a wildfire in arsonist prone chaparral, infecting other shaky economies, especially Portugal, Spain, Italy and eventually Ireland, which were lumped together as PIIGS. The northern EU that had pumped their own economic numbers up by lending to southern EU so that they can buy northern products like tanks and submarines, then sanctimoniuosly castigated the peripheral member states for their economic profligacy despite having their own economic mirages depending on the same.
The Euro Crisis coincided with Arab Spring which had been triggered by exploding food prices, brought to you by bad weather (droughts, floods and sundry), US agricultural and green energy policies (‘green’ corn-based bioethanol had consumed the US feed corn, so the US ranchers bought cheap corn from abroad, which then raised the food corn prices in Third World), deregulation of wheat futures market (previously open only for farmers and grain processors, anyone could speculate on bad weather, and speculate they did), and Gaddafi’s decision to start selling oil in currencies other than USD. The last one was fatal for Gaddafi and Libya – for me this was the most obvious demonstration how social media could be used for destabilizing fragile countries. Though the Abar Spring itself is credited for having started in Tunisia when some fish cart got confiscated by officials (the famous last straw), Tunisia avoided the worst consequences. Morocco and Algeria had troubles, too but those were ‘handled’, whereas Libya got bombed. The campaign was seemingly started at EU/French initiative and US participating simply because we had to (though in retrospective, I wonder…). It degenerated into multiparty civil war, shenanigans in Benghazi being a side note – I think that was about US running guns to ISIS, but I might be wrong, and it took a major oil producer out of market. Egypt which fell and then stabilized under Muslim Brotherhood and then under military dictatorship (I don’t think Arab Spring brought much democracy anywhere) does not produce oil, but Suez Canal is kind of important, Lebanon, Iraq and especially Syria fared poorly (I wonder if US troops are still in Syria to protect their oil now that ISIS toppled Assad?).
We also had instituted sanctions against Venezuela during Chavez presidency (also tried to get rid of him by other means), affecting global oil markets, there has been happenings in Nigeria (partly due to destruction of Libya which unleashed islamists all over Northern Africa), all of which have pumped oil price up, helping the demand for US treasuries. That is, trillions of dollars more government debt for bailing out the billionaire class (not just too big to fail banks but many other megacorporations), waging wars and insane government social engineering programs meant to extract control and wealth from the working and middle classes to various bureaucracies and governmental NGOs. A classic example, Obamacare. Marketed as a government healthcare system, it actually manifested as a government mandate to buy a private sector health insurance. Problem: people who could not afford health insurance before Obamacare were still too poor, even though some pressure had been taken off by complex and arcane health insurance subsidy system based on the buyer’s reported annual income.
In any case, Obama continued the debt bazooka, fueled by oil wars, but since it only benefited the 1%ers, voters went berserk and elected Trump. I had expected 2016 election to be between the anointed Clinton and the anointed Bush, but then the Republican primaries went sideways, with Jeb proving himself unelectable without properly organized party machinery, Trump winning the primaries. If it had been on voters, the Democratic primary winner would have been Bernie, but superdelegates rescued Hillary, who then expected a smooth coronation. Except that the US voters did not co-operate.
Trump’s first term increased the spending but did not add any oil wars. By 2019 the economy was about to have a coronary arrest – I was expecting banking collapse some time during autumn or early 2020 at the latest, but then came COVID-19 and two weeks to flatten the curve. Giving a great excuse for the economic collapse that IMHO would probably have happened even without the virus, though maybe not as comprehensively.
Biden was ushered into presidency and once the lockdown mess began to clear, it was obvious that the US treasury was being looted by every (administration aligned interest group) as if the country was under a fire sale. The disastrous withdrawal from Afghanistan was the US equivalent of Byzantine’s Battle of Manzikert. Not the withdrawal itself which should have been done years ago, but the manner it was executed, complete with reenactement of Last Helicopter Out of Saigon. Emboldened by this clear sign of an empire in decline, Russia moved to Ukraine 2022, after waiting for Beijing Olympics so as not to insult their new best friend and fellow BRICS member.
Technically USA could have ignored Ukraine, but too many corrupt interests converged there, and then there was the fight over superpower prestige. Plus it was a too good opportunity to destroy the EU economically by isolating it from cheap Russian energy resources and markets. Nordstream II exploded. There was self-imposed ban on buying Russian oil (though buying the more expensive Indian distillates made from Russian oil was OK). All this meant more pressure on energy supplies, meaning higher US dollar demand. Meaning the debt could balloon from well over 20 trillion dollars at the end of Trump’s first term to well over 30 trillion dollars after Biden’s only term.
When Trump took over, he promised a Department of Government Efficiency to weed out fraudulent spending. I wonder what happened to that. He had also promised no new wars, then took out Venezuelan president Maduro (and US oil companies are back in Venezuela, trying to extract the oil there, but years of sanctions have left the infrastructure shaky), threatened to take over Greenland (mineral resources and Northwest Passage), and finally went to Iran.
Problem with Iran war (among the too many to list): too much oil production has been taken off the market and global economy is failing. The price per barrel has been suppressed by multinational SPR releases, but the tanks are nearing empty. Also the agriculture has been devastated by rising fuel and fertilizer prices, and the summer has been brutal in North America, Europe and Asia.
The Ukraine and Iran wars had also been a double whammy on the treasury demand. People have spoken of glut in dollars, worried about inflation, but it was the increasing use of economic sanctions as a weapon to all directions have shaken the buyers’ faith on their safety as investment. Also, USA has bled Japan dry with yen carry trade (cheap yen loans to buy a bit higher interest US treasuries and bonds and pay the Japan loans with US paper and pocket the difference has supported the US debt machine), and the recent bail outs IMHO are just a drop in a leaking bucket, an omen of end to arrive.
Now, on that background we have reached 40 trillion dollars, and borrowing costs have risen to levels that Treasury apparently is uncomfortable with. IMHO, Bessent’s buyback promise is a sign of weakness, and may be remembered by future economic historians as a gross blunder, but blaming the current administration for failing to kick the can one more election cycle further is a bit intellectually dishonest. Bessent’s hands are tied by the realities, namely USA has over the decades squandered its superpower status by living well beyond its means (partially to maintain superpower status, partially to appease voters), and there is very little that can be done to soften or even postpone the dollar collapse, especially with the current incoherent administration. For example, I don’t like how Treasury and Fed are uncoordinated. Nor do I like the AI mania or how our trade policies sabotage our agriculture.
I expect the official Federal debt to continue at least a couple of trillion dollars higher, possibly up to 50 trillion dollars, but backed by full faith of US government is no longer what it was. Meanwhile, while money gets printed, nobody is printing bread (even vat grown meat is a specialty item and requires way more resources for much unhealthier product to be currently more than a curiosity for healthy technocrat class, though meat glued scraps are the new sausages for plebeians), so I expect food inflation with sporadic shortages and rampant skimpflation in wealthy countries and outright famines in poor countries.
(A side note back to the Arab Spring; there was a model that predicted the level of food prices when a country undergoes an upheaval and on 2011 all the Arab Spring countries had crossed that level. In Europe, the only country to have food price distress was Latvia, but instead of revolution, the Latvians simply migrated, thanks to EU free mobility. Later, UK, dismayed at all the Eastern Europeans flooding the island, voted for Brexit, but that was then another story.)
