The U.S. dollar has declined about four percent year-to-date. What’s its outlook? Could the greenback recover the losses and continue to move higher, or is it only headed down from here?
Recently, I had a chance to talk to Michael Lombardi, founder of investment research firm Lombardi Publishing Corporation and the popular financial web site Profit Confidential.
Michael Lombardi believes that a U.S. dollar collapse is a real possibility and that the rise we have seen in the U.S. dollar over the past few years is nothing but a dead cat bounce.
Below is an excerpt from the conversation with Michael Lombardi. It has been lightly edited for clarity and a chart has been added to make the concept clear.
Moe Zulfiqar: Why do you believe the U.S. dollar could collapse when it’s the darling of investors and institutions around the world? People trust in it and whenever something happens, it’s considered a safe-haven currency.
Michael Lombardi: I am a true believer in fundamentals. When looking at the data, the future of the dollar seems very bleak.
In basic economics, you are taught that when there’s a lot of something, its value declines. Let me tell you this—and sadly no one is talking about it—there are a lot of U.S. dollars out there, and the amount is increasing every day. For instance, look at the monetary base [a measure of money supply]. It has increased over 350% since the financial crisis.
(Source: Federal Reserve Bank of St. Louis, last accessed August 16, 2016.)
To give you an idea of how fast this growth rate is, consider this: prior to the financial crisis, the monetary base increased by 351% in roughly three decades.
Moe Zulfiqar: So, is too much money the only reason the U.S. dollar could collapse, or are there more?
Michael Lombardi: The list of reasons why the U.S. dollar could collapse is getting bigger daily. Some other factors I am closely following include:
- Reckless monetary policies by the Federal Reserve. The Fed has kept interest rates low for a very long-time, and now it’s doing more damage than it’s doing good. Low interest rates drive the value of currency lower.
- U.S. national debt continues to increase. The U.S. government is spending without remorse. Understand that it could destroy the U.S. dollar if those who have lent to the U.S. government ask for their money back.
- Other currencies like the Chinese yuan are gaining a significant amount of attention on a global level. They could be in a race to become the new reserve currency. The International Monetary Fund (IMF) agreed to add the Chinese currency to the Special Drawing Right (SDR) basket, and it continues to grow as one of the major currencies used in global payments.
- Central banks are starting to lose trust in the U.S. dollar as well. If you look at their reserve over the past decade, you will see their dislike for the dollar. Let me be very clear here: they are not selling their dollars just yet, but proportionally, the reserve consists of fewer U.S. dollars than before.
With all this said, I also want to add that I don’t expect the U.S. dollar to collapse instantly. It’s going to take a long-time.