Is the US Dollar the Cause of Inflation?

The cause of inflation is complex, but rest assured there is a simple solution for you. Important factors to consider include your country of residence, where your assets are located, tax rates and of course, currency exchange rates.

But all things considered, volatility of the US dollar (USD) or lack of volatility in the USD has for most of the world long been the most conspicuous factor causing inflation (or deflation). This invisible hand has especially affected those living outside the US. However, the days of low inflation inside the US can no longer be taken for granted by Americans.   

Indeed, most of us cannot even imagine a world where the USD is not the global reserve currency. For better or worse, everyone will feel the effects when dollar supremacy ends, but in different ways. Although most everyone outside the US will benefit, those who maintain blind faith in the USD will pay the consequences.  

So how do you protect yourself and your unsuspecting family? The foremost solution is second citizenship. Now more than ever, your financial plan must include a Plan B passport. Learn more below about the cause of inflation and this time tested solution.

Table of Contents

  1. Economic Alchemy is the Cause of Inflation
  2. US Economic Policies Will Backfire
  3. How the USD Prevents Inflation Inside the US
  4. The Real Cost of Consumer Goods is Emerging
  5. The Cause of Inflation for the Rest of the World
  6. Why USD is No Longer an American Advantage
  7. How will the US Government Pay its Debt?
  8. The New Cause of Inflation for Americans
  9. Avoid Hyperinflation with Second Citizenship

Economic Alchemy is the Cause of Inflation

Inflation comes in different forms. Mostly, the effect of high prices are considered negative. However, when under control, inflation is actually welcomed by the authorities overseeing monetary policy in developed economies such as the US.

The assumption of the monetary authorities is that moderate inflation stimulates consumers into buying something when they otherwise would put it off. The theory is that since consumers are afraid that prices will rise in the near future, they will buy something today instead of tomorrow. This is apparently good for the economy, which creates more jobs and gets the politicians reelected.

But to further stimulate the economy, the authorities also like to keep interest rates low. This encourages using debt to buy more consumer goods. In addition, low interest debt stimulates asset prices such as in stocks and real estate (asset price inflation).

In moderation, asset price inflation is also welcomed by Western economists and consumers alike. It keeps the economy humming along and of course gets the politicians reelected. That is, as long as the authorities never raise interest rates which causes asset price deflation and stock market volatility.

US Economic Policies Will Backfire 

If this sounds like alchemy, that’s because it is alchemy. This type of economic alchemy is what got us into the new era of high inflation that we are currently in. It is nothing new, governments have always debased their currencies since the beginning of human civilization.

But inflation which is out of control, as it is now, is not welcomed. In fact, it is potentially disastrous. Not only for the US, but the entire world. Furthermore, thanks to USD being the global reserve currency, the economic policies in the US reverberate worldwide.

Historically, over dependence on the USD causes a roller coaster of inflation and deflation especially in developing countries. All the while it benefits the US, at the expense of the rest. The US lowers interest rates and it blows asset bubbles worldwide. Then the US raises interest rates and currencies collapse worldwide.

As a result, developing economies in Africa and Asia feel the effects of food and energy inflation which creates famine. All thanks to the USD global reserve currency status. The assumption is that their misery will never come to the US. 

Indeed, many generations of US consumers take low consumer prices and high asset prices for granted. But this time it is different. The US economic policy is a viper that is about to bite itself in the tail. 

How the USD Prevents Inflation Inside the US

The USD as the global reserve currency, has long played to the advantage of American citizens. This keeps the price of your imports low, which is very easy to take for granted.

For example, the US has run huge current account deficits for decades. This is mostly because of the decimation of the US manufacturing base in the 1980s and 1990s which the US has blamed on globalization. 

So for as long as most Americans can remember, the vast majority of goods consumed in the US have always been manufactured outside the US e.g. China, South Korea, Japan. The overall result is that the US has very low domestic production levels of the goods that American consumers want to buy.

The governments of the producer countries in Asia accept USD to pay for these goods. In return, they buy US treasuries and assets which props up the USD. This also keeps interest rates artificially low inside the US.

As a result, it creates asset price bubbles in stocks and real estate. However, the artificial strength of the USD also keeps the price of consumer goods low.

Cheap labor in Asia is certainly a huge factor that controls inflation in the US. The cost of domestic production of the same goods in the US would literally be 10x higher.

But what flies under the radar for most Americans is that Asian producers buying US treasuries keeps the USD artificially stable. If this stopped, the USD would collapse and interest rates would soar.

Indeed, the price of goods has already started to rise in the US. Most Americans have never experienced high inflation in their entire lifetimes. Predictably, they have falsely assumed the mysterious cause of inflation will disappear. However, the light at the end of the tunnel is a train. 

The Real Cost of Consumer Goods is Emerging

Supply chain disruptions caused by the pandemic are ostensibly being alleviated. But if this is not the real cause of inflation, then it may be a false dawn. You must consider that to effectively alleviate the US labor shortage, the cost of labor will need to rise significantly.

In reality, Americans would demand 10x what Asians accept as pay to do the same work. It is a stretch of the imagination how high US consumer prices would need to be if all the goods Americans buy with their USD were also manufactured in the US by Americans. Even at these artificially low prices, Americans need to borrow heavily to make ends meet. 

For example, the escalation of the trade war between China and the US seems unavoidable. If so, this will cause two very unwelcome changes to occur in the US. First, the cheap labor mostly performed in Asia would need to come back to the US. Second, Asian countries such of China will stop buying US treasury bonds which will result in sky high interest rates.

These two structural changes are imminent, US labor demanding 10x higher wages and the long overdue collapse of the USD. Wise Americans would fear this long overdue financial reckoning.

Either of these events could happen at any time with the US constantly provoking China in the manner that they are. In fact, it is already happening not only in China but also Japan. Holding massive amounts of US treasuries is too risky, they are buying gold and liquidating USD.

So who else but America’s trading partners are going to buy back all the USD which the US government has been printing? The US government would force US banks and individuals to buy more debt, but the house of cards will collapse nonetheless.

The Cause of Inflation for the Rest of the World

On the other hand, for those living outside the US, hyperinflation has always been a reality. This factor is especially pertinent when the USD is strong because the cost of commodities is amplified, not only because of short supply.

For example, the price of oil shot up to US $140 per barrel when Russia initially invaded Ukraine in the Spring of 2022. Americans may have felt the pinch, but can you imagine the price at the pump for Europeans or those in the Global South? If your savings are in USD it is difficult, but if your savings are in Euros it is a disaster.   

However, the collapse of the USD as global reserve currency will change the status quo. As a result, the role of the primary USD beneficiaries (Americans) and those who do not benefit (the rest of the world) could be abruptly reversed.

Rest assured, a collapse of the US dollar is no longer on the distant horizon. It is imminent, potentially within three to five years or even sooner. Until then it will continue to get worse and worse. Death by a thousand cuts. This will have a profoundly negative effect on Americans, while immensely benefiting the rest of the world.

Why USD is No Longer an American Advantage

Since the collapse of the Bretton Woods in August 1971, the US dollar is no longer pegged to the price of gold. This means it is only a paper note, backed by nothing but the promise of the US government to honor its debts.

Paradoxically, the USD has still remained strong after 70 years of rapid fiscal deterioration in the US. In fact the US dollar has defied gravity far beyond expectations of many.

This includes the US government itself, when the famous “conundrum” of FOMC Chairman Alan Greenspan was admitted to in February 2005, at the height of the real estate bubble in the US.

The conundrum of the chairman was that although he had been aggressively raising interest rates, the US 10 Year treasury remained unchanged. As a result, interest rates in the US remained far too low, for far too long.

This perpetuated the US housing bubble. But then new FOMC chairman Ben Bernanke abruptly raised rates to 5%, resulting not only in a real estate market collapse, but also stocks, bonds and every other form of financial asset collapsed.

The aftershocks reverberated worldwide, so the chairman reversed course and fixed rates at 0% where they stayed for over 10 years. The whole time claiming to be some kind of genius because US inflation stayed dormant. Not any more. 

The point is that the US government is not in control of their own economic policy. Indeed, the USD and the debt levels in the US are a financial monster that is out of control. This has been an unprecedented disaster for the global economy, but it is now coming home to roost.

How will the US Government Pay its Debt?

When the real estate bubble blew up, the FOMC promptly reversed course on interest rate policy lowering rates to 0%. In addition, a new phenomenon called “quantitative easing” was introduced allowing the Fed to purchase US government debt and other securities.

This set the precedent 10 years later for gratuitous stimulus given directly to US consumers to the tune of 6 trillion US dollars. However, in the US the real cause of inflation is still a mystery.

You will recall that prior to receiving the government handouts, Americans were busy running through the streets rioting, ostensibly to save African Americans from racism.

But as soon as they got their checks, the riots stopped. Strange coincidence? It is equally naive to assume the stimulus would not eventually be the cause of inflation. The genie is out of the bottle.

The level of government debt in the US (excluding debt held directly by US consumers) is now over US $31.5 trillion dollars. Indeed, the American government could not even make ends meet when interest rates were pegged at 0%, for over 10 years! How is the US government going to pay their debts with rates at 5%?

Even if they expropriate all the wealth of the richest 1%, it will only last for a few days. You can imagine what will happen if the economy collapses in the US and the government cannot print money to bail it out.

The obvious implications are that hyperinflation is soon coming to the US. Plus, interest rates are never going back to zero. In addition, if the USD loses reserve currency status all of its advantages will backfire on the US.

So if you think the recent civil unrest in the US was bad, you can imagine what is to come.

The New Cause of Inflation for Americans

Although Americans often complain about the high price of energy, it could be much worse. For reasons outlined above, the strong USD keeps energy price inflation artificially low for those living in the US. This is especially true for the price of commodities such as oil.

But if the USD was no longer the global reserve currency, Americans would very soon feel the effects of hyperinflation at the pump and elsewhere. This is because of a global phenomenon called the “petrodollar”.

The petrodollar is the result of the vast majority of oil being historically traded using US dollars, but the source of the oil is countries in the Middle East. As a result, over many decades, Saudi Arabia and other major oil producing countries have accumulated trillions of US dollars.

The petrodollars have historically been recycled to the benefit of the US. This is accomplished through investments in US assets such as US treasuries, stocks and real estate. This keeps US interest rates low and asset prices stable which gets the politicians reelected et cetera.

For many years, it has been a self reinforcing circle that has long supported the US dollar. Additionally, the effect of petrodollars has been far more significant than support provided by Asian producer countries (outlined above). This positive effect will soon go the other way as the significance of the petrodollar is diminished.

This effect is the result of gratuitous US sanctions starting to backfire. Wealthy Middle East oil producers no longer trust the US government and are increasingly using alternative currencies to sell their oil.

This will gain momentum in the future and we may soon see the emergence of the Petroyuan. In addition, digital currencies backed by central banks are gaining momentum which will hasten the demise of the USD.

Avoid Hyperinflation with Second Citizenship

The utility of advanced preparation is a tremendous asset to have. As the day fast approaches when you will to put your new passport to use, procrastination can be disastrous. Being prepared in advance allows you to turn inflationary risk into your advantage.

You must act now. The status quo has been unsustainable for far too long. How can you prepare for an uncertain future? Turn the tide of rising inflation to your advantage with second citizenship and offshore residency.

Learn from an experienced professional who has lived the offshore dream for 10 years. As a result, protect your wealth, your family and your assets. Plus, eliminate all income tax with a prudent offshore strategy. Rest assured, the cause of inflation can be averted. Start today to secure global access and economic freedom.

Avoid Hyperinflation, speak with a citizenship agent
Edwin Morgan, Managing Director Go Global Corporation PTE LTD