THE WOLF STREET REPORT: US Dollar Exchange Rates and Inflation – What’s Next?

The USD had a heck of a ride, which kept inflation from spiking even further. But it may not last much longer (you can also download the WOLF STREET REPORT wherever you get your podcasts).

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  198 comments for “THE WOLF STREET REPORT: US Dollar Exchange Rates and Inflation – What’s Next?

  1. CreditGB says:

    It seems to be that those who actually participate in markets, and the financial community, know when things change or begin to shift. The market drivers, media and so called experts fall into 2 broad categories. First is those hucksters who benefit by an alternate message, you refer this as the hype crowd or the pump and dump crowd. Second is the PhD in economics, who are hopelessly buried in data and spreadsheets. They are often dead wrong, or if they do spot a trend such as inflation or recession, they are months behind the times. Those who are daily involved just need to do what they need to do, when they need to do it. Don’t wait for “experts” or media to confirm your observations, by then, it is too late.

    • unamused says:

      ‘Don’t wait for “experts” or media to confirm your observations, by then, it is too late.’

      So just which ‘non-experts’ are we to listen to – the ones who manage to make one lucky guess out of dozens, or the ones who can’t keep their conspiracy theories straight?

      ‘ Second is the PhD in economics, who are hopelessly buried in data and spreadsheets.’

      Just because they know more than, for example, you, doesn’t mean they’re wrong.

      I could have a lot of fun with this, but I have other things to do.

      • unamused says:

        One of my consulting partners is a Ph.D. economist. He doesn’t talk much. Mostly he shakes his head.

        When he reads wolfstreet he says ‘Yeah, okay’, and goes back to what he was doing.

        Another is a Ph.D. psychologist. He shakes his head a lot too. When he reads wolfstreet he doesn’t say much of anything, because we’ve all heard about how screwy people can be about just about anything. Sometimes he trades places with the Ph.D. economist and the psychologist does economics and the economist does psychology, both of them shaking their heads the whole time.

        Now, the chemist will tell you that if you’re not part of the solution you’re part of the precipitate. Not very helpful. But having studied both chemical and economic systems, he notes that Le Châtelier’s principle predicts the behavior of an equilibrium system when changes to its reaction conditions occur. If a dynamic equilibrium is disturbed by changing the conditions, the position of equilibrium moves to partially reverse the change.

        So he, at least, has some insight into the nature of currency exchange dynamics, even if nobody listens to him because they have no idea what he is talking about.

        • There is the problem with standard deviations (black swans) when the mean around which the distribution is based changes over time.

        • unamused says:

          “Do your probably smart buddies have a systemic solution to inflation?”

          Yes. Regulate economic systems into stability and manage the problems before they detonate. That will never happen, because chaos creates opportunity. Why, when the situation is so clear and alarming, does it remain so stubbornly intractable to change? It is because those who have power in the world want it to be this way. The other way isn’t sufficiently profitable.

          “the Theorem of Proper Taxation”

          It smells bad enough but I can’t manure my garden with it. If you don’t like getting taxed just buy into the global tax evasion industry and rent some red-state senators and Bob’s your uncle.

        • DelawareMan says:

          “If you don’t like getting taxed just buy into the global tax evasion industry and rent some red-state senators………….”

          Is that why bluer than blue Delaware is the incorporation capital of the USA with all sorts of nifty laws that sheild people and companies?

        • p coyle says:

          i have a t-shirt with “if you’re not part of the solution, you’re part of the precipitate” on it.

        • Winston says:

          Economic models are ALL simplistic garbage attempting to predict changes in an INCREDIBLY complex system with a woefully incomplete input data set where even some of the inputs are manipulated for political and economic reasons (ex., CPI) and the interrelationships are unknown or imperfectly known. If I could post links to graphs here, I’d post a link to a hilarious IMF projections vs results graph.

          On ivory tower types:

          “In his book, ‘Thinking Fast and Slow’, Princeton University Nobel Laureate, Daniel Kahneman, introduces us to the principle of Theory Induced Blindness – the adherence to a vulnerable belief, even though a counterexample may exist, about how something works that prevents you from seeing how it REALLY works. So, once you have accepted a theory, it is extraordinarily difficult to notice its flaws, trusting instead the community of experts who have already accepted it.”

      • roddy6667 says:

        How many of the guys with a PhD in economics have seen the last (insert any number) recessions coming and announced it?

        I’m waiting.


        • Halibut says:


        • steve says:

          Well, maybe its because the NBER says that “A recession is the period between a peak of economic activity and its subsequent trough, or lowest point.” So, calling a bottom is like calling the bottom of the stock market. You really don’t know until you’re there.
          Also, note that employment rates play a part in determining if we are “officially” in a recession. “The determination of the months of peaks and troughs is based on a range of monthly measures of aggregate real economic activity published by the federal statistical agencies. These include real personal income less transfers, nonfarm payroll employment, employment as measured by the household survey, real personal consumption expenditures, wholesale-retail sales adjusted for price changes, and industrial production. There is no fixed rule about what measures contribute information to the process or how they are weighted in our decisions. In recent decades, the two measures we have put the most weight on are real personal income less transfers and nonfarm payroll employment.

        • ru82 says:

          Halibut….I was thinking it was 42 too. ;)

        • Lawrence says:

          I will do you one better….All the FED Governors are academic economists.

          Here is a very short list of headlines/quotes from them over the past few years.

          Fed expects to keep its key rate near zero through 2023

          Fed’s Powell says high inflation temporary, will ‘wane’
          By CHRISTOPHER RUGABERJune 22, 2021

          Fed’s Powell: 75 basis point rate hike not being ‘actively considered’

          I don’t want to just pick on Chairman Powell, here is a list of quotes over the last year and half from FED Governor Loretta Mester:

          I expect some higher inflation measures in the next couple of months but that is different from underlying inflation levels reaching 2%. – Feb. 28, 2021

          I am unconcerned with inflation running away from us. – April 5, 2021

          I’m not worried about inflation getting out of control. – May 5, 2021

          The Fed needs inflation expectations and real inflation to rise. – May 6, 2021

          I’d like to see inflation rise to 2% or higher. – May 14, 2021

          By the end of the year I expect inflation to be between 3.5% and 4%, with a drop in 2022. – Aug. 27, 2021
          Inflation will be little more than 2% in the next years. – Sept. 24, 2021

      • DawnsEarlyLight says:

        You just as well listen to the weatherman.

        • El Katz says:

          Economists were created to give the weatherman someone to make fun of.

        • drifterprof says:

          A problem with weather predictions, is many people have basic misconceptions of probability. If the data crunching indicates 70% chance of rain, many relatively uneducated Americans think in terms of right or wrong – they think the 70% prediction was wrong if it doesn’t rain.

          There is also a margin of error involved in each prediction, which is calculated from variability in the data. This would help interpret the 70%, but it’s too far above the heads of most people, who have never been exposed to the theory and calculations.

      • historicus says:

        Ive been around traders all my adult life.
        Some had degrees, some no.
        They traded their own money…lost when wrong, profited when right.
        Some small, some huge traders.
        How many PHDs risk their own money?
        These successful traders laugh at most of the “experts” on cable shows.
        I would rather listen to a successful independent trader than an “expert” who never risked his own money.
        Many posters on this site, and others, were dead right that the Fed was wrong and reckless while PHD talking heads on cable and making important decisions in central banking were wrong.

        • NBay says:

          So you believe that whoever has made the most money (educated or not) is the one you will listen to?
          Well, you are EXACTLY right!…..although you bungled into the truth by accident.
          John Calvin could explain it all to you.

      • OG says:

        When you have eliminated all which is impossible, then whatever remains, however improbable, must be the truth.

      • phillip jeffreys says:

        You sure they ‘know” more?

        Or that the culture they represent is nevertheless biased anyway?

        Spent my whole life in the academic community from parents/grand parents to my own advanced education. It’s a culture that is not immune to its own corruption (Hey, I know, let’s sponsor a conference in Paris the University or state will pay for – every Summer/Fall!). And, the poster has a point, Henderson and Quant aside, exactly what has been the quality of economic predictive analytics at a granular level?

        Fun indeed. Exactly the core problem.

    • Old Ghost says:

      Change is by definition, transitory..

      ….and a broken clock is correct twice a day.

      In my humble opinion, wars and depressions drive big changes.

      Trends can last decades, even when you can see how stupid they are (I am looking here at you Bitcoin). Even if you can see what is coming, you can never time it.

      • andy says:

        Of course you can time it. Bunch of people time it very well. It’s “being right and sitting tight” that is the issue for most.

    • curiouscat says:

      “Second is the PhD in economics, who are hopelessly buried in data and spreadsheets. ”

      I have observed that those individuals who study for a PhD generally study one small segment of their discipline to great depths, as opposed to studying many things about their discipline to improve their overall grasp of it. This has been called studying something that’s a foot wide and a mile deep as opposed to a mile wide and a foot deep. There are exceptions of course. Dr. Robert Shiller comes to mind. But this tendency to study depth versus breadth is the reason I tend to ignore the prognostications of most PhDs.

      Another problem of prognostications is that they are seldom if ever reconciled. The talking heads on media are never held to account later for the accuracy of their predictions. In this case, Jim Cramer comes to mind who recommended both Lehman Brothers and the crypto firm Voyager before their collapse.

      • andy says:

        Most PHDs learn foot wide and foot deep. Good analogy though.

      • Jon says:

        One of my former bosses would say this: A PhD is a person who tries to learn everything about something but ends up learning nothing about everything.
        Never trust these phds.

        • Seen it all before, Bob says:

          I’ve heard this one:

          An expert/PhD knows more and more about less and less until he or she knows everything about nothing.

          A generalist knows less and less about more and more until he or she knows nothing about everything.

  2. Cs says:

    Im very naive in these things. How does deflation occur and is this the ostensible goal of the fed? How do i get the purchasing power of my dollar back? Or is the value gone forever?

    • Wolf Richter says:

      1. “How does deflation occur?”: It rarely does, so don’t worry about it. In my entire lifetime, deflation occurred for only a few quarters, and mild deflation at that. It just unwound a few months of inflation. And that was it. The rest of the time, it was inflation and raging inflation. So don’t worry about or hope for deflation. It’s not gonna happen except very rarely, and only a little, and only briefly.

      2. “…is [deflation] the ostensible goal of the fed?” No, neither ostensibly nor otherwise. The goal of the Fed is inflation, but not raging inflation.

      3. “How do i get the purchasing power of my dollar back?” You don’t. It’s gone. The Fed always succeeds in flushing it down the shitter. So thank the Fed.

      4. “Or is the value gone forever?” Yes, you nailed it. The value is gone forever.

      • Jay says:

        Wolf, you know I like predictions. When do you think this drop to 5% CPI may occur and how high would you expect the drop in the $$$ value to push it back up?

        You’ve indicated that rents, assuming it stays strong for a good while longer, is going to continue to push up CPI until next spring, right? Assuming the labor market holds up through the end of the year into early 2023, this would mean a drop to 5% in CPI probably isn’t in the cards until summer 2023 at the earliest? Does that sound correct, so maybe by late 2023 we could see this resurgence in CPI due to the depressed $$$ from its current highs?

        • Wolf Richter says:

          I don’t think I predicted CPI will hit 5%. What I said was, what I meant to say was, and what I think I said, was that CPI won’t drop below 5%. So that’s the low point in my estimation. I think CPI will drop but might not go that low. The mid-range of my estimate would be 6-7%.

          I do think yoy CPI will drop some this year, and part of it is the base effect since we had such a spike late last year.

          Also some goods (used cars, maybe new cars, electronics) will see much lower yoy CPI than late last year and earlier this year, with a potential for month-to-month drops — we already saw some of those in used vehicles. Electronics are already down yoy, which is kind of the normal state.

          The driver of inflation going forward will be services. We’re going to see some really ugly numbers. They’re already baked in, but they just haven’t shown up yet. They’re slow in picking up reality, so this will drag into late this year and early next year.

          So I see this type of fluctuation. This is what services CPI looked like through May. And all of services CPI goes into core CPI. So you get the spirit of it:

      • Cs says:

        Thank you for the explanation.

        Gonna put up my ‘end the fed’ bumper sticker tonight.

      • Depth Charge says:

        If deflation isn’t happening, then I guess I should run out and buy a brand new vehicle, prices be damned, because at almost 9% annual inflation they’re just going to keep going up. In a couple years, I’ll be money ahead. So FOMO makes sense, I guess. Hurry up and buy, or be priced out forever.

        • Wolf Richter says:

          Individual prices going down happens all the time. That’s not deflation. Deflation is when the overall consumer price index turns negative, when the prices in the basket of goods and service all combined on net go down. So some go up and some go down, and on net prices go down.

          Even in the 8.6% CPI we had, prices of consumer electronics went down, which they normally do, and have done for decades.

      • Michael Engel says:

        Wolf, before u expire in the 2060’s – 2070’s u might know deflation.
        Bonds might do well.

      • Egon says:

        Why is the goal of the FED moderate inflation and not price stability ?
        Who has advantage of moderate inflation ?
        And why is high inflation not a goal of the FED ?

        • Wolf Richter says:

          Great questions. Ask Powell at the next press conference. I would love to see him squirm some more, LOL.

        • drifterprof says:

          “Who has advantage of moderate inflation ?”

          I’ve thought about that and wondered if moderate inflation can be good in in a way because it keeps wealthy people on their toes, increasing motivation to do something with their money, rather than laying back confident that their advantaged position is stable and permanent.

          But knowing human greed and selfishness, there are most likely plenty of sinister predatory functions that are enabled by non-trivial moderate inflation.

        • Hank Rearden says:

          Because moderate inflation gives all the suckers the illusion of “progress” — salaries rise, so therefore the economy is “strong”

          The best thing about moderate inflation is that mostly prices don’t rise in tandem with salaries so actually it’s worse than not gaining, you’re actually losing in terms of lifestyle and purchasing power.

          The reason this hasn’t been too obvious is that technological change has masked the decrease in living standards; for instance, now we can watch all the insipid crap out of Hollywood for one flat fee a month rather than having to buy DVDs or go to the movies. But in many other ways, lifestyles have declined in terms of hours worked vs pay.

          Price stability means the suckers realize they’re not actually going anywhere.

        • historicus says:

          That 2% “goal” which they now label a “mandate” is recent.
          Clearly a conflict with stable prices. Even at 2% the dollar loses 22% in ten years….at 2.5% (the upper end of their accepted range) the dollar loses 28%.
          How can this be labeled “stable prices”? Punishing the holders of a currency seems like a policy that can’t last.
          The defenders will twist the issue and say stable increases are good.
          It would be fun to have “Questions for the Fed” thread, and then send them to some Banking and Finance committee members a week before a Powell testimony.
          In a system that boasts of “checks and balances”, who checks the Fed? It isnt the Senate Banking committee with questions about race and gender inclusiveness.

      • historicus says:

        Wolf , to your point
        “ The goal of the Fed is inflation, but not raging inflation.”
        The Fed never speaks of price rollbacks…only slower rates of increase….added one on top of another
        then compounded
        Who wouldnt want to see some “disinflation”?

        • Wolf Richter says:

          Yes, just about everyone, including the Fed, would like to see “disinflation”– meaning declining inflation, from raging inflation to some something a lot less raging.

        • phillip jeffreys says:

          Depends on how fast gov’t and the over-leveraged top 1% want to pay off their loans in worthless dollars.

          Either way, it’ll be interesting to see how effective BRICS+ et al are in hoisting the dubious digit to the US petrodollar.

      • Jay says:

        “what I meant to say was, and what I think I said, was that CPI won’t drop below 5%.”

        No worries. I don’t think you included the 6-7% range initially. Excellent reply. I agree, especially for the near-term lower bound of CPI. IMO, it’s going to take a lot more action on the Fed’s part to reign in services & the labor market.

        Thanks, Wolf!

    • Seen it all before, Bob says:

      I’ve read that the goal of the Fed lowering rates and other policies over the last decade was to fight deflation.

      Cheap imported goods from factories who employed laborers at pennies per hour deflates prices.

      Improved efficient mass production with machines vs high paid union labor deflates prices (electronics, agriculture harvesting, robotic production lines).
      The Model T production was deflationary back in the day for the automotive industry.

      I read that Fed policies were to combat deflation and to keep the inflation rate slightly positive.

      With supply chains for imports and semiconductors disrupted, the normal deflationary pressure is missing. Along with the pandemic induced money printing, stimulus, and low interest rates have created a huge inflationary imbalance.

      It makes sense to me.

    • michel says:

      Deflation occurs in serious depressions. You technically get your purchasing power back… but you get less dollars faster. When something seems too good to be true… it is.

      Normally, interest rates should have been above inflation…. but our financial system is a zombie. It would collapse if they did that.

  3. Old School says:

    I wonder if dollar is relatively strong against yen and Euro because they are screwed because they are big importers of fossil fuels.

    The dollar is relatively really strong. That could mean it’s a good time (or will be soon) to trade a dollar for something else. Here are some thoughts:

    I noticed the 50 cc Taiwanese scooter I bought sells for the same $1899 price it did last year.

    Blood in the streets in Europe. Maybe an international index fund. You get a twofer if their much cheaper stock markets go up vs. US market and dollar goes down.

    Maybe a big gold miner. I follow Barrick. No net debt. Pays a dividend and gold should go up if dollar goes down.

    At some point I hope to buy Berkshire Hathaway shares as they have no net debt. They are #1 in real capital, #3 in sales, but only #6 in market cap. The five stocks larger in market cap are tech stocks if you classify Tesla as tech.

    If I was a gambler I would short Tesla and go long Berkshire as in my mind there is no way Tesla should have a higher market cap than Berkshire going into a recession.

    • Harrold says:

      In f/x, it’s mainly about relative interest rates. The fed has raised. The boj and eu central bank are still trying to hold on to zirp. So money is leaving them for the better deal in US bonds.

      What happens to berkshire when 90+ YO buffet dies? Will there be a mass exodus? I’ll wait and see before investing there. Good luck to you!

      Inflation has slowed down in my area. Some items I purchase have actually come back down a bit. IMO, oil prices will be high until the west stops punishing russia. They’ve been on russia’s back for 50 years, so I don’t see friendly relations even after the fighting ends in ukraine.

      • Francis Lunenschloss says:

        Why should we be friends with Russia? Everyone will be in the next war. Thank Putin while you can.

        • VintageVNvet says:

          Many ongoing challenges with the puter,,, far damn shore FL:
          Fact is that it is very likely than RU knows full well that their ”best” partners against the very very likely ”challenges” going forward will be western…
          As always, time will tell…
          Meanwhile RU doing bad and will have to pay.
          Maybe just result of illness, mental and physical.

      • Shiloh1 says:

        I’d love to see Elon running Berkshire and Uncles Buffy and Charlie running Tesla! Shareholder meetings would be hilarious.

        • Old School says:

          Yes they are at opposite ends of the spectrum in a lot of ways. Buffet is all about conservative balance sheet and making sure company has growing income stream over the next decade and Musk is a risk taking entrepreneur who seems to risk a lot to make a lot.

          You have to think about what each person’s goal is for the company. Buffet’s company is set up to be an investment vehicle that is safe enough to be someone’s only investment holding.

          Musk is operating Tesla partially to save the planet if you believe him. Definitely not a one stock holding.

    • Miller says:

      I doubt that has anything to do with it. There isn’t anything special about being a net importer or exporter of fossil fuels vs. any other commodity or core good or service. All of that is reflected in the net statistic that we call the trade surplus (or trade deficit), and on that number, the USA is actually far worse off than Japan and most EU countries since our trade deficit is massive. Japan has been having trade deficits recently but has recorded trade surpluses in almost every year before, while the EU and most of its member countries have had solid trade surpluses every year since 2011–with the trade balance of course, accounting for fossil fuels and other commodities. Not to mention the US as energy exporter is likely temporary at best, most of the sharp rise in American fossil fuel production has been due to the fracking boom but those wells will only provide for so long, and another problem for the US is that with our growing population (for now, though the growth has been falling sharply lately), our own needs will rise sharply and we won’t be able to export much, so we’ll be back to being a major energy importer ourselves soon enough. And even outside of that, our trade deficits keep hitting new records. The exchange rates therefore likely have little do with any of that, except perhaps in the opposite direction (the yen and euro dropping as a way to boost manufacturing). The DXY isn’t representative of a broader currency menu (and the US dollar is indeed dropping against some other currencies) so it doesn’t tell us much about the dollar’s true strength. What does is inflation, clearly showing that the dollar’s actually value is falling–inflation after all is a constant loss of the USD’s buying power (which is only the value that really matters, since the only thing a currency is good for is buying real goods and services). And also the dollar’s steady and increasing decline as a component of worldwide currency baskets.

    • Uber Driver says:

      It’s likely that the DXY will remain strong until Japan and Europe begin to believe in inflation and raise rates. Just remember that the general markets have been calm lately as the summer vacation malaise kicks in. If earnings this season is the disaster everyone thinks, then we could see a spike to 115-20 on the DXY as broader markets sell off.

  4. Putter says:

    Fed will raise rates until something breaks. Probably an EM currency crisis. Attempting to pay back debt, denominated in dollars, with a depreciating currency is hopeless.

    • SoCalBeachDude says:

      The US government is obligated to REPAY IN FULL APPROXIMATELY $15 TRILLION OF DEBT EACH AND EVERY YEAR which it does.

      • Augustus Frost says:

        You are describing a debt rollover. It is entirely correct to state there is no intent to ever reduce outstanding notional government debt.

        • Jay says:

          Agreed. To actually pay down debt, we’d have to run a surplus as was the case in the 1990’s.

          It’s rolled over to current treasury rates. There’s $3T in bills, 52 weeks or less, set to rollover by this time next year. Then, there’s $13.6T in notes (2-10 years). Conservatively, 50% of that is 3 years or less.

          So if stagflation hits and the Fed isn’t able to lower the FFR and the treasury rates stay high as well for most of those 3 years, then we may have a big problem.

          I know Wolf disagrees with me on this, but the next 12-24 months will show us how far above $600B in annual interest expense on the debt can go with falling tax revenues.

        • Brian pawlak says:

          That’s entirely correct. Keep printing more money, faster, the National debt is a ghost thats vapor for all.

        • David Hall says:

          Bill Clinton balanced the Federal budget during his second term. He created budget surpluses. George W. Bush became president, then Al Qaeda flew planes into the WTC and Pentagon. It has been budget deficits ever since.

        • Frederick says:

          Lol Al Qaeda

      • Francis Lunenschloss says:

        We can print it. What’s the problem?

        • Balanced says:

          “Bill Clinton balanced the Federal budget during his second term. He created budget surpluses.”

          I think that lie has posted her many times.

          He did not have a balanced budget.


    • Robert K says:

      Where can one get more info on which EM countries are first in line to default/lose their shit? A crisis would likely entail more than 1 country losing their sh*t ya?

      • Wolf Richter says:

        Sri Lanka already defaulted this year.

        Russia defaulted too, but not because it ran out of money (it has plenty), but because financial pipelines are blocked and it cannot transmit the funds, so this doesn’t really count as a default.

        Next candidates are, according to Bloomberg:

        El Salvador
        Argentina (I forgot how many times it already defaulted in the past 20 years)

        • Flea says:


        • Anthony says:

          If Russia cuts the natural gas off, not quite Germany but loads of German Companies….possibly

        • Wolf Richter says:

          Germany is already becoming bailout city over this. The government won’t allow any of its bigger companies to get in trouble over energy. Bailouts in Germany usually, at least in part, consist of the company raising capital by selling new shares to the German government, and the German government is then a stockholder of the company. At least taxpayers get something for their money.

        • LonelyPessimist says:

          Can El Salvador not pay in Bitcoin? :D

  5. Halibut says:

    Many are expecting a little disinflation (maybe 6% CPI by year end), and suggesting a Fed pause of some sort. I have no idea what the future holds, but if the dollar weakens, adding to the inflation fire, perhaps the Fed holds course longer?

    • ru82 says:

      Many are thinking or guessing that. But if you go back and look at the 1970s, this is exactly what happened.

      Inflation and Fed Interest yo-yo’d through out the 1970s. The FED never totally squashed inflation. They lowered inflation YOY and would cut rates and inflation came right back. This happened until Volker stepped in the early 1980 and squashed inflation.

      So if Powel wants to squash inflation, then they will not ease up. But after Volker squashed inflation, we had a long recession and unemployment jumped from 7 to almost 11%.

  6. phleep says:

    Great to hear a solid data-based view of gaming this out for the rest of the year. I can’t take my eyes off of the lingering risks for Europe with the Russia-energy wild card. If Europe is going to “catch up” with the US in terms of its currency strength, there seem to be all sorts of ways that can falter. I think Europe and Japan each have a weak hand right now, Europe especially around energy as winter approaches, and Putin hangs tough.

    I see signs this past week of sentiment slowing its descent in the USA, for example BTC hovering around $20k. But I just bought this energy dip, and made a modest bet going long on volatility (which paid off very nicely in early summer, so now I’m going back in). As I see it, stagflation would benefit these bets (persistent high energy costs, plus some slowdown in business, hence, stocks). I can easily be all wrong, so my bet sizes are small.

    • Miller says:

      And it may be a misconception about “catching up” with the USD since there’s a good chance Europe and Japan have no interest in doing that anyway. Japan has actually been craving inflation and a moderating value of the yen for many years for it’s own reasons, so having inflation right now (and relatively modest compared to the US) suits them pretty well. And Europe also for its own reasons probably prefers having some moderation of the euro, it helps them with their exports. Even with the energy issues here (and perhaps in part related to them), EU countries are still posting massive trade surpluses, which would likely be harmed if the euro goes too high against the dollar. Europe has been dealing with the energy issues in big part through a fast diversification of its energy supplies (for ex. nuclear power was recently included as a clean fuel even in Germany, a complete repudiation of Angela Merkel’s blunder with the Energie Wende), and setting up more LNG terminals and greater incorporation of renewables and improved battery tech. And the EU benefits simply by not needing cars as much as the US–the public transportation and more delocalized work and social gatherings mean they don’t have to travel long distances as much and don’t need fossil fuels to begin with as much as we do in America.

      As for the stagflation, that may be possible but I wonder how the calculations would play out if it actually does come. We’re not in stagflation yet in the US (based on the recent employment report) though there may be early signs of it, still if we do enter stagflation, it seems like that would work against energy prices. Less employment, fewer jobs, less spending and less traveling as a part of it.

  7. David Hall says:

    Inflation is variable. It rises and falls. Inflation seldom falls for long as we are no longer on the gold standard. There are vehicle shortages. They may wait for up to a year for a $66k Tesla Model Y. My neighbor told me he wants to replace two windows, but there is a window shortage. The price of gasoline is falling. They may need to ration electricity and natural gas in Europe. There is a worker shortage. JPMorgan Chase started hiring people with criminal records. CEO Jamie Dimon is having to allow some workers to work from home at least some of the time.

    • Harvey Mushman says:

      “JPMorgan Chase started hiring people with criminal records.”


    • SoCalBeachDude says:

      The so-called ‘gold standard’ was a very brief and totally failed 60 year experiment from 1973 until 1933 at which time it was totally discarded as an unworkable and inane idea for all domestic currency purposes in the US and the last vestige of it for some international purposes was dumped back in 1971. Tying any currency to any thingy of any sort is patently absurd and utterly pointless. All legitimate government issued currencies are backed by the current and future assets and current and future labor and productivity of their citizens which are vastly more valuable than mere thingies which are miniscule in value in any economy.

      • SoCalBeachDude says:

        1873 , not 1973.

        • Pape rburns Gold doesn't says:


          Is that right?

          Tell me, what what used in the US British colonies before Independence as a medium of exchange? And then in the USA from 1776 to around1971?

          And while you are at it tell us what the rate of inflation was in the USA from after the conclusion of the US Civil war until the 1930’s? And then from 1971 to 2021?

          Please compare the rates of inflation.

          We’d all like to know.

        • Harrold says:

          Beaver pelts and tobacco were used as currency during the revolutionary war.

        • phillip jeffreys says:

          Yup! Fungible people!

      • Augustus Frost says:

        The current financial system is designed to fail, guaranteed.

        Fractional reserve lending + exorbitant leverage + (mostly) government created moral hazard which the vast majority believes has magically eliminated risk = guaranteed to fail financial system.

        It’s a future “fat tail” catastrophic systemic failure event instead of the periodic panics of the past.

        • Sams says:

          Compound interest will over time inflate the amount of money to endless. But do not worry, the money will be wortless before that happen. ;)

        • Miller says:

          “It’s a future “fat tail” catastrophic systemic failure event instead of the periodic panics of the past.”

          Have wondered about this too. Could easily see such a black swan disaster (presuming it really was unforeseen) coming to pass, with all the weak points in the financial system being exposed as of late.

        • Lawefa says:

          All financial systems are designed to fail.

      • Sams says:

        If there is any interest rate other than zero, a gold standard money system must change the gold-money rate yearly to match the inflation due to the interests on the money.

        Note, inflation is here monetary inflation. That is the increase in amount of money.

        • Miller says:

          “Note, inflation is here monetary inflation. That is the increase in amount of money.”

          Yep. Say what someone will about Milton Friedman but this, it was one thing from my old econ classes I’ve taken to heart, and it’s held true more than most things I was taught. Even if supply shortages have contributed to the rampant US inflation since last year, the biggest cause above all has been that a huge percentage of the dollars even printed into circulations have been printed since March 2020. It’s hard to see how inflation wouldn’t have occurred in a big way from that.

        • NBay says:

          Pulease….Unca Milty is so 1980….we are talking horse and sparrow now.

    • Michael Engel says:

      The Germans take cold showers three times/day in order to fill the natgas tank. But Russia start doing Nordstream maintenance next week, for “only” ten days. Putin might preempt the German plan to fill the tank up to 80% before Nov, for the winter.

    • Miller says:

      ” They may need to ration electricity and natural gas in Europe. ”

      Where is all this speculation coming from? There’s nothing about this in the commodities markets, and based on recent work with partners in Europe, there’s nothing of the sort going on. At all. Yes there are issues with natural gas supply as there always have been, but the EU has a solid nuclear power network and because of recent events, they’ve declared it a clean fuel out of pure necessity, which is helping distribution. Plus new LNG terminals and new diversified sources, both fossil fuels and more renewables. The situation to the east if anything seems to be winding down more and more since people just don’t want to fight anymore (that’s how WWI came to an end after all), and on top of this a new strain of COVID is tearing across the world (another WWI analogy, with the Spanish flu). As for the worker shortage here in the US–yes that’s true, but I’d venture another reason might be all the cases of long COVID, and Americans of prime working age getting all kinds of complications from even just mild COVID cases. Nasty things, like heart and lung disease. This may be the elephant in the room, affecting millions of people.

      • Bobbleheadlincoln says:

        I have heard that a planned LNG terminal takes more than 3 years to come online. So I don’t think that provides any near-term relief. It’s part of the reason the increased demand in Europe won’t fill the pockets of export companies in USA for instance.

    • Brant Lee says:

      Work from jail?

  8. Beardawg says:


    What I took from Wolf’s words of wisdom (Wolfdom) was inflation may in fact abate slightly while we wait for ECB / Japan start their QT / rate hikes (balance of this year), then wave 2 of inflation hits in the next 12-18 months as USD weakens.

    Translation = Extended recession.

    We are in it already (due to Fed follies) but the ROTW (rest of the world) actions will understandably exacerbate.

    • Harvey Mushman says:

      “What I took from Wolf’s words of wisdom (Wolfdom) was inflation may in fact abate slightly while we wait for ECB / Japan start their QT / rate hikes (balance of this year), then wave 2 of inflation hits in the next 12-18 months as USD weakens.”

      That’s what I got too. I didn’t even think about the USD weakening and its effects.

      • phillip jeffreys says:

        Yes – in part because of how the stat itself is measured yoy (i.e., against a high a denominator in this case).

    • Halibut says:

      Thanks. I listened to the podcast a second time, and your analysis sounds about right to me.

      It sounds like Wolf agrees that the CPI will reduce a bit in the short term and then SHTF2 occurs.

      I’m wondering how this all impacts Fed actions. They could hang tough a bit and actually bring market valuations back to reality. But then again, they could start waffling and maybe the party starts again.

      Or, just maybe, they waffle but the party’s over anyway?

      My curiosity emanates from a total cash position, which really sucks, but I’m holding pat for a while. Would like to see some opportunity out there, but I don’t yet.

      I figure slow bleeding beats a head first jump into a wood chipper.

      • RockHard says:

        Short term T bills should do better than cash (and longer term treasuries TBH), you might put some away there for now

        • Halibut says:

          I’m in various term CDs. Getting some better rates lately but still losing big to inflation. I called the Fed to complain and they said it’s all Wolf’s fault.

        • RockHard says:

          Better to lose less ground than more.

          Also I can’t believe they didn’t believe Michael Burry any credit. He might be short but that’s no reason to discriminate.

      • Harvey Mushman says:

        “My curiosity emanates from a total cash position, which really sucks, but I’m holding pat for a while. Would like to see some opportunity out there, but I don’t yet.”

        Yeah, but just imagine if you were one of the people who can’t get their crypto out of Voyager. Now that would really suck!!!

      • Seen it all before, Bob says:

        “I figure slow bleeding beats a head first jump into a wood chipper.”

        At least you can enjoy life awhile longer.

        We’ve discussed the alternatives to cash since the beginning of the year:

        I’d rank it this way:

        Wood Chipper:

        1) Wolf’s speculative stock list – Down 70-90%
        2) Bitcoin – Down 70%

        Axe arterial wound.

        1) Long term Bonds – Down 20%
        2) Growth stocks – Down 20%

        Knife wound:

        1) Short term bonds – Down 5%
        2) Value Stocks – Down 5-10%

        Paper cut:

        1) Cash – down at the inflation rate.

        No wounds at the moment:

        1) Real Estate – low growth after 10-20% growth this year. TBD, the year is half over.
        2) I-Bonds – 9.6% interest growth.

  9. brewski says:

    Excellent analysis and commentary.

    I think it is a “contrary opinion” that will prove to be correct.

    So reminiscent of the 1970s.



  10. If had to take a flyer on one thing that’s different this time, I would say the forex system will not self-right itself. All central banks have been over producing currency, and that has an offset in EM sovereigns, which do not have the same deep state credit system, (the EU is trying to hold the PIIGs together) hence global inflation, (non sequitur to Prechter’s observation that China exports deflation, and inversely) Is coordinated monetary reduction, the outcome or competitive? Is the US losing its advantage?

    • Flea says:

      We lost our advantage when corporations,offshored all the jobs

      • economicminor says:

        It did bring us cheap goods and places outside the US to sell our Treasuries. Everyone, gov, corp, and consumers all had good benefits while it has lasted in the offshoring of our industries.

        Oh sure there were the negative consequences but just imagine how things would have been if the government had no place to sell treasuries. How high would interest rates have had to be to sell them to us? How high would wages had to be?

        Things might have been better with innovation but I was in a union back in the day and the unions were pretty rigid and extremely reluctant to allow corporations to automate. Just look at how long it has taken the USPS to!

        Seems to me that trend is at its end.. Maybe not.. We’ll see!

    • unamused says:

      “I would say the forex system will not self-right itself.”

      Unfortunately the world doesn’t come with a Pause button, much less a Reset.

      Sometimes I’d just like to unplug the blessed thing so I can take it apart and fix it and put it back together again so it will run a bit more smoothly.

      You have no idea how hard it is to do an oil change at highway speeds.

      Well, maybe you do. I shouldn’t make assumptions.

    • Sams says:

      What might be different this time is cheap natural resources. If cost of energy and other resources continue to rise because they get scarce, no monetary or financial magic will fix that.

  11. economicminor says:

    The strong dollar is hurting lots of countries in the world. Sri Lanka is rioting. Lots of very negative consequences outside the US.

    Borrow in dollars and have the exchange rate change this dramatically and there are going to be a lot of chaos and defaults. Many of which will affect US lenders (pension funds?) and if it gets bad enough out there, even will affect our supply lines.

    So temporarily not so bad for the US but longer term, this could be a disaster.

    • SoCalBeachDude says:

      Tough luck, and so what?

      • drifterprof says:

        Well, the sad thing about that is many of those countries are in dire need of good government. But their oligarchs, politicians, and corrupt corporations bleed off most of the benefit the dollar loans.

        Then when their country defaults on dollars, it’s the general not-so-well-off population that suffers. In previous era, for the defaulting country to get back on track (able to borrow dollars again), the IMF would require draconian economic policies that punished the general population’s health and welfare.

    • Wolf Richter says:

      No one forces these morons (the governments and companies of developing economies) to borrow in dollars (issue dollar denominated bonds). But why do they do this? Because these morons killed their own currencies with inflation and defaults, and now no one wants to lend them in their own currencies.

      And why CAN they issue dollar bonds? Because Wall Street gets rich on fees with these dollar-bonds, and because it stuffs these bonds into emerging market bond funds that are hyped to retail investors; and then when the bonds get in trouble, the bond funds sell them for cents on the dollar to US hedge funds (more Wall Street goons), that then try to make money when the IMF rescues them.

      It’s always the same thing. Investors should NEVER EVER buy emerging market dollar bonds, and no one EVER NEVER EVER should buy an emerging market bond fund with dollar bonds. Period.

      Argentina and Wall Street have gotten into the most incestuous relationship about dollar bonds and serial defaults – and they’re both ripping off investors, and investors keep falling for it. Here is more that … and no I don’t feel sorry for idiots that buy this stuff. And I don’t feel sorry for the morons that issue dollar bonds when they cannot issue bonds in their own currency because yields would be out the wazoo.

      • ispanyolca says:

        I’m from Turkey. I totally agree to your words on developing countries.

      • economicminor says:

        I was just pointing out the collateral damage that is likely to incur within the US from the strong dollar. I wasn’t defending what greed and stupidity does!

    • Rowen says:

      Fed to developing world (w/o forex central bank swaps): our currency, your problem.

      Putin/Xi: our commodities, our goods, your problem.

      It’s only a matter of time before a developing country defaults on USD dominated debt, and trades directly with local/hard currencies. I guess Venezuela and Iran are already there.

      • Sams says:

        And some say that is one reason for war in Ukraine. Russia wanted better pay for their natural gas. Backfired at the moment, but in the long run?

    • Trailer Trash says:

      “The strong dollar is hurting lots of countries in the world.”

      Indeed. As Professor Hudson puts it, “Debts that can’t be paid, won’t be paid.” He also says, “A financial crisis is a break in the chain of payments.”

      I’ve been wondering where the break in the chain of payments will occur. I speculate it will be a foreign government that defaults on dollar loans.

      • Wolf Richter says:

        Investors got paid via bond yields to take those risks. They now need to take the losses that came with the risk that they got paid to take. Simple as that. No magic here. Most of those investors are bond funds and hedge funds in the West, so no biggie.

        And then these borrowers won’t be able to borrow in dollars ever again. They need to fix their own currencies, get their inflation under control, and run their economies accordingly. And then they can borrow in their own currency, even if it costs a lot more in interest, and they won’t ever have to default.

        • Trailer Trash says:

          Lack of foreign currency for purchase of food and fuel is a big deal in Sri Lanka. They depended on tourism for foreign exchange, but since COVID, no tourists, and no foreign currency.

          Now they have no food, fuel, or government, but it doesn’t much matter as long as it doesn’t affect Wall Street.

        • Wolf Richter says:

          They don’t have to borrow foreign currency. They EARN it from foreign tourists and exports. If they had a decent local currency — not that thing that they burned into the ground — they could exchange it for any currency and buy whatever they want to with it.

          When you willfully destroy your own currency, your problems are homemade.

          Government incompetence and corruptions over many decades are to blame, always. Aided and abetted by Wall Street.

      • Flea says:

        How aboutAmerica ,no s payments

  12. MH says:

    Wolf, love the analysis as always. Not trying to cause any drama, but I think Nassim Taleb was trying to dunk on your analysis of the dollar’s purchasing power. Thoughts?
    [link removed]

    • Wolf Richter says:

      He confused two very standard well-defined concepts: “purchasing power of the dollar” (a monetary concept) with “investment returns of dollar-denominated assets” (a financial concept). I have no idea how his brain could short-circuit like that, but it sure did. But it was a really really dumb mistake to make. I can’t believe that he is that ignorant. But maybe he is. Or maybe he just says whatever without using his brain.

      • MH says:

        I used to be a big fan of his. However, he has gone off the rails over the past several years. It’s a shame. Thanks for always being the beacon in the night. You should put a book out.

  13. Fan of your blog says:

    Hi Wolf, Excellent piece, as usual. The fact that, as you say, US inflation would go up if the USD drops in value, combined with the big trade deficit of the US, suggests that the US has a strong interest in not letting the USD drop. The main way to achieve that is to ensure that the US Fed rates are at at keast as high as those of its major trading partner countries – in particular the 20 countries you refer to regarding the weighted currency index the US has been tracking since 2006. The EU is rife with political unity issues and instability threats, and so presumably the US should have no problem keeping well ahead of the EU in its rate hike path – indeed, as rates get higher everywhere, it is plausible that the US will be able to keep surpassing all other countries’s hikes, with the exception of China’s. That would only further strengthen the USD. I can see that the USD may reach a point where for other reasons the US considers this unhealthy for its allied trading partners, but that point has not yet been reached. For example, the USD was much higher versus the CAD at the start of the pandemic. Also, countries such as Canada have even greater housing bubbles than the US, as you have documented, and so they will be unable at some point to keep up with US interest rate hikes because the impact on GDP etc will be greater. In short, based on the excellent information you provide, one can just as well make the opposite case that the USD is likely to continue to strengthen, no?

    • Old School says:

      It’s good to listen to a lot of smart people about where they think we are going. Every few months I watch Lacy Hunts presentation. Don’t know that he is right, but he has a good chart stack.

      Summing up his presentation is that once debt levels reach a certain level, more debt damages economic output over the intermediate and long term. Plus western world demographics are poor. Combining debt and demographics the Western world per Capita growth rankings will continue the trend of US being the cleanest dirty shirt, with Europe next and in last place Japan.

      Western politicians are still living in the illusion that more government spending helps the economy, while this can be true for a few months the debt levels are so high that servicing the additional debt just becomes a drag on future growth.

      If he is correct the only way out is through a forced austerity like WW2 or a tremendous technical innovation that bumps up productivity a couple of per cent.

      In a way his presentation is much like David Stockman’s in that the world went on a one time sugar high running debt up from 1.5 × GDP to 3.0 x GDP. Now that you did that you can’t use that as a growth lever anymore.

      • Jon says:

        I don’t believe in worsening demographic story.
        Immigration can solve all these.
        Most of the rich and elites of developing countries would love to emigrate to USA and other developed western countries.
        Hence we see schemes like permanent residency via investment.

        • Miller says:

          “Most of the rich and elites of developing countries would love to emigrate to USA and other developed western countries.”

          lol no, they don’t. In their home countries they can live like royalty and nobility, often with servants and indoors help (we saw this in India and the Philippines). In the US they’d be nothing special, face much higher costs of living (so their money wouldn’t take them as far) and potentially lose a lot of their wealth due to things like medical bills or divorce (the US has some of the most expensive divorce costs in the world, and even wealthy spouses can be taken to the cleaners). The immigration data shows this, most immigrants to the US come from lower or working classes, or educated middle classes trying to get ahead. This makes sense–becoming an expat is extremely difficult and expensive (we have to provide a lot of support to employees to encourage them, even going to other 1st world countries at high salaries). So the elites largely don’t move. And even when they do, it’s usually not to the United States. For ex. some mobile elites in Venezuela, Colombia and Cuba lately have preferred largely going to Spain, just as Brazil’s elite moves to Portugal, Pakistan’s elite moves to Britain and so on. A lot of the elite from Nigeria, Senegal and Congo are now coming to the US, we have several in high positions at our partner firms (Nigerians are actually the most successful immigrants in the USA right now) but I can’t really think of any other country that’s true for.

  14. Michael Engel says:

    1) DXY reached Jan 1974 fractal zone : 105.90-109.50. It might drop a little, before rising to R/R Nov 1982/ Jan 1983 backbone : 115.43 – 126.02. If DXY will rise > the BB, it will exceed 1999/2001 highs.
    2) US10Y breached 2018 highs. DET 3M is up to minus (-)0.31. It might rise to zero. DET10Y reached 1.76 in June. US10Y – DET10Y in one year
    trading range, before rising higher.
    3) Viscosity will keep the German rates on the zero line, like in Japan.
    Gravity with Germany will keep US rates down, inverting them.
    4) If DXY breach R/R BB, US10Y will make a round trip to zero. The
    bond massacre will be over.
    5) Sidney and India floods sucked liquidity from the Po river and lake Mead.

  15. Michael Engel says:

    Didier Sornette might amuse your partners.

    • Dan Romig says:

      Didier Sornette is a smart dude; physics, earth science and predictive behavior. “Statistical physics models of fractures and faults.”

      Ferrari might want to hire him, and help them predict/prevent another F1 engine from blowing up during a race; as it happened again today.

      Couldn’t hurt, as Carlos got out of the machine as it was burning. “I wanted to jump out, but the car was rolling backwards.” “An easy 1-2 goes up in flames.”

      “It happens sometimes. Ferraris just explode. Natural causes.” -Agent Rogersz

      A new SF90 Stradale Ferrari will cost more in the USA if and when the dollar goes down versus the euro. But if you get one, before it might blow up, sometimes, from natural causes, it can go zero to 200kph in 6.7 seconds.

      Carlos’ Ferrari used to do it in under five seconds.

      • drifterprof says:

        Tesla Model S P100D did zero to 60 in less than 2.275 seconds (2017), which made it the quickest stock production vehicle ever.

        Not sure if the Tesla would tend to blow up like Ferrari.

        However, I read that ICE supercars (Ferrari LaFerrari, Porsche 918 or McLaren P1) would catch up to the Tesla and pull ahead within seconds.

        • Dan Romig says:

          I was being being a bit sarcastic. Agent Rogersz is a character from the movie RepoMan.

          The Ferrari Formula 1 car and the SF90 Stradale are both hybrid powered, and amazing technology. The other Ferrari won the race today.

          EV performance machines are indeed very quick. The Ford Mustang Mach-E GT Performance Edition runs about $70k. It has, for a short period of driving hard and fast, 480 hp and 634 lb-ft torque.

          From a highly respected and well-read auto magazine’s review, 8 February 2022:

          “It feels quick off the line, has quick steering and allows for a decent and quite fun amount of oversteer. Its brakes are particularly good too (Brembo).

          Next, no matter what mode you’re in, the massive amount of power while tooling around plummets north of 80 mph. Finally, throw a corner or two the mach-E’s way, and it can be damn near impossible to perform the same way twice.”

          That’s the EV from Ford that Wolf mentioned in a reply to my comment one week ago.

          To me, it is perfect for short, fast trips in town; if you don’t turn. Not really a performance Grand Touring coupe IMO. But I could be wrong.

          ICE performance cars can run at high speed for long distance, and get refueled quickly to continue on again and again. Like driving a BMW M4 from Charlotte, North Carolina straight home to Minneapolis, Minnesota, for example.

          That has not yet, at least, been matched by any EV machines as far as I can find. And I am looking.

          If the dollar tumbles hard, all those ICE supercars are gonna be a lot more expensive here in the USA.

        • drifterprof says:

          My knowledge about cars is shallow 😁 so I salute your knowledge on this, as well as your economic commentary.

          Although, I do have some bits and pieces of knowledge – as young adult I took my 318 V8 engine apart and put it back together (to do the valves), and did various repairs / maintenance to it while taking an auto class in community college.

          My parents bought a Prius around 2006, I liked the hybrid concept – it was getting 45 to 50 mph if you didn’t beat on it. When it was 10 years old or so, I drove it up from Oregon to Canada a couple of times and it seemed pretty good getting me from one place to another (I don’t need much power to be happy, but I hate loose spongy steering).

  16. Cd says:

    USD going to 126, possible 132 on blow off top…
    doubled one trading account over last 3 weeks picking right sector
    there will always be a market of stocks…..

  17. BBB says:

    DXY is headed to 120. The EUR is headed to 84.

    • Old School says:

      There is a theory that dollar is strong due to so much money flowing in to big tech stocks and foreign investors getting a twofer with stock appreciation and dollar appreciation. Now it’s the safety trafe.

      When the stocks fall enough and the money starts being taken back home the dollar can fall fast as it’s a twofer in the other direction for foreign money.

  18. Bobber says:

    If a person thought the USD would drop, would it make sense to invest in an international ex-US bond or stock fund? The currency movement might increase the return.

    Problem is, I believe many international funds like to hedge out the currency risks, so even if the USD drops, such funds might not increase in value (all else equal). The disclosures about currency hedging are usually very poor.

    As a consequence, I’ve tended to invest directly in various international ADR’s of specific companies, so that I’m capturing the currency risk.

    • Old School says:

      Vanguard international index is a cheap way to get unhedged exposure cheap. It’s gone nowhere for a long time which might be a sign that it has more relative value than SP500.

  19. Guy Daley says:

    Not a word about the carry trade and how it’s supporting the surging dollar. The US is leading the interest rate hike parade and until we step aside it will continue to support the dollar. At that point in time and we WILL get advance notice, I’m going long bonds. But we have another .5 or .75% increase end of this month. It’s also why the Japanese yen is cratering. Watching Japan’s collapse is extremely useful as that is our future.

    No telling when this rate hike cycle is over with but when it is, the interest on our debt will be off the charts. Our central bank will end up buying most of our Treasury bonds just like Japan is doing now and our currency will collapse and inflation will go into hyperdrive.

    • crazytown says:

      “They” won’t let the USD go hyperinflationary. Interest rates will continue to go up until inflation is under control and the government WILL implement painful deficit cuts when it becomes necessary. I think all of us here are too focused on monetary policy when fiscal policy is equally as important. Tax revenues will have to come up and spending will have to come down – and both of those are painful.

      One of the reasons I put some 401k money into the Roth option is I believe tax rates will never be lower than they are now. On the other hand, I hedge and put part of it in traditional 401k since I also believe in taking the tax break now since the government will pull the football and change the rules to suit themselves if they become desperate enough.

      • Old School says:

        Hard to get tax rates through Congress. When you can’t do that we have to pay the inflation tax.

  20. Concerned_guy says:

    Wolf – This second wave of inflation, when (late 2023?…) do you expect it to stop raising and start dropping back to nominal level?
    And I guessing that fed will be doing QT to being down this inflation.-

  21. Michael Engel says:

    1) The Fed will not imitate Japan.
    2) Step #1 : inflation attrition war with debt. The technical recession is just a warning sign.
    3) Step #2 : during the real plunge, US gov will do it’s min to support the elderly and the needy. They will ignore the cries until debt deletion
    will is BRUTAL enough, cleanse enough, for the next 20-40 years.
    4) Saint JP will do inverse of PPP for free and $10K for shingle mums,
    Nothing for U and ME. He will be the most hated man in the world, but he doesn’t care.

  22. Christopher Martin says:

    Back in the day, non-trade activity was referred to as ‘invisibles’ in the UK and pointed to as a mitigating factor for deficits. Repatriation of profits, franchise revenue and capital gains must be a large component of US dollar movements due to their vast business investments across the world.
    Same goes for Japan and I’ve seen speculation that the JCB manipulates their exchange rate to achieve a higher yen return during their repatriation period.
    On inflation, unless there is a negative print on the CPI the inflation is cumulative. So a 5 percent inflation rate next year might seem like good progress, but in fact it is additional to the inflation being suffered this year.

    • David Hall says:

      The S&P 500 gets 40% of its revenues from overseas. This contributes to our balance of payments along with import-export data.

  23. RickV says:

    The Fed has said it will raise rates until it hits the neutral rate, or a slightly restrictive real interest rate. When you say “[the] CPI won’t drop below 5 %”, doesn’t that violate the dictum of Don’t Fight the Fed. I have already seen some respected economists forecast a Fed Funds rate of 4 ½ percent which would put some serious upward pressure on $ exchange rates. Just sayin’….

    • Wolf Richter says:

      The Fed is no longer in a vacuum with its rate hikes. The ECB will start this month. And it could get very aggressive because they have a bigger inflation problem than we do. The September rate hike could be a doozie.

  24. HR01 says:


    Yes, the greenback has appreciated at a pace that appears unsustainable and a correction will show up at some point. However…contrary to what nearly everyone expects, the USD$ will simply correct and continue rallying to new highs.

    The buck is in the early stages of an extended secular bull market. The bottom was 2008. The rally will last for decades. Will go well beyond the pre-Plaza Accord highs. The yen is finished as is the euro. As for cryptos, they’ll assume room temp when Tether receives its margin call (or gets hauled off to jail for money laundering). The greenback will be last fiat standing.

    There are few with this bullish outlook, I know full well. Receive lots of eye rolls and other awfully funny looks. Am used to it.

    • QQQBall says:

      Right. JCB has torched the Yen and France and Germany are gonna really hurt their economies with their self-destructive energy policies. Would someone want the Yen, Euro or Dollar? If the “Currency” basket was composed of the Uncle Buck, a dog turd and a cat Turd, which would you want to own?

      • SocalJimObjects says:

        This question will not matter soon enough. Right now people are using the USD to settle international trades, but as the Russians have shown, you can also demand people to buy your goods using YOUR currency.
        That will reduce demand for the US Dollars dramatically.

        • SoCalBeachDude says:

          No, it will not reduce the use of the US Dollar at all to any significant extent. You do know that Russia’s economy is only half the size of California’s economy at only $1.5 trillion, don’t you?

        • SocalJimObjects says:

          SoCalBeachDude, it’s only the start of what will be a growing trend.

    • Miller says:

      This kind of statement is contradicted somewhat by the fact that Japan and the EU have had much lower inflation than the USA though, and inflation is the “what actually counts” measure of a currency, not the DXY or FX markets in general, which have all kinds of machinations and distortions from things like the carry trade, selective inclusion or exclusion of some or other currency or chains to various baskets. The only value of a currency is in buying real goods and services that have intrinsic value, so the Forex will always be somewhat of a sideshow compared to what the fiat can actually buy, and right now the USD is one of the biggest losers there among the bigger economies. It’s the US that’s getting slammed worst among those on the list by inflation (and Japan for its own reasons, actually wants some moderate inflation). Part of this is due to structural reasons, for ex. Japan and Europe’s healthcare and education systems keep those costs way down compared to US, housing tends to be viewed as shelter instead of investment and culturally, debt is frowned upon (thus much less household debt and debt buying). But those aren’t the only reasons, and the compositions of currency baskets (with the US dollar also losing ground) more undermine the premise that the dollar has some kind of special status. Again if it did, the US would have inflation under control esp with rates rising, which we don’t.

      I’d add that there’s a huge amount of misinformation spreading around for some reason about the energy situation in Europe. We have a lot of people posted in the EU and have travelled there recently, and yes it’s a problem and there’s been a lot of dumb energy policy in recent years. But that’s been readily acknowledged and corrected pretty fast, and above all, this means the collapse of whatever legacy Angela Merkel had left–the whole bloc has done a 180 on her dumb blindness about nuclear power which is now officially a “green source”, and even sources of clean coal and nat gas are now declared to be clean sources. There’s this weird misconception in some US investor clubs of European energy policy-makers occupying some kind of ivory tower, but they’re really not–they’ve very ruthlessly practical, largely because they have to be, and the Merkel era and all its short-sightedness has been tossed aside just as ruthlessly. New LNG terminals are aggressively being built, new fossil fuel sources are being quietly pursued and new pipelines being constructed. The conservation and renewable energy push in Europe aren’t just about environmental ideals, it’s about pure practicality to diversify their sources. Even some gas from eastern Europe is quietly coming in through back channels, and even more so with Iranian gas (which the EU has never had much of an issue with to begin with, that’s more a US thing and Europe has ambivalently followed only when convenient for them). And the EU has been big on battery technologies and urban-planning (to reduce distances travelled) along with optimizing solar panels even on modest municipal buildings for the same reason. It’s still an issue there but there’ve been huge exaggerations and misinformation from some places on this side of Atlantic about it, there’s a whole lot more to it.

      • Sams says:

        That urban planning may be one of the really dissmissed parts that are important. 20 US dollar or more a gallon petrol or gas, in Europe people would just use public transport as they use to. But driving in the US?

      • JW says:

        Oh dear! I live in France with half its nukes off line for a considerable time with rust problems. Germany already under restrictions of gas usage to try to get its stocks ready for winter. UK one spell of calm cold weather this winter from black outs.
        Its not good, not good at all.
        There is some furious back peddling on ‘net zero’ etc, but you can’t build new power stations in a few weeks.
        Your comments are too optimistic.

        • JW says:

          I would add that gas/petrol prices at the pump in UK are 76% higher than US ( France 60%) , yet latest monthly stats have road usage change at ZERO.
          Certain metro areas in Europe have reasonably good public transport, quite a lot have appalling ones, most people still depend on private means of travel.

        • NBay says:

          Anyone see that photo of the hotel in a town near Fukushima they decided to let people back into?
          Has a big bio-radiation meter (Siemens) in the lobby….just to calm guest’s nerves, I imagine.
          Don’t know who calibrates it.

    • drifterprof says:

      “The yen is finished as is the euro.”

      It would be more informative if you supported those expansive generalizations by analyzing the points made in Wolf’s above audio report (if you listened to it). Wolf cited data on how the dollar might be affected in the next year or two. It wasn’t some blanket unsupported pronouncement about some currencies being “finished” and the USD being the perpetual grand winner.

      For example, my takeaways from the article were:

      1. The “real broad dollar index” (inflation adjusted) has gained 11% since 2021 and is now at it’s highest point since it began being recorded in 2006.

      2. Because the dollar can buy other country’s stuff cheaper, this has softened the damage of the agonizingly continuous and currently the biggest fattest gigantic elephant in the room, the record high U.S. trade deficit in the first quarter.

      3. The current dollar strength is likely be reduced as other central banks raise their rates, causing the big elephant to bloat even more with its load of then more expensive foreign crap. Result could be the USD knocked down a lot, as it has sometimes done in the past after peaking.

      You could explain specifically how the USD would continue soaring in the medium to long term when the big black elephant trade deficit gets dangerously near exploding (SHTF not pretty).

  25. Cd says:

    Some issues for China with stronger dollar, when do they depeg? Seems currency wars are afoot and dollar might have one final blow off top with intention of slowing China or forcing a lot of cross bets to fold….

    Strong dollar coupled with production and manufacturing leaking back to mainland would not be great news to China…..

    • SocalJimObjects says:

      Strong dollar makes local labor expensive in comparison.

    • Sams says:

      A strong currency is benefical when bidding for scarce resources. As long as China can maintain a trade surplus they are ok with a strong currency.

      • cd says:

        with the renminbi tied to dollar it would also cause havoc for china export model if dollar remains strong. The cost of shipping, fuel, supply line issues, delays and quality of product now factors into cost of production here, its darn close to even steven again….

        • SocalJimObjects says:

          Exports now make up less than 20% of China’s GDP.

        • Sams says:

          With less overhead and rentiers production in China may come out cheaper than in the USA.

          The high cost of manufactuing in the USA look to be part because of to many to greedy rentiers.

  26. drifterprof says:

    A couple days ago the dollar was up about 22% against the Thai baht from its low in December 2020. I was going to nibble a little more, changing some more dollars into baht, as I’ve done while USD has soared in the last year. But I was feeling a little vertigo and balked.

    Dollar has backed off about 1% against the baht in the last couple of days, but if it goes back up one or two percent I’ll buy more baht. Not a serious downside for me because even if the baht nosedives I’ll eventually use the baht for living expenses in the local context anyway.

  27. Richie Rich says:

    I read this site often, as I enjoy the articles and comments!

    This report, and my take on the current financial environment, makes me consider speculating on the price of Gold increasing over the next nine months.

    I don’t believe anyone can call the bottom or top of any financial market, BUT, we understand that the USD is currently well supported against other currencies, and this report suggests that the USD will lose its support between now and January 2023 (6 months..).

    I believe its well supported that there has been a relationship between the price of Gold and the USD strength /weakness against other currencies.

    If history repeats itself, and the USD weakens from today’s price, then why would the price of Gold not increase, and prove to have been a sound investment (speculation) at todays price?

    • SoCalBeachDude says:

      The price of gold is rapidly headed towards and to its mean of $456 per ounce and then lower. It is just a speculative fungible commodity of little to no real use and is laughably and preposterously overpriced.

      • Escierto says:

        Goldman Sachs is predicting $2500 an ounce by the end of the year. What Lola wants Lola gets.

      • JohnD says:

        Whatever you say SoCalBeachDude. Please go home to Michael Synder.

    • Dan Romig says:

      Recent gold versus euro:

      1,030 on 29 August 2018
      1,725 on 10 August 2020
      1,421 on 5 March 2021
      1,870 on 8 March 2022
      1,726 as I type this reply

      The quotes are highs and lows of gold vs euro for last four years.

    • sunny129 says:

      Richie Rich

      As long as the rates are rising and the US $ remains strong, Gold will no where. I bought puts for the short and intermediate and leap long calls.
      Until Fed pivots back or pause, I just buy puts.

      • Richie Rich says:

        I see today, with the DXY dropping slightly, and the Gold price rising slightly, that (in this question / observation) there appears to be an intrinsic relationship between the two.
        Therefore, if this relationship is reliable, and at some point in the next 6 to 18 months the DXY falls below the point that Gold was purchased at, I presume that the price of Gold will be higher than what it was purchased at.
        As this report appears to say that the DXY will drop after 6 months……..

        • Richie Rich says:


          <€456 compared to a reported
          "Goldman Sachs is predicting $2500".

          As Jimmy said "You cannot be serious"

  28. Escierto says:

    Only a few of the people commenting above are predicting that the USD will go much higher. It is rocketing towards 108 today on its way to 120. At that point you are going to see mega Third World defaults destroying the banks that funded them. You are also going to see much higher US unemployment as US exports are decimated. It’s going to be a worldwide train wreck and the beginning of the next depression. Have fun girls and boys!

    • SocalJimObjects says:

      Don’t worry. What are swap lines for?

    • Old School says:

      There is some theory that has a name that starts with “Grand”. To sum up in our current situation when the Fed does experimental easing policy it has no idea of the consequences of extracting itself.

      They have influenced every economic actor on earth and what is going to be the response as they try to unwind. I think that is why they are trying to telegraph so carefully where they hope to go, a soft landing.

      If you know your asset is going to be worth 50% less in a year, you try to sell now and that is how panics catch fire.

    • SoCalBeachDude says:

      It would be wonderful to see the US Dollar go to 160 on the DXY where it last was briefly back in 1985 and that will fix many of the world’s entrenched problems by clearing the dead wood from the forests.

    • ru82 says:

      Another reason why the USD is rising is because the abundance of energy and food.

      We have plenty of both.

      Unemployment will probably be low going forward as manufacturing moves back from overseas. Energy is a big component in manufacturing. Is cheap labor (china) more of a business driver than cheap energy and supply chain disruptions? I am not sure.

  29. Michael Engel says:

    1) Milton Friedman : inflation is caused by the increase of the amount
    of money.
    2) ARAMCO confiscation, two oil embargo and Iran/Iraq war caused inflation.
    3) New oil fields discovery and the end of Iran/Iraq war caused an oil
    glut. The glut that lasted two decades beat inflation with some help from Paul Volcker.
    4) WWI caused inflation. Copper prices took off vertically. When WWI was over European kings were deposed along with US copper kings. US bonds deflation cleansed gov debt. In May 2020 inflation was +21.90%. It dropped within a year to minus (-)14.90 in July 2021. The 1919/1921 deep recession cleared the road for the booming 1920’s. US gov portion of the GDP was only 5% in the 1920’s. Cool.
    5) The war between coal and natgas will intensify. Add nuke, H3, the wind and the sun, the waves…
    6) Russia might declare a ceasefire before oil, coal and natgas deflate in unison.

    • Old School says:

      Freidman’s ideas were quickly cast aside because he really believed in limiting the size of government to have a vibrant economy. You can’t have the warfare/welfare state and follow Freidman’s economic theories.

    • ru82 says:

      Inflation is based on monitory policies by Governments and Central Banks.

  30. SoCalBeachDude says:

    The US Dollar is doing even more superbly again today andf is now at 107.95 on the DXY, up 0.87 to a new 2022 high.

  31. SoCalBeachDude says:

    The big news today is that the PRC Evergrande bonds are now in default as of July 8, 2022 and that they have now fallen in price around 38% across their various classes which puts the effective yield (interest rate) up towards the 50% range which right now offers the best interest rate in the world for investors and is the harbinger for much better rates to come in 2022 as long as you leave aside the little issue of risk which is what the world has been doing for decades. Expect the same from Japan as the final result of ‘Abenomics!’

  32. TaxHaven says:

    I wonder what will become of all these manic dollar-buying punters if the US is officially in a recession, unemployment rises, inflation continues and a panic-stricken Biden regime telephones Powell…?

    Shirts will be lost and dollar-buyers will be carted out feet first I think

  33. ru82 says:

    Just read the following. Canceled House Sale Agreements are high for June. But I have noticed that housing stocks are breaking out of a 7 month downward trend and diverging from the SPY. Maybe July is going to look better now that Mortgage rates have dropped from 6% down to low 5% which historically is still a very good rate. Two millennials I know who have been bidding and losing on homes for the pat 1 1/2 years have finally won a bid and are locked in at 5.1%.

    Maybe a short term bounce in the builders related to mortgage rates dropping.

    The share of sale agreements on existing homes canceled in June was just under 15% of all homes that went under contract, according to a new report from Redfin. That is the highest share since the early 2020, when homebuying paused immediately, albeit briefly. Cancelations were at about 11% one year ago.

    Higher mortgage rates and surging inflation are causing many potential homebuyers to reconsider their purchases.

    The average rate on the 30-year fixed mortgage started this year around 3% and then began rising steadily. It briefly shot above 6% in mid-June before settling in a narrow range around 5.75% now, according to Mortgage News Daily.

  34. The Bob who cried Wolf says:

    I went to the dentist last week and the hygienist was giving me economic advice and said there’s nothing to worry about. It’s all cyclical like it’s always been.

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