Death of the Dollar is Becoming One of the Big Stories of the Year

The US dollar has suffered its worst run since the perilous Nixon dollar days that came about in 1973, which precipitated out of Nixon’s decision to end the backing of the dollar with gold in 1971. That ended the Bretton Woods international monetary system that formed right after WWII. There have rarely been worse years for the dollar than this one, but what is the dollar’s decline being credited to?

Tariffs burning up the value of the dollar

The president’s stop-start tariff war, the US’s vast borrowing needs and worries about the independence of the Federal Reserve had undermined the appeal of the dollar as a safe haven for investors.

And how is the dollar traded as a safe haven by investors? The safe-haven trade is almost entirely by US Treasuries. Now, this, I pointed out yesterday, as I have pointed months ago to my paying subscribers, is THE KEY to understanding the most cataclysmic risk to the Trump Tariff Wars.

As I have also noted along the way, no one else that I’ve heard is talking about what tariffs will do to destroy the dollar. However, if you read here months ago as a paying subscriber, you knew the likelihood of the worst possibilities to come. If you read here as a free subscriber now, I’m giving you this major key now that word is coming in. I shouldn’t in terms business sense but, but I’m like that. I write more because I want people to understand what is happening to them than I do for the money (but, I’ll tell you, the money would be nice should you decide to reward my efforts to play it straight all the way, whether telling it straight helps me or hurts me ; ) I’m mission driven.

Why is this likely the worst thing that could happen? The dollar is crashing like it hasn’t since Nixon removed it entirely from the gold standard because Treasuries are no longer the world’s most appealing safe-haven investments (outside of metals). The logic behind my prediction was so simple and basic that I’m surprised I still hear no one warning about it; but you are getting the warning if you read here, and I hope you’ll share it with many others.

The simplicity of it, to repeat it in case you didn’t see those articles or in case you share this one, is that, if foreign trade is shrinking because of sudden massive tariffs all over the world (and shrinking trade is the normal purpose of tariffs), then why on earth do you need a trade currency? If you don’t need a global trade currency, why do you need US dollars since you are not trading much with the US? So, fewer Treasuries are traded, meaning the dollar drops in international value on currency exchanges.

That has two natural outfalls: one is that interest rises on the US debt as the demand for US debt (Treasuries) falls. The other is that the crashing dollar makes all imports higher in price in the US, and that comes on top of whatever price increases we see directly from tariffs. In short, if the international value of the dollar drops (which does not happen as a factor of US inflation but as a factor of supply of dollars internationally and demand for those dollars—mostly in Treasuries), then businesses have to fork over more of those dollars when exchanging them for goods or services from foreign suppliers because of the exchange rate. That, in turn, however, has an amplifying affect on US price inflation because wholesalers and retailers are pressured to make up those higher dollar costs on their purchases. So, the damage to the dollar exchange rate adds to the price pressures that the tariffs also directly add to the cost of goods sold.

It is the debt bomb or dollar death spiral that I am most concerned about.

US inflation could become quite hot, as a result of that compounding effect, but, if US debt interest rises quickly due to declining demand for dollars, all other interest rises more quickly; and the only way the Fed can try to fix that is to print massive amounts of money into the already scorching inflation. It does this by rushing in to buy all massive amounts of the Treasuries fewer and fewer people want in order to show their support for their safe-haven status and keep US interest from rising even higher.

Yikes! Bad all the way around—higher interest for everyone on everything, slower economic growth because of the higher bond-market-driven interest rates, and force-Fed money printing as gasoline thrown right into the existing flames of all of that inflation. When the Fed goes into that kind of money printing, it typically weakens the dollar even more, and that is where you see the present vortex widen into a roaring tornado of a death spiral. When you consider that the presently forming vortex is already greater than anything seen since Nixon did his best to kill the dollar.… Well, I needn’t explain how bad that could become.

The alternative to the typical Fed money printing is that the recession becomes so deep we someday retroactively call it a depression. If the Fed, for once, resists the path of trying to print our way out of every problem, which would be the right decision for it to make, but not one it ever seems inclined to make, then we have to go through a very deep recession because the federal government will be pressed to raise taxes to pay for its burgeoning debt, being blown even larger at a quicker pace by rising interest rates adding to that debt, and it will have to hugely cut spending out of Big Beautiful Blob -or- default.

Either of those two options would turn the present yawning recession into The Second Great Depression when those massive budget cuts and tax increases (or default) happen inside of the existing recession we saw opening up last quarter during a time of stagflation (as I’ve always said this would be) and DOGE layoffs, all made worse by retaliatory tariffs damaging US export trade. The economic destruction could become horrendous and almost unstoppable. That is the risk of the Trump Tariffs—total dollar collapse or total economic collapse … or both together.

You can see there is a major bad chain reaction that can happen there. It’s dangerous dynamite to be playing with. Trump, of course, has already been exerting his will to get the Fed to shove coal into the flames of inflation ever since he became president again. So, the third-world hyperinflation, Zimbabwe-inspired path is not entirely out of question if the Fed rushes to money printing to save the US from this tariff damage to Treasuries that we already see starting to form like a funnel cloud still high in the sky, especially if the government, again, doles the money to the general public, as Trump may want to do, having done it before.

This is the big risk you need to think about if you are to understand the major forces that are likely coming down on us. There was, of course, always a chance, though it would make no sense to me, that the tariffs wouldn’t cause that damage; but today’s article about the worst decline of King Dollar under King Trump clearly says it IS happening already.

Now, do you think Big Beautiful Blob, piling even more mountains of debt rapidly on top of that is going to help the equation? I don’t. And, if you understand those forces, you understand why I have been so tough on Trump for his hugely misguided and mistimed tariff policies and on all Republicans for becoming such traitors to their claim for decades that they are the spending hawks in budgeting.

What a laugh! Of course, I’ve always argued their pretense at being budget hawks was a total façade in this uni-party system because the only difference between Dem’s and Repubs when it has come to deficit spending has been what they are willing to spend the new debt on each year! True to form, they are now tripping all over themselves in a rush to spend more debt than ever on the biggest military buildup we’ve seen since, at least, Nixon’s Vietnam adventure, if not since WWII (adjusted for inflation). What a house of idiots!

Also, highlighted in the following headlines today is another good article going back to the Nixon days on why this stagflation is not going to feel like the 70s, but is going to be its own kind of slow slog through the swamps of dollar death. Remember, too, I am the guy who was never wringing my hands about the dollar’s collapse UNTIL the new Trump Tariff Wars. That’s when I said the mechanics for the dollar’s destruction clearly came into existence. The dollar would not die due to CBDCs, though its eventual attempt at salvation may come through a CBDC, or die due to the BRICS nations undermining it. However, it can certainly die due to massive global US tariffs killing any need of it as a global trade currency! And with Big Blob making it look not very safe as a haven, it’s really imperiled more than most are realizing right now; yet, virtually no one seems to be seeing that tariff connection.

So far, we’ve seen the US trade deficit with other nations widen as US imports remained flat, but US exports got crushed! Likely, imports were spared due to front-running of US import tariffs by US buyers, while other nations have exacted retaliatory tariffs on our exports that have not seen much front-running in other nations by their citizens because the rest of the world is not as stupid as we are: they are not launching tariff wars with the entire world at once; so … they have many products they can import from all over the world that are not impacted by their retaliatory tariffs on the US. These become a substitute for US products, taking down our exports to those nations. We, on the other hand, have inflicted ourselves with major tariffs on just about everything we import from everywhere. That makes us the biggest losers. There is just so much stupid in play here.

Anyway, I recommend reading the highlighted article on stagflation to get a good sense of what our last major experience with stagflation was like and how this time might be different but not good. I’ll note, though, that the article states a major difference is that last time we had an embargo on oil created by OPEC. This time we are the world’s biggest oil producers, so we don’t have an embargo. That, however, will not be the balm for our pains the article may think it is because this time we have an embargo on everything else, which we created for ourselves!

Even Treasury Secretary Scott Bessent chose to use the world “embargo” when describing the highest tariffs the US exacted on China, explaining they effectively ended all trade with China. Now, we’ve dropped those rates, but they are still high enough that we can say we have a partial embargo. In fact, they may be high enough that they still turn out to be, effectively, an full embargo on trade with China—our major trading partner for something like 60% of everything we buy.

Wolf Richter also has an article in the headlines below (boldface) about the new slow rise in inflation and how there is no evidence of tariff inflation in that. I agree with him, but will add the caveat, which my predicted inflation has always had, which is that tariff inflation will not start to show up until tariffied products (pun intended) hit the shelves in the early summer, and that will not show up much in statistics until July gets reported in August. You’ll see it on the shelves before you read about it.

Now, I’ll close with this comical note from the Financial Times article quoted above about the dollar’s decline:

The currency’s slide has confounded widespread predictions at the start of the year that Trump’s trade war would do greater damage to economies outside the US while fuelling American inflation, strengthening the currency against its rivals.

It didn’t confound predictions here. It only confounded them everywhere else because no one saw the obvious key relationship between global trade and the global trade currency, which is exchanged via Treasuries. If you read here, you saw only predictions that the tariffs would weaken the US dollar against its currency rivals because no one wants dollars when there isn’t much US trade to exchange for!

Economists in all their fancy metrics often miss common sense.

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