The bond guru known in financial circles Jeffrey Gundlach, Founder and CEO of DoubleLine Capital in the US, this week has again done a lengthy interview with Julia La Roche from Yahoo Finance composed. The two talked about the status of the current global economic development in view of the COVID-19 pandemic, about currencies and about expectations of the central banks.
Most interesting, however, are Gundlach’s prospects for the US dollar and its future as the world’s reserve currency. To put it mildly: According to Gundlach, it doesn’t look particularly good.
Gundlach, who is never afraid to express his beliefs, had a great deal to say about the future of the US dollar. Regarding the United States government, Gundlach indicated that the situation was not looking good. Gundlach said:
“We run our economy in a way that almost looks as if we are not interested in maintaining the status of a world reserve currency.”
Gundlach noted that after the pandemic, by far the strongest economy was no longer in the USA, but in China:
“China has made no secret of the fact that it wants to be a global player and at least have a place at the table of the global reserve currency”he said, adding
that China has made no secret of it, that it wants to make its military dominant, perhaps the largest in the world.
When we combine this with the fact that the US is “growing its debt like crazy,” it becomes clear that the dollar is on the way to losing its reserve currency status, Gundlach said. According to Gundlach:
“As long as we continue this policy, and more aggressively – we are not pulling it back in any way – we are facing a roadmap that is clearly aimed at the US dollar losing its status as the sole reserve currency.”
The issuer of a global reserve currency has – at least for a temporary period – the option of printing its currency as desired without further damage. This fact has far-reaching geopolitical consequences. For this reason, a complete copy of the question from Part 2 of the interview that Gundlach was asked about the future of the US dollar as a world reserve currency follows.
JULIA LA ROCHE: Welcome back to Yahoo Finance Live. I am Julia La Roche. And we’re having a fascinating discussion with DoubleLine Capital founder and CEO Jeffrey Gundlach. Jeffrey, you just made a point about your negative views on the future of the US dollar. I want to explore this a little further and help our viewers understand what some of the longer-term implications of this development could mean, especially for the US’s standing on a global scale.
JEFFREY GUNDLACH: Well, the USA has enjoyed the status of the only reserve currency in the world for decades. And that’s an incredible benefit. We also have the largest military in the world, which kind of goes hand in hand with reserve currency status I think.
But after the lockdowns – and the pandemic that continues – by far the strongest economy in the world is now the Chinese economy. And the US economy has recovered through a lot of consumption. Much of this consumption rests in China. That is one of the reasons why China has such a strong economy.
So what we are seeing is that the United States is starting to lag behind in economic growth. This is not a new development. It’s been going on for a generation – the US is falling behind. But the Chinese economy is growing so fast that estimates of when the Chinese economy will be the largest in the world are being postponed ever further. Twenty years ago it was thought that the Chinese would be bigger than the US by 2050, and then it was 2040.
And now the estimates are that maybe it will be by the 2020s – maybe the Chinese economy will be bigger by 2028. And China has made no secret of the fact that they want to be a global player and at least want a place at the table of the world’s leading currencies. And they spend like crazy on the military and have made no secret of the fact that they want to make their military dominant, perhaps the largest in the world.
They also have huge savings in China. They have a culture of saving – are the gold medal saving winners in history. So if you put all of these things together with the US debt growing like crazy – we have debt-to-GDP ratio that is the bulk of our so-called economic growth. So is it really economic growth, borrowing money or printing money, sending checks to people who go out and buy goods on Amazon – in addition to paying off debts on speculation – and those goods are from China?
So we run our economy in a way that is almost as if we were not interested in keeping the status of the global reserve currency – or keeping the largest military or the global so-called superiority or control. So as long as we continue to pursue this policy – and we are pursuing it more and more aggressively, we are not reducing it in any way – we are facing a development that will clearly result in the US dollar losing its status as the sole reserve currency.
And I think as long as we have this policy, it is almost certain that that will happen. And because of this, the dollar rate should fall. The value of the dollar is so high because we enjoy the status of a world reserve currency. And we don’t really respect him enough. We take it for granted, I mean.
We seem to take a lot of things for granted in the United States today compared to how we thought about things in previous decades and generations. And I believe that we are creating the conditions for us, unfortunately – I use the word ‘enjoy’, but I mean, I should say better to ‘experience the consequences of our actions’ – just as we have really not had a serious economic program since 1980 do more, but it has really accelerated tremendously over the past decade.
And there is no sign that that is wearing off. So that’s why the dollar will go down. And it has already peaked. The DXY (Dollar Index) index peaked at 103. There was a double peak in January 2017 and then right after the pandemic. And now we’re about 10 percent lower, and I believe the dollar is about to break the lows of the past downward cycle.
You see, the dollar has been in a series of falling highs for decades. That goes back to the 80s. And because of this, I think that the next time the dollar breaks down, it will break the recent low of around 80 and even the low of 70. So I think there is easily 25 percent downside potential for the US dollar. And with stocks so overvalued by historical standards, that means that other stocks – for US-based investors buying stocks in foreign currencies (I prefer the euro at the moment) – will ultimately be the place for emerging markets (maybe next year) where one should be.
Gundlach was also asked whether the central banks were able to raise interest rates and reduce quantitative easing (QE: Quantitative easing) go back as they claim they want to do it. But Gundlach says this is just not realistic:
“I’m sure the FED is not seriously considering hike short-term rates while it is in quantitative easing. Therefore, while interest rate cuts were seen as impossible for 2021, it is rumored behind the scenes that some of the FED – Officials are thinking about starting interest rate cuts maybe next month, I don’t think that’s going to happen.
I think they will wait and keep watching. They cling to this temporary or temporary inflation thesis. They were already wrong. When they said that the rise in the consumer price index and other inflation would be temporary, they said so for two or three months. But more than two or three months have passed. Now they are talking about six or nine months. “
When asked how he assesses the future of the economy, Gundlach pointed out that it is becoming more and more difficult to rely on old methods when it comes to assessing the future, since the state intervenes so heavily in economic activity:
“Since the government interfered so heavily in the economy, the economic picture has been very, very difficult to assess … So it’s very difficult to see what’s going to happen … Everywhere you go, in almost every job that you ask It is said that it is difficult to find a workforce, which is no wonder, because people get as much or more money when they are not working, and the government continues to support that.
So what will happen when those stimulus programs run out or people actually have to start paying their rent? There will be enormous economic upheavals. The officers have grabbed the tiger by the tail and at the moment they are not being clawed or torn by it. But if you let go of the tiger’s tail, you will very likely get torn apart. “
Gundlach added that an economy based on the issuance of debt and consumption is not really viable in the long run. A truly sustainable economy must be built on production and saving:
“You know, 70 percent of US GDP is consumption. And as the economy recovers on a GDP basis, it does so with a huge increase in the trade deficit. Several percentage points of GDP are due to an increase in the trade deficit. And that is.” not real GDP.
Consumption is not really the economy. The economy is about production. And when you buy goods made with stimulus money in Asia, it shows up as GDP, but it’s actually Asian GDP. In the United States, that’s just consumption.
So the economy isn’t really as strong with five million fewer jobs as you said. It appears mathematically correct in the productivity equation, but in reality it is Chinese productivity. Because again: if you only consume goods, you have no real economic growth. You only consume, but we represent it as economic growth. “
At the end of the interview, Gundlach stated that he expected – as long as the economic stimulus programs are continued – a further increase in food prices, for example. Making it clear that serious economic upheaval is imminent, he said, “When this party ends, there will be a hangover in the form of a huge decline in economic growth.”
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