George Gammon Says Dollar FX Higher Causes Global Economic Crisis

this will create a global economic crisis

what am i referring to i’m talking about the dollar skyrocketing higher over the past few

weeks it got up to over 107 on the dxy yesterday it’s already

crushed economies like sri lanka turkey argentina ecuador and if the dollar

continues to go higher against other currencies we could see countries

collapsing like japan and even countries in western europe to the point where we

have this global economic crisis that could eventually

impact the united states i’m going to explain this to you in three simple fast

steps step number one let’s go over what the basic problem is

let’s start by going all the way back to the gfc something we all know well starts off with the average joe he takes

out a loan to buy let’s say a rental property and his monthly mortgage payment is one thousand dollars a month

let’s say his other expense is about 400 but he’s gets 1500 in rent so he’s got

positive cash flow of about 100 bucks a month not bad

but let’s say that joe has an adjustable rate mortgage

we all remember these so instead of his monthly payment being a thousand dollars now it’s 1200.

he still has the same 400 in expenses the same rent coming in 1500 but instead

of being a hundred dollars positive cash flow at the end of the month now he has

negative cash flow he has to come out of pocket to cover the expenses for the

rental property he just purchased so now let’s move on to the average joe

not as happy as he was at the beginning you could tell he’s got a big frown on

his face so he looks at his balance sheet and says oh my gosh i’ve got to come out of pocket 100 a month and it

could get worse if interest rates go even higher and my loan adjusts again

so he’s got these dollars as assets on his balance sheet but pretty soon he runs out of dollars but he still has

that loan and that monthly payment as a liability you guys know how this story

ends joe goes bankrupt because he doesn’t have any money left to cover the cost of the

rental property that he purchased because the interest rates kept going up

and up and up in other words the burden of his debt continued to

increase until he went bust and he had to give the house back to the bank then if enough

people have these adjustable rate mortgages like the average joe all of these loans go bad and this creates a

systemic risk not only for the banking system but the domestic economy and

potentially the global economy leading again to a global economic crisis

but now what we’re dealing with we’ll say we go from the gfc to what i’m calling the d dfc

the dollar financial crisis and with the dollar financial crisis it’s very

similar to what happened with the gfc and adjustable rate mortgages on homes

but now it’s about a thousand times worse and i might be understating that

because now these rates if you will adjust daily and when there are dollars that are

taking out the balance sheet to make the higher loan payments this exacerbates

the problem by paying the loans with the dollars on joe’s balance sheet it makes the debt

burden even higher and i’ll explain this in one moment but

let’s go over to not the average joe oh no but his cousin down in argentina the average

jose and the average jose starts a widget maker we’ll call it

widget xyz corporation down in argentina and they deal in pesos but

a lot of jose’s input costs are denominated in dollars so he had to go out there and take a

dollar denominated loan we’ll say his monthly payments for this dollar denominated loan are one million

dollars a month okay and let’s just assume for a moment that we start off with a one-to-one

relationship between the peso and the dollar now let’s go through what happens to

jose and you’ll see it’s the exact same thing that happened to joe but on a much

much larger scale so he’s got a one million dollar a month

payment and this is denominated in dollars but right now we’ve got a one-to-one relationship we’ll say his

expenses about 400 000 pesos per month his income about 1.5 million

pesos per month so in this example he is netting a hundred

thousand dollars or pesos per month pretty easy math

but now let’s say the dollar goes higher against the peso and this is what we

have seen to an extreme over the past few months and like i said at the

beginning of the video the dollar now is at 107 on the dxy for most of you that might

not sound like a big deal but trust me if the dollar goes up 10 20

relative to your local currency this could be the catalyst that brings

down the entire house of cards let’s keep moving on with the example so now the dollar is worth

1.2 pesos so in peso terms now the debt has become more of a

financial burden now our peso amount of the loan per month or our monthly loan payment is 1.2

million our expenses are still 400 000 our income revenue still 1.5 million so now

we’re at a loss of a hundred thousand instead of here we’re at a gain of a hundred thousand

it’s the exact same thing that happened to the average joe but what’s different

is not only does jose go bust but then he has to lay off all of his employees

which now don’t have any purchasing power to put a roof over their head buy

food etc and if jose does have pesos on his

balance sheet just like joe had dollars he’s going to sell those pesos to buy dollars to make

that monthly loan payment right but what is he doing he’s increasing the supply

of pesos and increasing the demand for dollars

which like we said here makes the dollar go higher against the peso and

exacerbates this problem in other words it makes the loss that he has every

single month even greater by using the peso cash flow or the peso

assets that he had on his balance sheet to make the previous month’s dollar

denominated loan payment but unfortunately our story doesn’t end

there it gets a lot worse for the average jose down in argentina just like

we saw with the gfc the unemployment rate spiked higher meaning the average

joe wouldn’t have as many people there to rent his property so maybe it goes

vacant to where his income goes from 1500 a month down to zero

all right well let’s say that we have this global economic crisis where the dollar going up and up and up is

reducing economic activity well that means that if the average jose

was collecting dollars let’s say part of his revenue was denominated in dollars

because he is exporting his widget to other countries and those other countries are paying him dollars

for the widgets that he is sending to them or selling them okay well so let’s

just say that he has 1.5 million dollars coming in and that loan payment is 1

million dollars per month and again expenses are 400 000 pesos but what

happens when the global economy slows down now his income or his revenue goes from

1.5 million down to 1.3 million so even if he is making dollars he’s making far

fewer dollars which takes him right back into the same position he was before

where every single month he is losing money and as he loses more and more

money he lays off more and more people and this happens globally therefore the

amount of customers he has shrinks and shrinks and shrinks and then so does his revenue therefore

putting him in a worse and worse position every single month so the main takeaway from step number

one is we had a gfc back in 2008 let’s call it but if the dollar continues to

go higher and higher and higher against other currencies we will

go into a dfc a dollar financial crisis

for the exact same reasons the bottom line is as the dollar goes higher the

debt burden increases for all of these global entities and global economies

just like it did for the average joe during the last global financial crisis

the problem is that the dfc is global

this was specific to real estate so my point is the dollar financial crisis

will be exponentially worse than the global financial crisis we saw

in 2008 step number two unfortunately it gets much much worse

for our friend the average jose why because commodities are settled

in dollars so let’s think about this if jose was in an argentina

in an alternate universe let’s say that didn’t have any dollar denominated

death like we used in this example in step number one they still have big problems

why because most of their trading partners are in the situation that we outlined in step number one

so let’s think about this in a normally functioning global economy let’s say

that we have three dollars coming in to argentina represented by this black

square and this central bank will say the argentinian central bank not sure what they call it but we’ll just say

this represents the entire banking system so if the global economy was functioning

in a healthy way again we’d have three dollars coming in all right well what does

jose do with those dollars well a lot of them he’s got to give to the bank or the

central bank to get pesos because his expenses his payroll as an example

denominated in pesos and then alternatively if jose needs to

buy some commodities let’s say wheat corn or oil he has to take some of

his pesos give them to the banking system to get those dollars in return so

he can buy those inputs because again those commodities are settled in dollars

not pesos so in other words if you don’t have the dollars to buy the stuff you

ain’t getting the stuff no matter how many pesos you have

so this puts jose in the country of argentina in this case in a very

difficult position if their trading partners start going into a recession

because they’re bringing in fewer dollars into the country so let’s think about

this in terms of the balance sheet of the banking system we have assets on the left liabilities

on the right if they have all these dollars coming in because the global economy is functioning on all eight cylinders then

they’re gonna have these three dollars on the asset side of their balance sheet they’re gonna have a lot more than just dollars on the balance sheet so keep in

mind this is only for the sake of this example then the liabilities most likely peso bank reserves or peso deposits

so if they have fewer dollars coming in then we go from their balance sheet

having three dollars to their balance sheet only having one dollar

okay but let’s think about this it takes us straight into a doom loop we’ll call

it the peso dollar doom loop that if the country is bringing in fewer dollars

well they have to have those dollars to get the stuff they need therefore they’re going to have to print pesos to

buy dollars this increases the supply of pesos and increases the demand for dollars

just like we talked about over here if the dollar continues to go higher then we look at this phenomenon in aggregate

total across the entire globe we see that this is going to reduce the

velocity of dollars going from one country to the next which just

exacerbates this doom loop and let’s not forget this stuff argentina needs is

settled in dollars so let’s assume that when our example began and they had three dollars coming

in because the global economy was running on all eight cylinders that one peso bought this amount of

goods well now it costs them two pesos to buy the same amount of goods which puts them

into a deeper recession than they are already in think about the united states

right now how we see the cpi at 8.6 what makes you realize the demand for

food energy shelter is very inelastic therefore people if they have to are

going to prioritize food energy shelter which means they’re going to take money away from other

things that they would have bought one man’s spending is another man’s income so if they’re taking money away

from all the things they really don’t need to pay for the things they really really really do need then this creates

an economic recession within the country which has a systemic effect on all the

other countries because there’s fewer dollars going out of argentina to xyz

country or one two three country because their purchasing power has been

diminished and it’s not just one man’s spending as another man’s income but one country’s

spending is another country’s income so if we go into this scenario meaning the

dollar keeps going up and up and up and up causing these recessions in all of

these countries reducing their purchasing power and it’s exacerbated by

them having to print pesos to buy the dollars they need to import the

commodities in the first place it takes us right back to this situation that we outlined in step number one where there

are fewer dollars going into the we’ll say the original jose

to pay off his dollar denominated debt you have greater defaults this puts

pressure on the banking system which means dollar liquidity goes down the

less dollar liquidity we have meaning the less access to dollar denominated

credit these corporations have the greater demand for the existing dollars

that are circulating within the system and it takes us right back to this

dollar doom loop and instead of happening just at a domestic level in argentina it happens at a global level

taking the dollar maybe from 107 to 110 to 115 to 118

where the central planners the countries themselves the central banks would have to come together and figure out some

sort of solution before the whole entire global economy implodes

whoa time out i know that might have been a little tough for a lot of you to follow so let me describe it in a little bit

different way so hopefully you can connect the dots and make sense of this all so i know it gets very complex

so let’s go over to the far side of the whiteboard and start with a simple question

we’ve got to understand that we live or we have a debt based monetary system so the way dollars

or currency units are created is by banks lending them

into existence but there’s a catch if the banking system creates

ten dollars worth of loans there’s actually twenty dollars worth of

debt let’s say because you’ve got to add interest so i know the math isn’t perfect here but i’m

just using this as an example so again if the banking system creates

ten dollars of currency units by lending them into existence there’s more debt

than currency available to pay the debt when you include the rate of

interest now a lot of people would come to the conclusion that oh my gosh this means that the system has to fail

that isn’t entirely true because if you have velocity

of this ten dollars or of these ten dollars that are circulating within the system if velocity is high enough you

can pay twenty dollars worth of total debt including interest with only ten dollars

in the system but what we’re talking about in these examples is economic activity being

reduced and it can be reduced many ways one would be global lockdowns

how can we assume that locking everyone in a cage and not allowing them to produce goods and

services is going to lead to anything other than lower velocity and that’s

just one example of central planning another would be sanctions on russia

that’s going to decrease the velocity and i could go down the list of these things that the governments have screwed

up that create these unintended consequences

or maybe those unintended consequences aren’t so unintended

i’ll let you be the judge but the bottom line here is when economic activity decreases so does the velocity

and you get into a position where if the velocity isn’t high enough like we said earlier there aren’t enough currency

units to service the debt so then what happens it takes us right

into this loop where there are more currency units created of xyz currency

called pesos to buy the existing dollars that are out there therefore the demand

for the dollars increases significantly if the velocity goes down in other words

if economic activity globally declines and what makes the problem even worse is

as the velocity goes down there isn’t enough dollars to service the debt but

there also isn’t enough dollars to buy commodities like food and energy and we

know by studying history that if people don’t have access to the necessities especially food that’s when they go out

to the streets with the torches and the pitchforks in other words social unrest

and if the dollar continues to go higher we’re not only going to see this social unrest in countries like ecuador like

sri lanka like turkey but we’re also going to see it spread to other

countries like japan like western europe and possibly even the united states

and i know many of you right about now are probably scratching your head and say wait a minute george how can the united states have a problem when they

could just print any of the dollars they need well you’re right the united states

can print the money to buy the stuff but unfortunately we don’t make any of the

stuff so if all of these corporations like the widget maker that jose has are going

bust that means that the next time you go to walmart target home depot there isn’t going to be any

stuff available for you to buy with your dollars also we produce a lot of commodities

here in the united states but we don’t produce all the commodities we consume we import a lot

especially energy when it comes to different grades of oil than we produce

right here in the united states so if the whole global economy stops producing

stuff that means that we in the united states will have a lot less stuff

shortages regardless of how many dollars that we have in our bank account or how

many dollars the government and the federal reserve can print my point is if the dollar continues to

go higher and higher and higher it’s not just a problem for all those other

countries let them deal with it not even close this is a huge problem not only

for the globe but for americans and the united states

step number three so what are the solutions how do we get

the dollar back down to a level to where is manageable for the global economy

i know this hasn’t been the most uplifting video i’ve ever done so i definitely want to

go over some solutions but trust me i could have got even more

doom and gloom if i would have talked about the amount of derivatives that are actually built or created on top of this

global dollar denominated debt let’s just use as an example the gfc again

maybe there was 5 trillion or so in mortgage-backed securities or mortgages

that all these derivatives like cdos and credit default swaps were built on well

now we’re talking about probably 200 trillion dollars worth of debt

that is the foundation or the base for all of these other or very similar types

of derivatives that we had back during the gfc so let that one sink in for a moment

that’s a completely separate video in and of itself but getting back to the solutions here what can be done

first the fed could just print an epic amount of dollars

and in the united states we could somehow just produce a lot less than we’re

already producing now i know this wouldn’t be ideal for the u.s economy but i’m strictly trying

to think through how we could get the dollar down if we really needed to

we meaning the central planners the politicians etc so in this case the fed

would just pretty much print money give it to the average joe an average joe would take those dollars and give it to

jose the average joe would just have to produce less than we already produced

and that in and of itself would be a challenge because the us doesn’t produce anything but just hypothetically

we don’t produce or we produce even less we offshore even more so more

stuff comes in meaning our trade deficit increases even more more dollars go out

and circulate in the global economy okay and i’m not saying these are perfect solutions i’m just trying to think

through everything that we could do to put downward pressure on the dollar swap lines now most of you have heard of swap

lines going back to 2020. this is pretty much where the fed just puts

dollars in the account of xyz central bank we’ll call it argentinian central

bank and the argentinian central bank gives the fed pesos puts it in their

account and we just have this swap dollars for pesos at a specific interest

rate and then the central bank has dollars to go ahead and give to jose for his pesos now there

is a catch here because the central bank doesn’t go directly to jose so the banks

are the intermediary if you will so in order to get those dollars to jose the banks have

to lend them to him and are the banks going to be willing to lend to anybody

and the type of environment that we went over in steps one and two probably not

now those banks could just swap dollars for pesos to give to jose but that would

require his business to be making a profit even in peso terms to begin with

and with economic activity declining with velocity slowing that’s going to be more and more difficult so this is by no

means a panacea next we’ve got interest rate differential pretty easy

so if the fed just drops rates down to zero and all these other central banks just

bump rates up to let’s say five percent then the dollar would most likely go

down this would put downward pressure on the dollar but here you can already see the problem one of our main issues is

economic activity globally in velocity therefore what’s going to happen to

economic activity outside the united states if the bank of japan bumps rates to five percent or the ecb

does the same thing you’re gonna have the opposite of economic activity you’re gonna have economic destruction to a

massive degree but let’s think this through if the dollar has downward pressure if the fed

starts lowering rates and the other central banks start raising them we’re in the exact opposite

environment right now as we speak the fed is actually raising rates even

faster than these other central banks therefore making the problem even worse

so let’s take it to the next step if we continue to see the cpi at high levels

in the united states this would prompt the fed to take rates higher and higher

and higher which would do what that would put upward pressure on the

dollar putting downward pressure on the global economies

increasing the probability that we have this dollar financial crisis or global

economic crisis whichever you prefer so again by no means a panacea and right

now we’re actually doing the opposite so number four we could have a booming global economy

because all these banks in the euro dollar system if they see productive loans out there they’re going to create

more and more and more dollars so this is pretty simple if we’ve got jose

that starts trading a lot doing business with the average joe and the average jose and the average joe

start doing a lot of business with their asian cousin we’ll call him the average

hoe and the average poe starts doing business with the average jose

then we could have this velocity that we’re talking about this economic activity really increase more dollars

are being created like we said with the euro dollar system and this could also

solve the problem this could bring the dollar back down to a tolerable level

number five we could have a plaza accord 2.0 back in 1984

85 if my memory serves me right the united states met with countries like japan and germany the dollar was

extremely high they needed to get it back down so the central planners did this artificially and this basically

means the fed goes out there prints a massive i mean trillions and trillions

amount of dollars and just sells them into the global fx market to increase

the supply if the supply goes up that high most likely the dollar comes down

now this gets very technical and i’m not going to dive into that but this is basically the gist of how they might do

a plaza accord 2.0 they could do it in a different way who knows but the main

takeaway is that the central planners would come together and artificially lower the value of the dollar just like

they did back in the 1980s so then with the plaza accord 2.0 the question

becomes well at what point will they need to step in and do something and i

can’t answer that question for you but what i can say is if we throw up a chart of the dxy right now editor go and help

me out with that one we can see that we’re at 106 107. now i’m not a

technician by any means but i do understand just basic support and resistance levels and it seems like if

we break through let’s call it 109 or 110 that from a technical analysis

standpoint we could move all the way up to 118 very quickly would this create

enough economic damage for the central planners to come in and try to quote unquote do something i don’t know we’ll

have to see how it plays out so the main takeaway from this entire video is we are moving into some unprecedented times

we’re going to see a lot of uncertainty and it’s definitely going to be very

tumultuous so now is a great time to check out rebel capitalist pro it is the investment form

that i have with my partners lynn alden and chris mcintosh other pros brent johnson uh jason hartman tony grier

patrick ceresna and our objective is to help you navigate these tumultuous

economic times to the best of our ability so check it out right now at

georgegaming.com forward slash pro i think you’ll find this is one of the best ways to ensure that you are

building wealth and thriving in this world of out-of-control central banks

and big governments