“When the facts change, I change my mind. What do you do, sir?” — John Maynard Keynes, British economist (1883–1946), in reply to a criticism during the Great Depression of having changed his position on monetary policy, as quoted in Lost Prophets: An Insider's History of the Modern Economists (1994) by Alfred L. Malabre, p 220
"Green shoots" has become the new economic mantra used by the media to describe our current economic condition. The recession that began in December, 2007 is now in its twentieth month. You would have to go back as far as 1981–82 or 1973–74 to find a recession that has lasted this long with unemployment rates this high.
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Source: National Bureau of Economic Research (NBER)
The "green shoots" mantra is being used to reassure investors that "things will soon improve, therefore take hope things will soon be back to normal." We disagree with that assumption. We believe things will never go back to the way they were but a year ago.
What we are witnessing in real time is the end of an era. For more than 40 years the government has used monetary and fiscal policy to soften the blow and cushion the impact of economic contractions. For decades now, modern economists have thought that government policy could be used to tame and overcome the business cycle. For a time, it seemed to be working. During the 1980s and 1990s we experienced only two recessions in the United States. The time between and severity of those recessions lengthened and lessened with the economy experiencing only 2–3 quarters of negative economic growth.
In reality there was no miracle economic cure for the recessions during the 1980s and 1990s. Increasing amounts of debt were used to leverage the economy, spark consumption, rekindle economic growth and bring the country out of recession. The market/economic research publication Bank Credit Analyst coined the phrase "The Debt Supercycle" to describe the forces behind the rising trend in U.S. debt burdens during the last four decades. Escalating debt levels created inflationary bubbles—each one more overblown than the last—which increased the economy's and financial system’s vulnerability to shocks. Each time the debt-driven bubble burst, authorities were forced to take ever-more-desperate reflationary actions in order to prevent the system from imploding as it tried to unwind all of the accumulated financial imbalances. The result is that each past reflationary episode set the stage for even greater financial excesses and imbalances down the road.
As shown in the graph below, debt burdens have grown tremendously over the last four decades with a sharp acceleration beginning in the 1980s.
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Source: Casey Research, The Casey Report, Volume II, Issue 7, July 2009, p 4
Total debt to GDP has risen from under 150% in the 1950s to today’s level of 372%. That debt level will approach 450% over the next few years as a result of the accelerated spending of the Obama Administration (which piggybacked on some expensive stimulus measures implemented by the Bush Administration). The graph below puts our current predicament into perspective. It reflects all manner of debt from the consumer to corporations to the government.
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Source: Federal Reserve, Bureau of Economic Analysis (BEA).
Note: Total Debt corresponds to the figures on the right axis; all other debt calculations correspond to the figures on the left axis.
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Source: John D McKinnon, " Trillion Defecit Complicates Obama’s Agenda," The Wall Street Journal, 15 July 2009
There is a finite limit to how much debt a country can absorb, but it is hard to identify what that point is. Analysts have worried for decades that the U.S. was reaching the outer limits of its ability to support more debt, but such fears have proved to be misplaced, as the ratio of debt-to-GDP has continued to climb. The U.S. long ago surpassed the domestic capacity to finance its spending from domestic savings, and has relied increasingly on borrowing from abroad. The result is that foreigners now own and control over 50% of U.S. public Treasury debt, over 25% of our corporate debt, and nearly 20% of U.S. equities.
While the U.S. government continues to successfully tap the debt markets to finance trillion-dollar deficits, it is becoming more difficult for consumers and corporations to get financing. Banks have tightened lending everywhere—from home mortgages, to consumer lines of credit, to credit cards. Only sound companies with strong balance sheets have been able to tap the corporate debt markets. Those that do manage to tap the bond markets have been forced to pay the highest interest rate spreads in well over three decades. Economists refer to this as the "crowding out" effect. The enormous debt financing needs of the federal government are crowding out the financing needs of corporations and the consumer. The result is that the rate of change of debt expansion has been contracting at the consumer level. Moreover, the savings rate has now turned positive, rising from a negative rate two years ago to the current rate of 6.9%.
This has enormous implications regarding future economic growth. As we see it the economy won't begin to recover until the end of the year. Even then we may only get 2–3 quarters of positive economic growth before the economy turns down again. By 2011 we should head back into another recession since Bush's tax cuts expire at the end of 2010; the Bank Credit Analyst research group is also predicting another recession by 2011 due to massive tax increases, higher rates of inflation, and higher oil prices. Furthermore, in order to finance Obama's proposed healthcare plan, tax rates may rise as high as 52.4%. A 47% tax rate with an additional 5.4% surtax on married income of ,000,000 (a surtax of 1% applies for married incomes over 0,000, and 1.5% over 0,000; these rates could rise to 2% or 3% respectively if certain targets are not met) has been proposed. This does not include nearly trillion in new taxes that will be enacted under Cap and Trade. One of the lessons that the current administration has failed to learn from the Great Depression is that raising taxes during the middle of a recession lengthens and exacerbates the economic decline.
That is why you are starting to hear more talk about a second economic stimulus. The Administration may deny it, but according to the economic sources we subscribe to, we have it on good authority that the administration is already working on a second stimulus plan that may be offered up during the first quarter of next year. The current stimulus plan begins to wind down by Q2 of next year. With mid-year elections coming up next fall you can bet another economic stimulus plan is in the works.
Here is why. Rising stock prices during the 1980s and 1990s, and then rising housing prices during this decade allowed consumers to finance spending in excess of income gains. This resulted in pushing up consumer spending as a share of GDP from a 62% average to 71% this decade.
Now, with stocks having declined for the second time this decade, and with housing prices still in search of a bottom, consumers are left with no new major sources of borrowing to fund their spending. In response to asset declines, consumers have embarked on a new wave of frugality, a theme we highlighted at last year’s Client Only Meeting. Over the past nine months, both BusinessWeek (9 October 2008) and Time (27 April 2009) have highlighted this new trend towards frugality.
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The problem for the government is that the majority of the economic stimulus packages is not being spent. After-tax income rose 0 billion at an annual rate in April and a further 8.1 billion in May. However, savings jumped 6.2 billion in April and jumped 0.3 billion in May.
So consumers are saving rather than spending virtually the entire fiscal stimulus. What this means is two different sides of a bookkeeping entry—an increase in the federal deficit matched by an increase in household savings. You can see this new trend in the graph of the U.S. personal savings rate below.
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Source: BEA
This brings me to our conclusion regarding future economic growth. Yes, we may see some of these so-called green shoots morph into "green stalks" beginning next year. But I believe it won't last. High consumer and corporate debt levels are likely to lead to higher savings rates in the years ahead. So whatever economic bounce we get from massive government deficits won't last long. I want to point out that it is not unusual to see at least 1–2 quarters of positive economic growth within the timeframe of a recession. Since the end of World War II, 8 of the 11 recessions has had at least one quarter of rising GDP within them, but then suffered further weakness before the economy finally hit bottom. This idea that recessions start at the top and then decline steadily until they hit a bottom is an economic myth. Each recession takes a shape of its own. The economic whizzes have come up with an alphabet soup to describe them as V's, U's, W's, or L's. The economist A. Gary Schilling believes we'll experience a saw-toothed pattern along declining trends, in other words a series of W's.
It took the United States four decades to go from the world's largest creditor to become the world's largest debtor. You cannot resolve four decades of debt accumulation in just a few years. It is going to take time for consumer debt loads to be unwound. The economic models of debt-based consumption spending will no longer work. If the country wants to see its economy revive it is going to have to go back to what drove our economy during the first half of the 20th century: saving and investment. You cannot borrow your way to prosperity. This means we will have to go back to what we do best which is: make things. That means reviving our manufacturing base, expanding our technology lead, and supporting our commanding agricultural base.
It is unfortunate that very few in Washington, DC seem to understand these economic truths. The government is still trying to encourage debt accumulation and consumption. It won't work. The "Debt Supercycle" era of American economic growth has come to an end. We expect consumer and corporate downsizing to last well into the next decade. If you want to know what this may look like you need go no further than the 1970s. The economy will experience a saw-toothed economic growth pattern. Economic growth periods will be brief and punctuated by periodic downturns. This economic pattern will have broad implications for investment markets. The key to survivability is going to be flexibility.
Investment Cycles and Risk Management
“There is a time for everything, and a season for every activity under the heavens…a time to plant and a time to uproot…a time to tear down and a time to build…a time for war and a time for peace.” — Ecclesiastes 3:1, 2, 3, 8 (Today’s New International Version)
You have often heard me speak about investment cycles. If you examine investment markets you will find they have a pattern. Most investment cycles last between 16–18 years. They tend to alternate between bull markets in paper assets and bull markets in commodities.
To paraphrase Ecclesiastes there is a time and a season for everything. After experiencing the worst depression in our nation’s history and after fighting one of history’s bloodiest wars, the U.S. stock market experienced a long bull market run from 1948–1966. The Dow Jones Industrial Average (DJIA) hit a peak of 1,000 in 1966 and did not surpass that level until 1982.
As shown in the graph of the DJIA taken from the bear market of the mid-'60s to early '80s, the bear market in stocks resembled a giant roller coaster with spectacular downdrafts as well as upswings in prices. During that entire period the stock market experienced five short bull and five short bear markets with bear market losses as high as 44.9% and bull market gains measuring 74.7%. Despite periods of market upswings, overall, the stock market went virtually nowhere for over a decade and a half.
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Source: Bloomberg
While the stock market vacillated between gains and losses during that time period, the commodity markets were experiencing a major bull market that took commodity prices up fourfold. Individual commodities such as oil rose from .25 a barrel to over a barrel. The precious metals—gold and silver—experienced more spectacular gains with gold rising from an ounce in 1971 to a high of 0 in 1980. Silver’s run was even more spectacular rising from a little over __spamspan_img_placeholder__.50 to a high of .
However, during this timeframe, commodity prices as a whole, like the concurrent bear market in stocks, also experienced spectacular gains as well as convulsive corrections (see chart below)—even though the gains in commodities were on a long-term up-trend.
Gains & Corrections in Commodities 1971–1982
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Data Sources: Commodity Research Bureau, Kitco
After rising in spectacular fashion from a low of in August of 1971 gold prices rose nearly sixfold to 0 an ounce in 1974 before falling almost 50% in 1975 (see chart below).
Detail: Gains & Corrections in Commodities 1971–1977
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Data Sources: Commodity Research Bureau, Kitco
Clearly, bull markets in commodities and bear markets in stocks are more difficult to navigate than bull markets in equities. As these graphs illustrate, a buy-and-hold strategy doesn't work very well during bear markets in equities. During these periods downturns can be quite severe, just as upturns can become explosive on the upside.
One only has to view the events in the stock and commodity markets over the last year to confirm this point. Although the oil markets rose fifteenfold from 1998–2008, they fell by 74% in a matter of eight months, something never experienced before in the oil markets. The characteristics of bull markets in "paper" (equities) and in commodities are entirely different. Bull markets in paper generally occur during a time of political, economic and social stability and a time of peace. Think back to the Reagan and Clinton presidencies. The Cold War had ended, Paul Volker had tamed the evils of inflation, the Reagan tax cuts had spurred economic growth, and Alan Greenspan, Larry Summers and Robert Rubin had become the maestros of finance and the economy or what the 15 February 1999 issue of Time magazine called "The Committee to Save the World."
Image cannot be displayedThere were only two short wars during the '90s: the first Gulf War and the Kosovo War. Both wars were brief. In contrast to this decade, which began with the attacks on 9-11, we are fighting two simultaneous wars in Iraq and in Afghanistan.
This decade has seen two major bear markets and two recessions with the government now running trillion deficits. The unemployment rate is at a level we have not seen since the 1981 recession and is still rising—it's likely to hit a record 11% next year. Both bear markets included losses of 40% or more. We saw inflation levels rise last summer to the highest level in two decades. Social unrest is also starting to grow—witness the more than 700 "tea parties" held across the U.S. on April 15th.
Unfortunately, commodity bull markets are more convulsive than bull markets in equities. They are characterized by wars, government intervention in the economy, expansive monetary and fiscal policies, large government deficits, high taxes and inflation, social unrest and stagnant economic growth. That is where we find ourselves today. I believe the bull market in commodities will last well into the next decade and that, in the long run, current government policies will only exacerbate the trend toward higher commodity prices.
In summary, commodity bull markets and equity bear markets require a different strategy than equity bull markets in order to prosper.
As John Maynard Keynes remarked, "When the facts change, I change my mind. What do you do, sir?" The stock market abhors uncertainty which is why we’ve seen an increase in volatility over the last year. Given this constantly changing and choppy environment, active rather than passive asset management is essential—as is the use of a greater number of investment tools.
In this kind of market, managing risk is as essential as seeking opportunities for profit. One way to manage risk is to try to move out of the market near market tops, and move back into the market near market bottoms (i.e. make strategic use of "cash"). However, selling off entire positions in a portfolio can be a fool's game; an all-or-nothing approach to markets like the current one isn't likely to work. Round-the-clock vigilance and tight timing would be required, and frequent moves in and out of positions would create significant trade costs and could result in unfavorable tax consequences (i.e. short-term capital gains). A more flexible approach that includes defensive "hedges" on the underlying core positions in a portfolio may be more beneficial. Holding a larger portion of the portfolio in cash, a portion in highly liquid bond instruments, and hedging with puts (a specific kind of options strategy) and reverse ETFs (exchange traded funds) that benefit from the stock market's decline (or the decline in a specific sector), could enable investors to continue to hold core positions while at the same time reducing portfolio volatility. Investors may also need to be more "awake" to short-term and intermediate-term movements in specific stocks and sectors. Since the return on cash ( money market) is next to zero, putting it to work by either investing it in the market or investing in "hedges" to reduce the impact of market corrections is worthy of consideration. (Some of the strategies mentioned are high risk, and may be suitable only for sophisticated and/or high net worth investors. Discus these strategies with your investment professional and/or educate yourself about the risks involved before attempting these strategies.)
Yields Near Zero
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Source: U.S. Board of Governors of the Federal Reserve System
The world has changed over the last year as the process of deleveraging has been unfolding. We are seeing economic, financial, and social instability rise and we are currently in a state of war. Government intervention in the economy and in financial markets is also on the rise which carries with it its own uncertainties. What new government policy or intrusion will be proposed next week or next month? How long will we have to contend with trillion dollar deficits? How high will this Administration and Congress raise income tax rates? Will we see a national sales tax or VAT? What major financial or industrial corporation will become the next major bankruptcy or who will the government bail out next (maybe CIT Group, Inc [CIT])? How long will the war on terror last? What new major spending program will the Obama Administration propose and how will we be able to pay for it? Will foreigners, who now hold over 50% of our Treasury debt, continue to finance our twin deficits? How long will the dollar hold its value?
As investors these are the questions we must contend with on a daily, weekly, and monthly basis.
I'm sure we all wish that we could go back to the way things were before. It is a feeling that we all share. Unfortunately that world has gone with the wind and no longer exists. This is a new world and we operate in uncharted waters. It is going to take adaptability and flexibility to navigate it safely.
The Reflation Cycle
“Inflation is like sin, every government denounces it and every government practices it.” — Frederick Leith-Ross (1887-1968), chief economic advisor to UK government from 1932 to 1945
“By a continuing process of inflation, government can confiscate, secretly and unobserved, an important part of the wealth of their citizens.” — John Maynard Keynes, The Economic Consequences of the Peace, Chapter VI (1919)
“Inflation is when you pay fifteen dollars for the ten-dollar haircut you used to get for five dollars when you had hair.” — Sam Ewing (1920–2001), American journalist & humorist, The National Enquirer, 2 September 1997 issue
In 1983, shortly after I began my career, I read a book that had a very profound influence on my investment philosophy: Is Inflation Ending? Are You Ready?, by investment strategists Kiril Sokoloff and A. Gary Shilling.
When I first entered the investment industry in 1979, inflation rates were over 15%, oil was heading toward a barrel, and gold and silver prices would soon attain 0 and an ounce, respectively. Inflation was the dominant investment theme with oil and gas investments, gold, silver, commodities in general, and leveraged real estate being the principal investments of the day. Bond investments during this period were considered "certificates of confiscation" due to their eroding value as a result of inflation. The financial world failed to recognize the enormous changes that were in the wind with the Volker Fed and the Reagan presidency.
Sokoloff & Shilling wrote their book to counter the numerous "hyperinflation survival guides" that dominated the investment bestseller lists. They contended that we were in for a long-term period of disinflation. The authors gave numerous speeches during the early and mid-1980s recommending the purchase of 30-year Treasuries, predicting the then-historically-high interest rates would fall to become the lowest.
After reading Sokoloff & Shilling’s book I began to understand the subtle changes that were taking place in the economy and the financial markets. I gradually began to change my investment strategy from inflationary investments toward fixed income. It was a wonderful period for fixed-income investors. I still remember putting one of my first clients into a 14% Treasury bond. Throughout the 1980s I was able to get double-digit returns from fixed income investments. Ginnie Mae bonds paid 12–13% interest; municipal bonds carried 8–9% interest rates while corporate bonds offered interest rates of 12–14%. Who wanted to invest in equities when fixed income returns were in the double-digit range? High real interest rates were the norm until the recession of 1991. It wasn't until 1995 that equity returns began to dominate investment markets.
As shown in the above graph of Treasury interest rates, the secular bull market in bonds which began in September 1981—a 27-year run—has now come to an end. In the third edition of A History of Interest Rates by Sidney Homer and Richard Sylla, the authors discuss the long secular runs that develop in the bond market with average durations of 26–27 years. The bull market in bonds that began in 1920 had a 26-year run which ended in 1946 with the yield bottoming at 2.12%. The next bear market for bonds, which began in 1946, lasted some 35 years, by far the longest duration of any bear market in U.S. history. From 1946 interest rates would go on to rise until reaching a peak in 1982. From 1982 until the low of 2.05% reached in December of last year the bond market had a 27-year run.
We believe that the next bear market in bonds is now in its infancy. Macroeconomic fundamentals of rising government deficits and the vast monetary expansion of the Fed’s balance sheet will ultimately drive interest rates higher as inflation risks increase. I have been astounded by the widespread complacency concerning inflation in the financial markets. Deflation seems to be the dominate theme in today's investment markets and investment thinking much in the same way that hyperinflation survival books were all the rage back in the late 1970s and early 1980s.
Several respected economists, ranging from Paul Kasriel, Director of Economic Research at Northern Trust; to Mervyn King, now head of the Bank of England; to the Global Economics Team at Morgan Stanley have recently written extensive papers as to why they expect higher rates of inflation. Investment strategist Kiril Sokoloff, who nailed the disinflation theme in early 1982, is now warning about inflation and the end of the bond bull market. We agree with their assertions. Deflationists are focusing on such things as the output gap, capacity utilization rates, low labor rates and a high unemployment rate to back their inflation thesis. However, they ignore the empirical evidence that clearly points to a different outcome. Paul Kasriel showed there is no correlation between the output gap and the CPI (Consumer Price Index). Likewise, some of our staff have illustrated there is virtually no correlation between low factory utilization rates and high unemployment rates. What some of our staff have shown is that there is a close correlation between the value of the dollar and inflation. That a falling dollar generally leads to higher inflation rates would seem to be obvious. The majority of goods in "big box" stores, department and electronic stores aren’t made here. We import them from overseas. As the dollar depreciates in value they become more expensive which elevates the level of inflation.
However, our chief reason for believing inflation not deflation will be the biggest surprise for the markets rests in our belief that inflation is a "monetary disease." Here we quote its symptoms from two Austrian economists: Murray N. Rothbard and Ludwig von Mises.
“What determines the price of money? The same forces that determine all prices on the market—that venerable but eternally true law: 'supply and demand.' An increase in the supply of money will tend to lower its 'price'; an increase in the demand for money will raise it.” – (Murray N. Rothbard, What Has Government Done to Our Money?, The Ludwig von Mises Institute, 1980, p 28)
And from Ludwig von Mises:
“In theoretical investigation there is only one meaning that can rationally be attached to the expression Inflation: an increase in the quantity of money (in the broader sense of the term, so as to include fiduciary media as well), that is not offset by a corresponding increase in the need for money (again in the broader sense of the term), so that a fall in the objective exchange-value of money must occur. Again, Deflation (or Restriction, or Contraction) signifies: a diminution of the quantity of money (in the broader sense) which is not offset by a corresponding diminution of the demand for money (in the broader sense), so that an increase in the objective exchange-value of money must occur.” – (The Theory of Money and Credit, translated by H.E. Batson, Yale University Press, 1953, p 240)
I believe that getting the inflation/deflation story right is the single-most important investment decision that needs to be made. It will determine the investment outcome of portfolios over the next decade. What I have tried to illustrate is that investment cycles have long durations. Bull markets in equities and in commodities tend to last 16–18 years while bond cycles of 26–27 years are longer in duration. We are now at a key inflection point in the investment markets and in the economy. Rising commodity prices since 1998 have been largely ignored by the investment community as an aberration. The common refrain is that the rise in commodity prices has been caused by speculators.
The basic economic principle of supply and demand tends to be ignored. Oil prices, precious and base metals prices, and agriculture prices which remained tame throughout most of the 1980s and 1990s, before moving up significantly in fits and starts in this decade, are considered to be the norm. The fact that oil is no longer a barrel, gold prices are over 0 an ounce, copper is over a pound, and grain inventories are the lowest they have been in nearly three decades, tend to be ignored by most investment pundits. Also ignored is the fact that a fifteen-fold increase in oil prices from 1998–2008 failed to bring a significant supply of new oil to the market. In most economic theory, the thinking is that higher prices tend to lead to more production of the product in demand. However, commodities are unique in that they have finite limits. Thus, there are times when demand far outstrips supply. In the case of energy, the markets ignore the fact that the number of new oil discoveries has fallen now for four consecutive decades, as have the size of the new fields.
It is our belief that the major selloff in commodities that occurred over the last year was brought about by deleveraging in the financial community. In addition to deleveraging, producers and manufacturers have been in the inventory liquidation mode. What we have witnessed over the last year is the single-largest inventory liquidation of the post-World War II period. In our opinion this is probably one of the largest collective misjudgments on the part of the business community. As Don Coxe of Coxe Advisors, LLC recently has written, what we are now seeing is a near-panic liquidation of inventories around the world.
Kiril Sokoloff in his recent advisory letter points to the following trends:
- In May, the average rate for a weekly airport rental of a compact car booked for seven days was 5.99, up a shocking 73% year-over-year.
- The Wall Street Journal noted earlier last week that U.S. and European steel producers increased flat steel prices by a ton, and in some cases have brought idle capacity back on line as customers have sought to restock depleted inventories.
- Automakers' inventories are tightening.
- The Boeing Company (BA) is reportedly planning to purchase a plant from one of its main suppliers—Voight Aircraft Industries—in an effort to exert more control over the supply chain supporting its 787 Dreamliner program, which is beset by delays.
- Alcoa Inc (AA), despite reporting a year-over-year decline in sales of 41%, is now reporting that sales are growing sequentially from the first quarter.
- BHP Billiton Ltd (BHP) reports that two-thirds of China's steel consumption last year was directed toward domestic construction, infrastructure, and transportation. China accounted for the consumption of 48% of world steel production in the first quarter of 2009, up 37% from a year earlier.
- The story of oil prices going back down to a barrel due to oil storage on tankers (a result of hyper-contango) doesn’t match reality. Tanker storage has fallen to 67 million barrels.
- Non-OPEC production is now firmly in decline while emerging oil demand is decoupling again from OECD demands.
- Since their May 1 peak, U.S. domestic crude oil stockpiles have fallen at an average weekly rate of 3.1 million barrels, a marked turnaround from average weekly gains of 2.7 million barrels during the prior seven weeks.
- Since June motor gasoline consumption has increased by 120,000 barrels per day.
(What I Learned This Week, 9 July 2009)
It is obvious from the few facts listed above that the financial media is missing the bigger picture by remaining focused on weekly U.S. consumption and inventory levels for oil and gasoline. Weekly inventory levels are the product of statistical computer models with seasonal adjustments added to smooth out the level of inventories. I’m not sure these models accurately reflect what is occurring in the real economy here or in emerging markets.
Once the global economy begins a temporary recovery (perhaps in the next 6–9 months), we expect that the bull market in commodities is likely to resume. We also expect that the Fed, despite its statements to the contrary, will be faced with additional rounds of money printing as the U.S. government deficit balloons to trillion dollars and remains above a trillion dollars for the balance of the next decade. We also anticipate a pickup in inflation by year-end and a rise in interest rates later on this year. Contrary to the consensus view that deflation is what lies ahead we believe otherwise, especially in the long term. I can’t guarantee that inflation will be the outcome, but what I’m relying on is over 5,000 years of recorded history to back up my inflation thesis. I would be surprised to see a nation that imports most of its goods, runs up trillion dollar budget deficits, and whose central bank is monetizing .75 trillion of government bonds, would see the value of its currency appreciate. The U.S. has been fortunate so far to have its currency accepted as the world’s reserve currency. This privilege, afforded to no other nation, allows the U.S. to "export its inflation" to the rest of the world, a privilege that is being increasingly challenged by the major nations of the world. The days of the Dollar's hegemony are drawing to a close. We are now in the beginning stages of its demise.
