Check out how the US exports inflation to other countries, impacting global economies and devaluing local currencies through its monetary policies.

The United States holds the currency that acts as a global store of value. Furthermore, many countries hold reserves in dollars and invest in US bonds, while commodities (such as oil) are purchased and priced in dollars in international trade.

Because of this, United States monetary policies exert a comprehensive influence over the entire world and have significant impacts on all economies, especially the most fragile ones.

Thus, since 1971, when the dollar lost its parity and convertibility into gold, decisions taken in Washington have had global repercussions through the dollar.

But then, how does the US export inflation to other countries? Well, that's what we'll see next.

The dollar has been increasingly expensive for the rest of the world since 2008, scaring developing economies and emerging countries in times of crisis.

The DXY, an index that measures the value of the dollar in relation to a basket of global currencies, has been gaining strength since the subprime crisis.

This occurs due to the phenomenon known as “flight to safety”, in which, faced with crises, the world still trusts the dollar and turns to it when economic instabilities arise.

As a result, no government has the same confidence in its monetary policies as the dollar offers, which is why it remains the predominant global standard.

However, this extraordinary privilege of the United States, of being a safe haven and at the same time the “printer of the world”, gradually depletes economies, especially when the dollar itself faces inflationary processes.

This effect is even more pronounced in countries with weaker currencies.

Furthermore, since 2022, the Federal Reserve (FED) has been raising interest rates in an attempt to contain rising prices, but persistent inflation and rising oil prices are putting the world on alert.

Since the 2008 crisis, the dollar has risen almost 45% on average against other currencies, US stocks have risen 112% and shares of companies in the rest of the world have fallen 10%, as you can see in the image below.

Several theories have been developed to explain this phenomenon, which has become increasingly evident. Thus, theories such as the “Dollar Milkshake Theory” and the “Dollar Wrecking Ball” have gained prominence since 2008, pointing out the risks associated with a strong and inflationary dollar for the rest of the world.

This is largely due to the fact that the dollar and American assets are in considerably greater demand compared to other currencies and assets from other economies.

Therefore, even in the face of a monetary expansion that exceeded 40% since 2020 (image below), the dollar does not lose value at the same rate as other currencies.

We can compare this situation to Einstein's Theory of Relativity. That is, when two bodies are falling with the same speed, they appear to be stationary in relation to each other. However, if the speeds change, both will continue to fall, but one will fall more quickly than the other.

This same principle applies to coins! The dollar is subjected to dilution by its own central bank through the expansion of the monetary base.

However, due to its higher demand relative to other currencies, it tends to depreciate at a slower rate. In this sense, it appears safer as it appears more stable, but in reality it is draining liquidity from other currencies by camouflaging its own dilution.

The following graph went viral on Twitter and illustrates the depreciation of the currencies of the G-20 countries in relation to the dollar.

It is important to note that the Venezuelan bolivar suffered a devaluation of 99.99%, while the real fell by 55% against the dollar.

Surprisingly, even developed country currencies experienced significant depreciation against the dollar in a period of just 10 years.

Amazing, right?!

As you can see, all of these countries have expanded their monetary bases over the last decade, but have faced devaluations against the dollar due to the lack of global demand to the same extent as the US currency.

Furthermore, when the prices of global consumer products, such as energy and commodities, are set locally, domestic prices tend to rise, leading local central banks to act to contain the effects of rising prices on currency conversion.

This means that the United States exports the inflationary impact of the dollar to other countries, and this effect, added to the monetary expansion carried out by local central banks, accelerates the speed of degradation of other currencies in relation to the dollar.

Ultimately, the value of the dollar in relation to gold is also diluted and loses purchasing power, but it loses value more slowly compared to other currencies, which also have this more accelerated degeneration in relation to gold.

Another point to note is that the DXY, which measures the strength of the dollar when priced in gold, shows how the US currency appreciated against gold in 1985, during the Plaza Accord, and in the 2000s, during the dot-com bubble. .

In the last major crises, in 2008 and 2020, the dollar lost strength in relation to gold and did not have the same appreciation seen in 1985 and 2000. This may be evidence of the loss of strength and confidence in the dollar following the subprime crisis.

Another effect is that when Americans face price increases domestically, the central bank often raises interest rates in an attempt to “control inflation.” This, in turn, further strengthens the dollar against other currencies.

Locally, central banks often find themselves raising interest rates, which in turn can increase debt, unemployment and trigger recessions. It makes purchasing essential items and importing food and fuel that are priced in dollars in other countries more expensive. This dynamic in which the Federal Reserve (Fed) exports inflation ends up putting pressure on all countries.

The consequences of the rapid appreciation of the dollar have become more evident in recent days. Japan, for example, intervened last Thursday for the first time in 24 years to support the yen, which had fallen 26% against the dollar.

The UK illustrates how quickly things can get out of control. The pound sterling hit an all-time low against the dollar after the implementation of unconventional measures such as major tax cuts and an increase in borrowing sparked alarm. The imbalance forced the Bank of England to announce an emergency bond purchase program to try to stabilize markets, in addition to generating a warning from the International Monetary Fund, which recommended that the British government rethink its policies.

The global financial system has become a real pressure cooker in 2023, with the failure of American banks and the impact of inflation in the United States.

Recently, the World Bank issued a warning indicating that the risk of a global recession in 2023 is increasing as central banks around the world simultaneously raise interest rates in response to inflation. This trend could also trigger a series of financial crises in emerging economies.

The most significant impacts can be observed in countries that issued debt denominated in dollars. As local currencies depreciate, paying these obligations becomes more costly, forcing governments to reduce spending in other areas, while inflation undermines living standards.

Brazil, for example, has maintained its interest rates at levels above double digits, currently at 12.75% per year, as a measure to contain the inflationary pressure that is still present.

The rise of the dollar against other currencies brought back memories of the 1980s, when policymakers in the United States, Japan, Germany, France and the United Kingdom announced a coordinated intervention in foreign exchange markets, known as the Plaza Accord.

The Plaza Agreement was a collective pact made on September 22, 1985 with the aim of devaluing the US dollar in relation to the French franc, the German mark, the Japanese yen and the British pound sterling, through interventions in the money markets. The United States dollar has suffered significant depreciation since the agreement. Many believe that the Plaza Accord contributed to the asset price bubble in Japan in the late 1980s.

The recent appreciation of the dollar and central bank concerns have led to rumors about a possible new Plaza-like deal, known as “Plaza 2.0.” However, the White House has cooled this speculation, indicating that this possibility is unlikely, at least for now.

As a result of these events, added to the conduct of central banks and local economic decisions, financial crises and accelerated impoverishment arise in countries with more vulnerable economies. We have witnessed a series of financial crises in countries such as Turkey, Lebanon, Nigeria, Argentina, and other countries are losing control over inflation.

Banks and companies are reporting unrealized losses at record levels over the past 10 years. Rising interest rates in the United States are generating an increase in debt. Banks are facing substantial unrealized losses and are waiting for a reduction in interest rates and more liquidity from the Federal Reserve (Fed) printing presses. However, the question is whether they will be able to hold out until the printers are turned back on.

The world now faces a scenario characterized by high inflation and higher interest rates. Both Powell and Lagarde have repeatedly mentioned the possibility of reviewing the 2% inflation target and considering raising it. Generally, in periods of inflation and higher interest rates, real and scarce assets tend to outperform financial assets, as illustrated in the following graph.

This also means that current popular investment strategies, such as the 60/40 portfolio, focused on diversification into fixed and variable income may lose their ability to protect assets in the cycle of instability that lies ahead.

In the current scenario of uncertainty, with companies facing bankruptcies and fixed income securities struggling to overcome inflation, the profile of investors is likely to change, and hard assets will likely benefit from this new macroeconomic environment.

This change in investor behavior reflects a market characterized by uncertainty that more closely resembles scenarios from the last century, prior to the 2000s, when the United States stock market had a strong correlation with government bonds.

After 45 years, US Treasury bonds now carry a higher level of risk than gold, which is redefining the concept of a “risk-free asset” and making commodities less risky in comparison.

The traditional 60/40 investment strategy, which consists of 60% stocks and 40% bonds, has had a golden era over the past four decades. This combination provided attractive and consistent risk-adjusted returns, often equal to or better than the S&P 500 index, but with lower volatility. However, the challenges faced in this new environment are related to the expected returns for the 60/40 strategy over the next decade, estimated at around 6.2% per year, 3.9 percentage points above inflation forecasts.

Over the past four decades, as real fixed income yields have fallen, stocks and bonds have benefited. The belief that the Federal Reserve would save the market became widespread, with the expectation that the central bank would intervene to ensure liquidity and control market volatility. However, this belief is no longer valid, as each Fed intervention appears to generate more market instability.

In a high inflation scenario, the benefits of diversification through a combination of stocks and bonds may be reduced. As nominal incomes rise with inflation, real incomes may not keep up with the destruction of purchasing power.

Strategies that rely exclusively on traditional fixed and variable income assets tend to perform poorly in challenging macroeconomic environments. It can be said that 2022 was a warning sign for the 60/40 portfolio, recording the worst return in the historical series of the last 100 years!

In macroeconomic scenarios of crisis and recession, value preservation strategies become crucial. Over time, gold has been the asset of choice as a hedge against systemic crises, when government assets lose credibility, as in the example of hyperinflation in Weimar.

Bitcoin is emerging as a monetary evolution and an essential part of this new macroeconomic cycle, due to its unique characteristics that are not observed in any other asset in the traditional financial system.

It was created to resist adverse situations and has stood out amid the liquidity and global debt crisis, as it has no links with banking or government entities. Anyone interested in preserving their purchasing power will begin to recognize the benefits of adding a small, balanced Bitcoin allocation, even to a traditional portfolio of stocks and bonds. Recent research from Bitwise demonstrated how including Bitcoin in a portfolio increased returns without increasing portfolio risk.

A mere 5% allocation to Bitcoin would have boosted the portfolio's cumulative return to 144.68%, more than doubling the total return of a traditional portfolio.

According to the research, those who did not rebalance their portfolio had higher returns, that is, those who did not get rid of their Bitcoin exposure since 2014. However, the portfolio showed much more volatility compared to those who rebalanced.

Bitcoin, with over 10 years of data, has demonstrated resilience by surviving and strengthening even during events such as the COVID crash in 2020, interest rate hikes in 2022, the Ukraine War, and the string of bank failures in March 2023, in macroeconomic crisis scenarios.

Every day that Bitcoin continues to exist, it consolidates itself as a stronger and necessary alternative to preserve purchasing power in the face of often manipulated and unstable markets. Its ability to withstand economic crises and its independent functioning from traditional financial institutions make it a crucial option for investors seeking protection in times of uncertainty.

The dollar ends up exporting its inflation to currencies that depend on it. Bitcoin does not depend on the dollar. Unlike traditional fiat currencies, it suffers the opposite effect, it has appreciated as the dollar and all other government currencies continue to melt.