Is the dollar's decline a sign of too much money printing?

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Nearly three months ago, as America’s first huge coronavirus relief packages reached full swing, Bitcoin advocates struck on one of the most resonant memes in the cryptocurrency’s already meme-heavy history: Money printer go brrr. The meme is a concise summation of the ‘sound money’ thesis, which holds that the post-Breton Woods detachment of the global monetary system from the gold standard creates inevitable temptation for governments to debase their currency by, in technical terms … letting the money printer go brrr.

There is now what could be taken as evidence that the memers had it right: the U.S. dollar has been slumping on foreign exchange markets. It had its biggest monthly drop in a decade in July, with one index measuring a nearly 5% decline. In trading terms, the dollar in July dropped 1.6% against a basket of currencies, and has lost a staggering 7.5% against the Euro since March. (The dollar saw a slight rebound in early August). On the other side of the equation, both Bitcoin and gold are surging, reflecting lack of market trust in fiat currency globally.

So, blame the money printer?

Maybe not. Bitcoiners and other hard money advocates are laser-focused on domestic inflation, not foreign exchange rates. The most cited examples of inflation-driven currency collapse include Weimar Germany and Zimbabwe. (Also worth noting: Those flailing states literally printed unbacked money. The U.S. Fed doesn’t do that – it issues redeemable debt. Not the same thing.)

The distinction between forex and inflation is key. According to traditional economics, domestic inflation is driven by relatively straightforward supply and demand – inflation means too many dollars are chasing a fixed supply of goods. And domestic U.S. consumer inflation has stayed relatively in check, with the latest data showing the consumer price index growing just 0.6% in June. That was held down in part by of a lack of demand, particularly for energy, amid the coronavirus lockdown. One motivator of the U.S. relief programs that made the money printer go brrr was old-fashioned Keynesianism, an attempt to increase the money supply through debt-funded government spending, in hopes of replacing that missing demand and staving off a fate vastly scarier than inflation: domestic deflation.

Foreign exchange markets have a different, more complex logic than domestic consumer prices, taking into account not just monetary supply, but broader measures of national economic strength and leadership – factors domestic spenders can’t fully take into account at the grocery store. Much of the dollar’s historic strength is based on its status as a ‘safe haven’ currency, which actually helped the dollar surge against other currencies in March, driven by early virus fears.

So more than fear of the money printer, the dollar’s drop can be read as the expiration of early hopes that the U.S., and its financial system, would weather the pandemic better than other countries. Instead, the U.S. has by many metrics done worse than nearly any developed country. That health failure is now turning into a dramatic economic failure, especially with the U.S. legislature so far failing to extend pandemic relief measures. That failure unfolded at the same time as much of the dollar’s late-July forex slump – and at the same time that the E.U. approved a huge financial recovery package.

If the real issue were an expanding money supply, then, it should have been the Euro that dropped with new spending on the horizon, while the dollar’s tightening purse-strings bolstered international trust. Instead, we saw exactly the opposite. In short, the U.S. dollar might be losing steam not because of the budget deficits caused by relief packages, but by the government’s current inability to keep that money printer going brrr.

David Z. Morris

@davidzmorris

david.morris@fortune.com

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