(Updated chart)
There are multiple forces keeping the U.S. dollar strong. One of those forces – and this next one may knock you over, so find a soft place to land before you keep reading – is a shortage of U.S. dollars.
I know, right? We have one of the most spend-thrift governments in the world, and our national debt is at nosebleed levels. But in the world of international trade, there’s a shortage of dollars … thanks to America’s energy boom.
The total U.S. dollars available to foreigners is shrinking. That’s because America used to ship vast quantities of dollars overseas to pay for oil. But U.S. crude oil production has jumped 76% since 2011. That’s a whole bunch of money we don’t have to pay Saudi Arabia, Venezuela, Nigeria and other oil-oozing international riff-raff.
And the crude we do import is at cut-rate prices. Oh, how your heart must be breaking for the squeezed oil sheiks. Here’s the thing: That money we used to send overseas sloshed around in international markets. We’ve cut our overseas oil payments by about $240 billion a year since 2011. That’s money that is no longer available globally, meaning there is a shortage of dollars.
And what happens when there’s a shortage of something? The value goes up! This makes the dollar stronger.
The stronger dollar not only tightens monetary conditions in the US. China keeps its currency in a band against the US dollar, a sort of peg. And that's one of the reasons why China has devalued its currency three times this week. Our dollar is getting too strong, and dragging China's yuan (or renminbi) along with it.
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