A very complicated topic being debated even by the most senior economists and seasoned investors: what does the world look like as we combine deflationary "dollarization" with massive money printing. This thread is an attempt at exploring the subject -

2/ First a little background. Prior to 2008, a massive increase in M1 (money supply), and then quantitative easing, most investors and economists thought that the simplified MV=PQ model was at least very roughly reasonable as a starting point.

3/ Within that framework, the money printing and quantitative easing that followed the 2008 financial crisis should have produced severe inflation. Alan Greenspan in 2009 predicted massive inflation imminently for example.

4/ we already had some contradictory data: Japan had been printing tons of money for more than a decade but were still stuck in a deflationary trap. Most investors seemed to view Japan as kind of an exception without a clear view on why.

5/ at first - the story was about velocity. The argument was, "sure we printed tons of money, but velocity of money collapsed, so the actual amount of money circulating didn't rise much." But this framing didn't offer much predictive power and lacked specificity.

6/ then it became more subtle. The more nuanced idea: we weren't getting inflation because a lot of the newly printed money was just sitting back at the Fed or in banks as deposits. Banks were reluctant to loan it out. Demand for loans was also relatively weak.

7/ This wasn't about velocity in the normal economic sense as being market driven - this argument's specific depended on regulation. For example, the ECB lent money to European central banks and required them to then buy sovereign debt with much of it: extremely low velocity.

8/ another angle was around inflation *expectations.* The idea here was that inflation is less about money printing and more about investor expectations for future inflation. Kind of made sense for financial assets like bonds and maybe wages, not so much for prices of goods.

9/ money printing is pretty sweet for governments and politicians of all stripes. In the short-term, it feels like a "free lunch." How much money could be printed without causing inflation? People stopped guessing in the last decade. Then Modern Monetary Theory (MMT),

10/ came along and said: basically unlimited. Or at least it's such a large amount, you don't need to worry about it. And if we print that money and use it productively, productivity will increase, further allowing us to print more money.

11/ At this point, let's take a step back and try to synthesize this a bit. MV=PQ says there's a certain amount of money around that wants to buy a certain amount of stuff. More money or less stuff, and prices (P) have to go up.

12/ but if banks are required by regulation or strongly incentivized by governments to just keep the money idle, it's not demanding to buy stuff. And if people don't expect inflation, they don't bid up wages or goods at the margin.

13/ which brings us to today. The world is making less stuff, and at least for a few years, we're likely to have a downward drag (all else equal) on productivity from protectionism/ tariffs, and health concerns around covid19.

14/ but we also have less demand for stuff. People have less reason to drive or fly, so less demand for gasoline and jet fuel (both synthesized from crude oil). And if people are worried about their financial future, they save more and consume less.

15/ and unlike in 2008, more of the newly printed money is going into the hands of consumers who are likely to spend it. Money to a big company may just sit on their balance sheet in a bank account. Money to a struggling family or small business gets spent, and quickly.

16/ One thing in common with 2008 though and deflationary is the unwinding of debt. Mortgage debt, corporate loans to the oil and gas industry and many other types of debt are suddenly far riskier. Financial leverage is decreasing, that's kind of like a reduction in velocity.

17/ the "new" story is global dollarization which @RaoulGMI articulates well. A great deal of global trade (even between countries in the eastern hemisphere) is denominated in, and literally uses, USD. Less financial leverage means more demand for raw USD.

18/ and political and economic concerns around many countries means their currencies are viewed as more volatile, less trustworthy. For example, if investors fear that the euro may fail in the next few years, even Europeans may favor buying debt and doing trade in dollars.

19/ can we get *both* dollarization and inflation for dollar users? I think it's quite likely (but I say that humbly - this is immensely complex, novel from many angles, and there's also uncertainty around policy and psychology).

20/ even as the world desperately clamors to get a hold of dollars and as US consumers may increase their savings rate relative to consumption, and as financial leverage decreases, I think the "skew" around inflation expectations is increasing - I'll clarify -

21/ while deflation may be the greater concern, the primary expectation, or even the eventual outcome, for the first time in 30 years, savvy US investors are serious about hedging inflation. The uncertainty has dramatically increased.

22/ Some specific examples - many banks are publishing general sell side research suggesting that investors may want to allocate 2-10% of their portfolio to gold and digital assets "just in case" inflation becomes a serious near-term threat.

23/ In places like Argentina (let alone Venezuela), the average citizen thinks about inflation frequently. They consider the risk of a sharp increase inflation as they decide how to invest, how to save, where to work.

24/ As this possibility becomes tangible to US investors for the first in more than a generation, we're likely to see more debt linked to inflation rates, long-term salary contracts that adjust for inflation, and a shift in portfolios towards inflation hedges.

25/ and globally - think about this - if your country is "dollarizing" and you're increasingly exposed to the vagaries of the white house and the US fed, to surveillance by US institutions, how do you think about hedging that?

26/ I think we're likely to see a simultaneous increase in dollar usage globally, *and* a piling into (on much smaller scale) alternative currencies that defend against that surveillance, that loss of control (by both individuals and governments.)