Macroeconomic imbalances could lead to the implosion of the U.S. dollar in the next one to two years, says economist Stephen Roach. Crypto assets could rise in value as a result.
The U.S. dollar will crash, says Yale professor and former Chairman of Morgan Stanley Asia Stephen Roach.
“A dollar crash may happen over the next year or two, maybe more. The crash is inevitable,” says Roach. He expects the U.S. dollar to depreciate by 35% against other leading currencies.
“Lethal” combination: economic crisis and protectionism
According to Roach, macroeconomic imbalances in the US have already been a problem for some time, but the corona-crisis has now made things worse.
“We are going from bad to worse,” says Roach.
He points to low domestic savings rates and increasing budget deficits. The COVID crisis has increased unemployment, resulting in less saving and less consumption. Also, the stimulus programs put an extra burden on the national budget in addition to already high levels of debt.
At the same time, American policy is becoming increasingly protectionist and is trying to decouple from the rest of the world. Roach calls this a “lethal combination.”
Stagflation like in the 1970s?
A dollar-crash could become a challenge for investors. Although export companies profit from a weaker currency, Roach considers the effect to be marginal. Instead, he sees the danger of rising inflation, because US-companies would have to buy goods from abroad at higher prices.
Roach draws a comparison with the economic situation in the USA in the 1970s. At that time, the American economy was suffering from a stagflation crisis, meaning consumer goods prices were rising while the economy was no longer growing.
Even a possible change of government after the presidential elections in November could hardly change this, says Roach. Policymakers never had to deal with anything close to this disruption.
Crypto-markets could see higher demand
Roach also says that cryptocurrencies could benefit from a dollar-crash. Yet, he believes the asset class is still too small to completely absorb adjustments in the global currency market.
Especially Bitcoin has in the past benefited from devaluations of the U.S. dollar. Given that the daily trading volume in the forex market is more than $6 trillion, even a small percentage of the money flowing into crypto-markets could boost prices massively. Additionally, investors would sell dollar-linked stablecoins and switch to other crypto-assets.
Also, if the dollar-crash weighs on U.S.-equities, it might trigger a global selloff similar to the recent shockwave caused by the COVID-virus. As crypto-assets have proven their recession-resilience, the next stock market crash might result in rising crypto demand. Thus, if Professor Roach is right with his crash prediction, crypto-asset-prices could appreciate significantly over the next two years.