A series of commentators have had to hammer into my skull the bizarrely counter-intuitive (to me, as to you) possibility that the USD could become massively in demand. I've been very resistant to that idea, and still intuitively am. Here are a few thoughts that may help explain.
1. Global debt levels are huge, and mostly denominated in USD. These vast borrowings have presumably been spent, so now comes the post-binge stage, when debtors have to rake together enough USD to make repayments. This USD demand would presumably be made more acute as rising interest rates increase the size of repayments. In addition, the USD earnings of debtors may be falling, if we can assume that many debtors, maybe most, earn their income in ever-weakening non-USD currencies. Then there's that pesky recession possibility, making the earning of USD even harder.
2. The impact of USD creation on inflation is I understand diluted by being spread across offshore as well as onshore USD markets. The relative growth in USD may thus be less, maybe much less, than that of less-widespread currencies, resulting in less inflationary impact on the USD. The USD thus becomes the cleanest pair of dirty dungers in the laundry hamper, and thus in demand.
3. Popular perceptions of excessive money creation rates may be over-estimates. That may be partly because bank reserves, however much they are grown, don't (I'm told) impact the amount of spendable money. I dimly understand that to mean that these reserves are sequestered in some weird interbank-only space, where they operate only as tokens and/or collateral. Japanese inflation rates, for example, have proven way less than popularly expected.
4. Bankers, bless their cotton socks, have historically tended to tighten lending just when people need it most. The curve inversions could be suggesting that bankers are once again becoming risk-averse, maybe demanding higher interest rates, better collateral and/or better credit ratings. Any such bank hoarding of USD thus increases USD demand, and USD shortages.
It does my head in to try to reconcile these pressures with the inflationary pressures produced by the Covid fiscal stimuli etc. That pig is not expected to have passed through the inflation python (ewww) for another year or two, keeping inflation rates elevated. Then there's the fact that the Democrats are set to pass a new bill which will add $500 billion of new spending on climate change and healthcare.
How can inflation and deflation both happen? I'm guessing convulsively, by turns. A deflationary pulse (be it called a credit squeeze, credit crunch, or liquidity crisis) may for a period overpower inflation until, sooner or later, it's in turn overwhelmed by a proportionate response of fiscal stimulus. In hopes of such a response being successful, I'm just so grateful that the US President, congress, and treasury are so dedicated, competent and cooperative in serving the people. Oh, yes indeedy, my word.
I'd recommend another stimulating walk on the beautiful riverbank to cheer yourself up, but after a pep talk this happy you'd probably jump in. Be advised though, I'm usually way too pessimistic.
(20min delay)