Dollar madness

In 1932, a film with this column's title was made, directed by the great Frank Capra. In the midst of the 1929 crisis, with the Great Depression as a backdrop, confidence in a bank is lost, and customers begin to withdraw their deposits en masse, bringing the institution almost to the point of collapse. Capra uses this financial drama as a metaphor for a society that has lost its balance, where only by regaining faith in each other, in honesty, and in the community can one move forward. Currently, we cannot speak of a bank panic. However, there is a massive sell-off of all kinds of dollar-denominated assets. Some of the things happening to the dollar today, even if primarily on a wholesale scale, and with due caution, show severe tensions and a certain madness in the currency environment, Capra-style.

After eight decades as a fundamental reserve asset, since the end of World War II, the dollar is suffering one of its most significant crises. This is not the first. In the late 1960s and early 1970s, it experienced significant financial stress due to internal problems—high inflation and unemployment, social discontent, and the Vietnam War that had to be financed—during the Nixon era. The implementation in 1971 of a policy of price and wage freezes and tariffs—does this sound familiar?—led to a sharp devaluation of its currency, with the United States unilaterally canceling the dollar's convertibility. These measures failed and led to low growth and high inflation.

Tensions We cannot speak of a banking panic, but there is a massive sale of all types of assets denominated in dollars.

Today, there is no fixed exchange rate system like Bretton Woods; currencies are now allowed to fluctuate (appreciate and depreciate). However, it is once again internal decisions that are causing the flight from US and/or dollar-denominated financial assets, revealing a major crisis of international confidence. And not just tariffs. Fiscal policy will likely lead to larger public deficits in the United States. The strong political pressure on the Federal Reserve guarantees neither the agency's independence nor a monetary and financial strategy that alleviates the problems that are concatenating with tariffs. And although interest rates are significantly higher there than in the eurozone, this has not stopped the depreciation and financial drain. Their excessive cheapening means the rise in the price of other currencies—the euro has surpassed $1.15—and of those countries' exports, which is like a second tariff, making energy cheaper but making it even more difficult to export to the United States, with potential new negative effects on the global economy. It is not known if it is madness, but it is a very dangerous drift of the dollar.