The Dollar Destruction That Was—and Is—Coming

Chart of the Week #73

The Federal Reserve just delivered what everyone expected—another rate cut. At yesterday’s FOMC meeting, Fed Chair Jerome Powell announced a 0.25% reduction, bringing total cuts since June to 1.5%. And while his statements were wrapped in the usual Fed-speak, the takeaway couldn’t be clearer—more cuts are coming.

But that’s just one side of the coin.

As you may remember, I wrote to you recently that, speaking at the National Association for Business Economics conference in Philadelphia earlier this month, Powell signaled the end of quantitative tightening (QT)—the Fed’s multi-year, pretend effort to shrink its balance sheet. Well, now we have confirmation. The Fed will officially end its balance sheet wind-down on December 1.

This matters because, as you know, when the tightening stops, the money printing starts. That’s how it always works.

Which brings us to this week’s chart. I might’ve shared a similar one with you before, but given what’s happening right now, it feels more relevant than ever. Take a look below.

This graph shows exactly what the Fed’s policies do to the value of the U.S. dollar.

Since 1913—the year the Federal Reserve was created—the U.S. dollar has lost a staggering 97% of its purchasing power. That $100 from 1913? It’s worth a mere $3.20 today.

While previous episodes of dollar destruction were driven by breaking the dollar’s link to gold—first Roosevelt’s confiscation in 1933, then Nixon severing the final tie in 1971—the 21st century brought a new weapon: the money printer, better known as quantitative easing (QE).

In simple terms, QE is when the Fed conjures up money out of thin air to buy government bonds, flooding the system with new dollars and eroding the value of those already in circulation.

And the Fed’s QE track record tells the story.

After the 2008 financial crisis, the Fed expanded its balance sheet from $900 billion to $4.5 trillion through multiple rounds of QE, creating roughly $3.6 trillion out of thin air. By the end of that QE decade, the dollar bought about 20% less than it did before the crisis.

Then, in 2020, came COVID, and things went truly parabolic. In that single year alone, the Fed created $3.3 trillion—roughly 20% of all U.S. dollars in circulation at the time. The Fed’s balance sheet exploded from $4.2 trillion in early 2020 to over $8.9 trillion by April 2022.

The result? The dollar lost roughly 25% of its purchasing power between 2020 and 2025. Inflation hit 9%—the highest in 40 years. What cost you $100 in 2020 now costs $125.

But this time around, it’s likely to be much worse.

The reason, of course, is that when the Fed inevitably restarts QE to push long-term rates down—likely early next year—it’ll be starting from an already bloated balance sheet. That’s because since June 2022, the Fed has reduced its holdings by about $2.2 trillion—but it’s still nowhere near the pre-pandemic level of roughly $4 trillion. That’s to say nothing of inflation, which remains far from tamed.

Kicking off the next money-printing cycle with roughly $6.6 trillion still sloshing around the system all but guarantees a return to double-digit inflation. We’re talking about potential currency destruction on a scale and at a speed America has never seen before.

Regards,

Lau Vegys

P.S. We believe the Fed’s inevitable return to the printing press will set off a massive bubble in commodities—especially in monetary metals like gold and silver. That’s why a big portion of our portfolio is in mining stocks, which Doug Casey himself owns. In fact, in tomorrow’s issue of Crisis Investing, we’ll be recommending another precious metals pick that’s perfectly positioned for what’s coming. Don’t miss it when it drops.