What's up guys and welcome back to wall street millennial on this channel, we cover everything related to stocks and investing before i jump into today's video. I want to thank the daily upside for partnering with the channel. The daily upside is a free business and finance newsletter that i actually use every morning to help get an edge on the latest business news check out the link in my bio to subscribe for free. It's no secret that the us government has printed a lot of money over the past year.

In fact, since the beginning of the pandemic, the fed has printed about 6 trillion new dollars, increasing the m2 money supply by 40. Most of this money has been borrowed and spent by the government under administrations of both parties and the government's love affair, with deficit spending isn't a recent phenomenon. Ever since the global financial crisis of 2008, the fed has been printing trillions of dollars with its controversial qe program to help the government finance ever-increasing budget deficits. The federal government currently has 29 trillion dollars of debt.

More than 120 percent of gdp, which is the worst financial position the country has experienced in history at the current rate of growth, public debt is expected to increase to over 200 of gdp within the next 20 years. The us, as a country, basically went on a decade-long 30 trillion. Dollar shopping, binge funded on credit card debt, but where is this money all coming from? For the most part? It's come from other countries. The u.s runs a current account deficit with the rest of the world, meaning that there is a net inflow of goods and services.

This deficit was around 100 billion dollars per quarter in 2016 and has exploded to almost 200 billion dollars in the second quarter of 2021. At the current rate, this means the country is consuming more than it produces to the tune of 800 billion dollars per year or about 3.5 percent of gdp. If you borrowed 3.5 percent of your income every single year, you would eventually go bankrupt, but the country as a whole has been doing this for the better part of the last two decades without any noticeable negative consequences. And if anything, the borrowing is expected to accelerate going forward so how's this possible.

Unlike you, the us government can print as many new us dollars as it once, and it has been doing this to the tunes of trillions of dollars per year. This sounds like a pretty good deal. The government can just print and spend an unlimited amount of money indefinitely, but when something sounds too good to be true, it usually is the us's status as the richest country in the world is running on borrowed time. Eventually, the chickens will come home to roost and will finally have to pay the consequences of living beyond our means for so long and we're already starting to see the beginning signs of this system unraveling.

But before we go any further. I want to thank the daily upside for partnering with me on this video. As a content creator, i am always trying to keep up to date with recent events in the stock market and economy. You can spend hours browsing through google and reddit reading about the stock market.

The problem is, the vast majority of finance articles are generated by ai or biased career journalists. That's why. Every morning i read the daily upside founded by a former investment maker who spent a decade on wall street. The daily upside provides actual insights and clarity on the stories shaping the business world.

Every weekday they deliver a morning brief, followed by more detailed stories. Instead of using click bait headlines and bias, coverage like most of us are well too familiar with they cut through the noise and give you only the most relevant information. They cover everything from turkey's economic crisis and the effect it will have on nutella to how inflation is affecting the u.s fed heading into 2022.. They had a great piece recently explaining why the spack bubble finally melted in the second half of 2021.

It's about a five minute, read that isn't afraid to dive into hot topics and give real high level unbiased analysis with the occasional dose of whip to keep things interesting. As someone who looks to stay on top of the news to help create videos like this, i can't recommend them enough click. The link in my bio to join the 200 000 other people that read the daily upside every morning and the best part, is it's absolutely free to understand how the us has been able to borrow so much money from the rest of the world. We first have to understand what the us dollar really is.

Currency is printed at the us mint paper. Bills are printed from cloth and linen a 20 bill costs just a few pennies to produce, and today the vast majority of new dollars are even printed digitally, so they are just ones and zeros on a computer. So what gives the us dollar value before money? People will just exchange goods with each other by bartering. A farmer can trade one cow for another, farmer's pig, but what? If the farmer doesn't have his cows with him at the time he can instead offer an iou that is exchangeable for one cow in the future.

He can use this to buy the pig instead, currencies are nothing more than a standardized system of ious. The pig farmer receives dollars as payment. He can use these dollars to buy cows from the cow farmer or whatever else he wants to buy in the future. International trade and foreign currency transactions broadly work in the same way.

Let's say a u.s consumer wants to buy a kia car. They would send us dollars to korea in return. They would ship over a kia. Korean customers can then use these us dollars to buy a ford from the us.

This way the international trade is balanced and nobody runs a net deficit, but what if they don't want to afford, if they don't import goods from the us at an equal value as their exports, they will start building up reserves of u.s dollars. Remember us dollars are just pieces of paper that the fed can print an unlimited quantity of from the us perspective. We basically get all of these kiosks for free and never have to spend anything back in return, and we can import an unlimited number of kias, because the government can always print more money. This is basically what has been happening for the past 20 years.

The us imports far more than it exports from a consumer perspective. This means that when you walk into a walmart, you can buy imported goods for very cheap prices, so every american consumer benefits from the trade deficit. The question is: why is the rest of the world willing to send the goods they produce to the us, while basically getting nothing in return? It all comes down to the us dollar status as the world's reserve currency. In 1944, the us, along with 44 allied nations, signed the bretton woods agreement which formally made the us dollar the world's reserve currency.

Under the treaty, all currencies are picked to the u.s dollar and in turn the dollar is convertible into gold. The us dollar was on the gold standard, so it was considered to be as good as gold because of the us's dominant position in global trade. Companies from around the world started using us dollars for international transactions. Also america developed the largest and most sophisticated capital markets in the world.

Ford investors wanted to buy us-based stocks and bonds and to buy these, you needed us dollars. In fact, many people in developing countries use the us dollar for domestic transactions, because their own currencies are too unstable. People from all over the world want to stock up on us dollars, so they can use them for international transactions as well as to buy us denominated. Financial assets and they're even willing to send over real goods and services in exchange for these dollars, but because the dollar was tied to gold, there was a limit on how much the government could print, but this restriction was lifted in 1971 when president nixon removed the Dollar from the gold standard, since then, the federal reserve could print as much money as they wanted and the us government could pretty much borrow as much as they wanted.

But why doesn't this cause hyperinflation? Because the rest of the world is willing to finance america's trade deficits, the inflation has effectively been exported around the world. This has allowed the us's domestic inflation rate to be relatively low despite the money printing. At the same time, foreign countries have built up massive reserves of u.s dollars. Currently, seven trillion dollars are held in the reserves of foreign central banks.

That's 60 of total foreign currency reserves. When you include the private sector, tens of trillions of dollars are held by foreigners. Remember that u.s dollars held by foreigners are a liability for the u.s economy. Some of the dollars are used by foreign companies as working capital for cross-border transactions, but much of it is also used to buy u.s financial assets such as treasury bonds, corporate bonds and stocks.

With the u.s running a current account deficit every year, a greater and greater proportion of the u.s debt and equity markets are owned by foreign investors, but does that really matter who cares if u.s companies are owned by american billionaires or chinese billionaires, it doesn't really have An effect on the average person, at least not yet, foreigners have built up a massive pile of us dollars. They haven't cashed this out yet, but they eventually will. Over the past 20 years, america has been eating a 10 trillion dollar free lunch. Eventually, the bill will come due, it's not a matter of if, but when, for all the current account deficits the us has run over the years.

It will eventually have to pay us back with interest. When this happens, the us will have to become a net exporter to its trading partners. Foreign consumers can use their us dollar reserves to buy american-made goods and because they already have so many us dollars, they don't have to send anything back in return. This will be manifested in a massive depreciation of the us dollar, which will benefit foreign consumers at the expense of u.s consumers.

If the dollar depreciates by 50, that means a pair of imported shoes that used to cost 50 now will cost 100. You can only buy half as many shoes as you used to. At the same time, foreign consumers will be able to buy american imports for half of the previous cost as denominated by their own local currencies. If you live in the us, even if you have no mortgage credit card balance or car loan, you are still massively indebted.

If your salary is denominated in u.s dollars, you have been benefiting from the overvalued exchange rate and you will pay the price of this when it reverses. But when will it reverse much of foreign dollars are held in u.s treasury bonds, which are considered to be a safe investment? The current 10-year yield is 1.5 percent at the current rate of inflation. This provides a real return of negative five percent. Even if inflation returns to the fed's two percent target, the real yield is still negative, with real interest rates being sharply negative foreigners are losing value every day from their holdings of treasury bonds.

Eventually, they'll say enough is enough and sell them with their unprecedented monetary response. To the pandemic, the federal reserve may have finally overstepped its bounds over the past five years. The u.s dollar is depreciated by seven percent versus the euro and eight percent against the chinese remnb. If inflation remains elevated over the next few years, things could quickly snowball out of control.

A depreciation of the dollar would not mean the end of the us economy. In fact, a depreciated exchange rate would boost the country's export sector and create new manufacturing jobs, but the days of debt field shopping, binges of cheap imported goods will have to come to an end. Alright guys that wraps it up for this video. Do you think the us dollar will lose its status as a global reserve currency? Let us know, in the comments section below also don't forget, to check out the daily upside link in the description below.

As always. Thank you so much for watching and we'll see you in the next one wall, street millennial, signing out.