A doom loop occurs when an adverse condition causes another adverse condition that, then, causes another adverse condition – creating a dangerous, downward spiral that’s difficult to escape.
Here is a doom loop example: Imagine a depressed man. That man can be depressed for a number of reasons, but that’s not important. What’s important is the effect depression has on the man. So, imagine a depressed man. Now imagine that the depression leads the man to behave in a way that causes him to lose his job. Now imagine that this man comes into conflict with his wife because he lost his job. This is a doom loop.
In the beginning, the man was simply depressed, but because of the depression, the man acted in a way that caused him to lose his job, which then caused him to come into conflict with his wife – creating a downward spiral toward harder times.
Doom Loop Economics
Fortunately, the doom loop theory means exactly the same in the context of economics: when one adverse condition triggers another adverse condition, there’s always a risk of things spiraling out of control. And one such example of a doom loop in the context of economics is a dollar doom loop.
What Is A Dollar Doom Loop?
A dollar doom loop does not refer to a single theory. In fact, the US dollar can cause various kinds of doom loops. Fundamentally, though, a dollar doom loop refers to an economic crisis caused by the US dollar. And this is what could be the start of a dollar doom loop:
Presently, manufacturing, commodities prices, and global trade are in decline, creating concerns surrounding global trade. But what’s important here is the context. This overall economic decline is occurring while the US dollar is in a strong position relative to other currencies. This is a problem because the US dollar is the main currency for global trade. Therefore, when countries are exchanging their national currencies for the US dollar, their currencies are devalued because of the strong US dollar. In other words, countries need more of their national currency when exchanging into US dollars.
This situation is raising concerns that it can trigger a dollar doom loop because, as stated above, countries worldwide are experiencing some form of economic decline or troubles. Therefore, when countries are exchanging their devalued national currency for US dollars, this can exacerbate their own economic troubles because their own economies are already in decline, raising fears that things can worsen.
And there’s more. Even though the US dollar is strong, this does not mean there are not any repercussions for the US. Many American businesses have interests and assets valued in foreign currencies, and thus their revenue streams are declining. In fact, Netflix reports that its revenue was reduced by recent exchange rates caused by the strong US dollar. Therefore, a strong dollar can impact American companies’ revenue, which can cause companies to lay off employees or even risk bankruptcy.
Therefore, to bring it all together, at first the problem was that global economic activity was in decline. However, as the US dollar became more valuable than other currencies, this has inadvertently worsened that trend of declining global economic activity by devaluing countries’ national currencies; thus, making it more costly for them to engage in global trade. Furthermore, this situation is further exacerbated when American businesses are also hurt by currency exchange rates when their overseas revenues are reduced by a strong US dollar. This is the general frame of a dollar doom loop.
The Doom Loop’s (C)ryptonite: Cryptocurrencies
As there are fears surrounding a dollar doom loop, Arthur Hayes wrote an article called The Doom Loop that predicts that Bitcoin and gold are going to hit $1 million (Bitcoin) and $20,000 (gold) respectively. Hayes argues that this will occur because of a particular doom loop that he outlines, as follows:
Globally, the world is experiencing inflation. On the edge of Europe, a war is waging involving one of the world’s largest nuclear powers and energy producers, Russia. Naturally, Europe is supporting Ukraine. The problem with this financial and military support is that the European economy, especially Germany, depends on cheap Russian energy. That energy is now gone.
This is concerning because Germany’s manufacturing and industrial base largely ran on Russian oil. In fact, cheap Russian oil is what allowed the German economy to compete with Asia. All of that is in jeopardy now. And as Germany is the backbone of the European Union and the Eurozone, any economic troubles that hit Germany will appear throughout the EU. If Germany gets a cold, so will Europe.
Furthermore, the world noticed that the United States further weaponized its financial monopoly over the world to damage and remove Russia’s economy from the global economy. Countries, especially countries with a surplus such as China, are now reviewing their decisions to place their surpluses in assets valued in US dollars, for they now know that America is willing to confiscate or freeze those assets in order to achieve specific goals.
Therefore, as the United States becomes more comfortable and willing to weaponize its financial tools, countries are going to look for an alternative to place their surplus cash supplies. Hayes argues that there are only two viable options: Bitcoin and gold. If this decision is made, Hayes argues, then that is what will push Bitcoin and gold to new heights.
Why Are There Fears Of A Bitcoin Doom Loop?
As Arthur Hayes predicts that there will be a doom loop that pushes Bitcoin (and gold) to new heights, there are other beliefs that see the opposite: that Bitcoin and crypto might descend into a doom loop. The impetus for these fears is found in Bitcoin’s recent price performance. Bitcoin was at $20,000 but now is at $16,000. Of course, this situation is further inflamed by the FTX collapse, which has stained crypto’s image. However, all industries have experienced fraud in some form or another. Thus, it’s expected that this stain will be temporary.
Presently, there are many fears surrounding potential doom loops, whether it be caused by the US dollar, the present economic and political environment, or the dramas surrounding the FTX collapse. Nevertheless, although there are many problems worldwide, economic activity has not collapsed as feared, especially during the pandemic. Jobs are available. And Bitcoin is still functioning worldwide.