When the US Economy Seems to Be Slowing Down, Does Fewer Immigrants Mean a Smaller Economy?

You know something weird is happening. Recently we keep hearing about economic slowdowns and job losses, yet the US dollar is acting like the king of the world, surging past other currencies. Many folks point fingers at foreign retail investors aggressively buying up U.S. stocks and thus demanding more dollars . But here's the thing: while individual investors certainly play a role, the core issue is less about who is buying dollars and much more about who has suddenly stopped selling them.

Let's dive into the fascinating, complex dynamics of currency flow. I’ve found that the biggest shift is actually a major drought in dollar supply from our big export-oriented corporations . Historically, these companies would earn dollars from U.S. or international sales and then sell them back to the market to get local foreign currency to pay salaries and run operations . Now, due to massive foreign investment —especially in sectors like semiconductors and batteries in the US following recent trade negotiations—these foreign companies are holding onto their dollars because they need them for huge projects in the U.S. . What’s interesting is that this committed capital investment is so massive, it’s essentially wiping out a significant portion of a country's annual current account surplus . This severe lack of U.S. dollar sellers, combined with the normal, continuous demand from investors, creates a lopsided market where the value of the dollar can only soar.

This leads us to a counterintuitive insight about market pricing. You might worry that this upward pressure means the dollar will continue rising for years as these investments roll out, but don't panic just yet. The financial markets are incredibly efficient at pricing in the future, you know? Just like Nvidia’s stock price already reflects years of expected future demand, the foreign exchange market has likely already discounted the impact of these multi-year, confirmed corporate investments into the current exchange rate . So, while the immediate reason for the strong dollar is a structural supply-side shortage driven by huge corporate investment needs, the biggest move might already be behind us, priced in by the collective anticipation of the market.

Fed Secretly Tapping the Brakes While Hitting the Gas

Have you ever wondered why the Fed seems so stubbornly hawkish, even when headlines scream about economic slowdown and poor job reports? It feels like they are easing the official interest rates with one hand while simultaneously clamping down on liquidity with the other—like hitting the gas and the brake at the same time, right? . Here's a surprising fact that often gets missed: while the Fed gets all the attention for setting the target interest rate, the actual day-to-day liquidity in the short-term money market is tightening to an extreme degree. We’re talking about the overnight dollar market, where institutions borrow and lend for a single day, which is currently seeing transaction rates equivalent to the Fed raising rates twice its current target .

This severe tightening is the silent engine driving the strong dollar. Why? Because high interest rates signal strong currency, and when the short-term dollar market is this tight, it means there is a critical shortage of the "real" liquidity—what economists call the monetary base, or the money printed by the central bank itself . This shortage is a direct result of the Fed’s aggressive Quantitative Tightening (QT), where they slowly reduce their balance sheet, effectively draining cash from the system . What's crazy is that the Fed itself often doesn't know where the edge is; they are operating with a 'blindfold,' gently feeling their way forward until they hit an obstacle .

That obstacle has now materialized in the form of elevated short-term funding rates and a massive surge in usage of the Standing Repo Facility (SRF) . The SRF is essentially a distress signal—a lifeline for large banks to borrow emergency liquidity from the Fed when they can't get it from their peers . When large institutions, the ones who usually manage their liquidity perfectly, are forced to use the SRF, it sends shivers through the market because it suggests a systemic dollar shortage is occurring . We saw this vulnerability during the Silicon Valley Bank crisis, where a lack of available reserves (or "bank money" known as required reserves) to deal with potential bank runs forced banks to desperately seek funds, often from the short-term market . The fact that the Fed is now stopping QT suggests they finally "felt" this obstacle—the lack of dollar liquidity—and are backing off before a major accident occurs .

Does Fewer Immigrants Mean Higher Wages, or Just a Smaller Economy?

When we talk about the job market and the Fed’s perspective, things get really interesting. You’d think that with recent dips in monthly job creation, the Fed would immediately turn dovish, right? After all, that's what the textbooks say: poor employment equals policy easing . But here’s the unexpected twist: the Fed doesn't view the current employment situation as "bad" at all; in fact, they see it as a Goldilocks scenario—not too hot, not too cold . They base this on the idea that the labor force isn't growing as fast as it used to, primarily because of a sharp decline in immigration, especially undocumented immigration .

If the number of available workers (the labor force) only grows by, say, 40,000 per month, then creating 40,000 jobs per month is considered perfectly balanced, keeping unemployment stable . This belief allows the Fed to maintain its hawkish stance, arguing that despite the seemingly low job numbers compared to the 200,000+ per month we were used to, the market is simply adjusting to a smaller inflow of new workers . But why did immigration slow down in the first place? While border policies get the blame, I believe the primary driver is actually the reduced availability of jobs in the US—immigrants, like anyone else, weigh the risk of entry against the potential for income, and if the job prospects dry up, they simply stop coming .

This brings us to a major counterintuitive point, one that turns classic economic thought on its head. Many people argue that reducing immigration (or "kicking out foreign workers") leads to labor shortages, which in turn drives up wages for existing workers and causes inflation . However, this argument only holds true if labor demand is infinite, which it absolutely is not . From my experience, when you remove a significant population of working consumers, you don't just lose workers; you lose an entire segment of the economy—people who buy houses, cars, groceries, and pay for education . This historical data supports this: when the US passed the Chinese Exclusion Act in 1880, banning the employment of Chinese laborers in certain states, wages for both Chinese and white workers actually fell in the states that adopted the law, compared to those that did not . Economic growth is fundamentally driven by people and their economic activity, and removing them simply shrinks the entire pie, leading to deflationary pressures and lower overall wages. Ultimately, if the Fed maintains its view that "everything is fine" based on these adjusted employment metrics, we should brace ourselves for continued slow rate cuts and a persistent strong dollar, potentially leading to widespread unhappiness in the asset markets .