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| US Dollar Collapse? |
A dollar collapse is when the value of the U.S. dollar plummets. Anyone
who holds dollar-denominated assets will sell them at any cost. That
includes foreign governments who own U.S. Treasurys. It also affects
foreign exchange futures traders. Last but not least are individual
investors.
When the crash occurs, these parties will demand assets denominated in
anything other than dollars. The collapse of the dollar means that
everyone is trying to sell their dollar-denominated assets, and no one
wants to buy them.
This will drive the value of the dollar down to near zero. It makes hyperinflation look like a day in the park.
Three conditions must be in place before the dollar could collapse.
First, there must be an underlying weakness. That situation exists in
2017. The U.S. currency is fundamentally weak despite its 25 percent
increase since 2014. The dollar declined 54.7 percent against the euro
between 2002 and 2012. Why? The U.S. debt almost tripled during that
period, from $6 trillion to $15 trillion. The debt is even worse now, at
$20 trillion. The debt-to-GDP ratio is now more than 100 percent. That
increases the chance the United States will let the dollar's value
slide. That's because it would be easier to repay its debt with cheaper
money.
Second, there must be a viable currency alternative for everyone to buy.
The dollar's strength is based on its use as the world's reserve
currency.
The dollar became the reserve currency in 1973 when President Nixon
abandoned the gold standard. As a global currency, the dollar is used
for 43 percent of all cross-border transactions. That means central
banks must hold the dollar in their reserves to pay for these
transactions. As a result, 61 percent of these foreign currency reserves
are in dollars.
The next most popular currency after the dollar is the euro. But it
comprises less than 30 percent of central bank reserves. The eurozone
debt crisis weakened the euro as a viable global currency.
China and others argue that a new currency should be created and used as
the global currency. China's central banker Zhou Xiaochuan goes one
step further. He claims that the yuan should replace the dollar to
maintain China's economic growth. China is right to be alarmed at the
dollar's drop in value. That's because it is the largest foreign holder
of U.S. Treasurys, so it just saw its investment deteriorate. For more,
see Dollar to Yuan Conversion and History.
Could bitcoin replace the dollar as the new world currency? It has many
benefits. It's not controlled by any one country's central bank. It is
created, managed, and spent online. It can also be used at
brick-and-mortar stores that accept it. Its supply is finite. That
appeals to those who would rather have a currency that's backed by
something concrete, such as gold.
But there are big obstacles. First, its value is highly volatile. That's
because there is no central bank to manage it. Second, it has become
the coin of choice for illegal activities that lurk in the deep web.
That makes it vulnerable to tampering by unknown forces.
These two situations make a collapse possible. But, it won’t occur
without a third condition. That's a huge economic triggering event that
destroys confidence in the dollar.
Altogether, foreign countries own more than $5 trillion in U.S. debt. If
China, Japan or other major holders started dumping these holdings of
Treasury notes on the secondary market, this could cause a panic leading
to collapse. China owns $1 trillion in U.S. Treasurys. That's because
China pegs the yuan to the dollar. This keeps the prices of its exports
to the United States relatively cheap. Japan also owns more than $1
trillion in Treasurys. It also wants to keep the yen low to stimulate
exports to the United States. Japan is trying to move out of a 15-year
deflationary cycle.
The 2011 earthquake and nuclear disaster didn't help.
Would China and Japan ever dump their dollars? Only if they saw their
holdings declining in value too fast and they had another export market
to replace the United States. The economies of Japan and China are
dependent on U.S. consumers. They know that if they sell their dollars,
that would further depress the value of the dollar. That means their
products, still priced in yuan and yen, will cost relatively more in the
United States. Their economies would suffer. Right now, it's still in
their best interest to hold onto their dollar reserves.
China and Japan are aware of their vulnerability. They are selling more
to other Asian countries that are gradually becoming wealthier. But the
United States is still the best market in the world.
A dollar collapse will not occur in 2017. In fact, it's unlikely that it
will collapse at all. That's because any of the countries who have the
power to make that happen (China, Japan, and other foreign dollar
holders) don't want it to occur. It's not in their best interest. Why
bankrupt your best customer? Instead, the dollar will resume its gradual
decline as these countries find other markets.
A sudden dollar collapse would create global economic turmoil. Investors
would rush to other currencies, such as the euro, or other assets, such
as gold and commodities. Demand for Treasurys would plummet, and
interest rates would rise. U.S. import prices would skyrocket, causing
inflation.
U.S. exports would be dirt cheap, given the economy a brief boost. In
the long run, inflation, high interest rates and volatility would
strangle possible business growth. Unemployment would worsen, sending
the United States back into recession or even a depression.
Protect yourself from a dollar collapse by first defending yourself from
a gradual dollar decline. Keep your assets well-diversified by holding
foreign mutual funds, gold, and other commodities.
A dollar collapse would create global economic turmoil. To respond to
this kind of uncertainty, you must be mobile. Keep your assets liquid,
so you can shift them as needed. Make sure your job skills are
transferable. Update your passport, in case things get so bad for so
long that you need to move quickly to another country. These are just a
few ways to Protect Yourself and Survive a Dollar Collapse.
Read more: Dollar Collapse: Will It and When
