As noted by economist Stephen Roach, the US dollar may be on its last legs.
Roach predicted that the dollar’s impending depreciation will have three major factors: it will be inflationary, providing a nice short-term cushion against deflation but also adding to concerns about stagflation, the difficult mix of poor economic growth, and increasing inflation that wreaks havoc on financial markets.
Please note that nothing within this article constitutes financial advice and should be used for informational purposes only.
How Do Currencies Fail in the First Place?
The loss of faith in any currency is the fundamental cause of its demise. And any currency’s usage and stability are the fundamental foundations of trust. This acts as a useful store of value.
To put it another way, a currency loses its value when people cease trusting in it. But it isn’t just because you and I, or our government, begin to believe in the loss of its worth, and everyone ceases to use it as a result.
The loss in value of the currency may be attributed to a number of reasons. With a history of failed currency incidents in formerly wealthy nations, hyperinflation wreaked havoc. In nations like Venezuela, Zimbabwe, and Germany, for example, hyperinflation fueled by overconfidence resulted in catastrophic catastrophes.
People in Zimbabwe thought of using banknotes instead of purchasing toilet paper when the country’s currency was devalued due to hyperinflation.
Why Could the US Dollar Be Headed Towards Collapse?
The downfall of every currency may be predicted by analyzing its weaknesses. The main cause of the dollar’s weakness is that the government does not let it depreciate; it continues to “print” more dollars to prop up the value of the currency.
Another factor contributing to the dollar’s depreciation is the worldwide demand for dollars. The statistical estimate of the dollar’s worth is about $90.19. The value of the asset has decreased 12% in less than a year. The relative strength of the dollar will decrease across the globe due to a decline in the value of the U.S. Dollar Index.
Leading into this are two elephants in the room for the American economy. Hyperinflation and excessive debt are a double-edged sword for the American economy because they both have the potential to devastate the U.S. economy if allowed to continue.
Hyperinflation, which affected countries such as Zimbabwe and Venezuela, is defined as rapid, excessive, and out-of-control price increases for a currency. While America is not currently at the point at which people are using US dollars as toilet paper, the US dollar did have an inflation rate of almost 5% over the past year. This is double of what US officials deem “healthy” inflation.
Hyperinflation was not always looming over the U.S. The majority of the world’s most powerful nations tied the value of their currency to the US dollar as a consequence of the Bretton Woods Agreement in 1944. The creation of this enhanced the U.S.’s worldwide financial dominance.
The U.S. dollar’s value remained constant since it was backed and redeemed for gold at that time. The experience demonstrated to the world that it was possible for foreign central banks to redeem $35 US dollars for one ounce of gold at a fixed rate. A single ounce of gold is now worth $1,783. This changed when President Richard Nixon removed the US dollar from being backed by gold in 1971.
This resulted in the bulk of the world using currencies that had no backing. Currently, the globe is indebted by more than $255 trillion dollars.
The other elephant in the room is America’s national debt. If a country’s national debt increases, it means that the government owes more money to creditors. The national debt of the United States is now $27.8 trillion, and it continues to rise. The more money that the U.S. owes to foreign creditors, the more influence they have on U.S. monetary policy.
Also, the U.S. government will have a difficult time dealing with interest payments. This may lead to the foreign creditors lowering the value of the US currency.
Other reasons may include the rapidly expanding economies of China and the European Union to contest the hegemony of the reserve currency and dominate the currency reserve area. If all this comes to pass, the value of the US dollar will decline and will cease to be a stable currency.
What Would Happen if the US Dollar Collapses?
The collapse of the US dollar would be an international event and will take years to recover from. To a certain degree, every nation is impacted by the failure of the U.S. economy, with the exception of China in certain areas. This was seen during the 2008 financial collapse.
Countries that trade or export to the United States will suffer significant losses in their economy. The countries that buy products from the United States may suffer shortages of commodities.
When they see USD begin to collapse, the public will start panicking. Banks and money exchangers will quickly see an increase in client activity, as people try to remove as much money as possible, and switch to other currencies. Withdrawing their money will be their last resort should things become worse. It will happen worldwide.
Banks are leveraged, and because of this, they are at risk of collapsing, and whole economies may fall if they cannot obtain the money they need.
The general population will bear the brunt of the damage. All their money will be in bank accounts and pension funds by the time they are bankrupt. Wealthier, diversified citizens will be insulated from much of the damage as they are likelier to hold relatively fewer amounts of cash and more assets such as gold and property.
The Bottom Line
With all this doom and gloom, what is there to do? Some resign themselves to our economy’s fate; decades of sustained growth cannot go unpunished, they say. Others look towards other fiat currencies, such as the Euro or the Chinese yuan. While those currencies have their strengths, they still face the same issue as the American greenback: nothing ties them to value.
Others, still, set their sights on alternative investments that stand the test of time. Creating a diverse portfolio of physical assets that are outside of the protected class could benefit you monetarily and provide you with future peace of mind.
The growth of anti-fiat sentiment across the globe has sparked a boom in alternative asset preservation methods, and with central banks and governments continue to print money, “extreme” methods of preserving your buying power could gain appeal in the next decade.