What Would Happen If The Dollar Collapses?

What The Dollar as the World’s Reserve Currency Means: A former CIA clandestine officer, aka a spy, described the importance of the dollar as the world’s reserve currency simply.

In just about any country he operated, a $100 bill would be accepted by locals. If he needed to slip a few $10 bills to a boat owner to cross a river to another country, that US currency was his passport to safety. If he had to hop in a taxi and drive a few hundred miles to escape capture, a Benjamin would suffice. 

The key point is those dollar bills were trusted as currency that could be exchanged for goods and services later by its recipients. The same cannot be said for the Venezuelan Bolivar.

But you’re unlikely to be pulling off a “Mission Impossible-style” escape anytime soon, so what difference does a strong dollar make to you?

As it turns out. A big difference. 

But before we get to what the Death of the Dollar means to you, it’s important to know how it rose to dominance in the first place. When you see the arc of its ascent, you can more easily spot its time of demise.

What Countries Have Canceled Their Currency?

Just about every country in the world has, at one time or another, canceled its currency. That’s a shocking statistic to the uninformed, and jarring perhaps to those living outside the United States. 

The reasons for the cancellation of currency are numerous. Most boil down to poor governance through excessive debt exposure. Even the old Romans suffered from currency problems by inflating away the value of coins through mixtures of high quality metals with inferior ones. 

For citizens around the world, it is not uncommon to wake up and find the value of local currency has been slashed by as much as 30% and more overnight. In the last 10 years alone, the following currencies were devalued: 

• Turkish Lira
• Argentine Peso
• Venezuelan Bolivar
• Iranian Rial
• Syrian Pound
• Libyan Dinar
• Egyptian Pound
• Lebanese Pound
• Ghanaian Cedi
• Nigerian Naira

The reason the United States dollar has remained a trusted currency is that it has never been canceled. 

It grew to prominence at the end of World War II and soon became the most widely used currency for international trade. At the time, the US government backed the currency with gold; Bretton Woods fixed the value of the dollar to gold at $35 per ounce.

By stabilizing the value of the dollar, demand increased and it became THE reserve currency of the world.

When Bretton Woods collapsed in 1971, the US dollar remained trusted and, at the time, no viable alternative to it existed.

Global trade, economic expansion and investment grew because an underlying, stabilizing foundation existed.

What Will Happen If The Dollar Collapses?

The US dollar is the world’s reserve currency, but it’s not immune to collapse. In fact, there are a number of factors that could contribute to the decline of the dollar, including:

• Government spending: The US government has spent trillions of dollars in response to the pandemic, and this spending has put a strain on the national debt. If the government continues to spend at this rate, it could lead to a default on the debt, which would have a devastating impact on the dollar.
• National debt: The US national debt is already over $31 trillion, and it’s projected to continue to grow. This debt is a major liability for the US, and it could eventually lead to a decline in the dollar’s value.
• Higher interest rates: If interest rates rise, it will become more expensive for the US government to borrow money. This could lead to a default on the debt, or it could force the government to cut spending, which would have a negative impact on the economy.
• Inflation: Inflation is another factor that could contribute to the decline of the dollar. If inflation gets too high, it will erode the value of the dollar and make it less attractive as a reserve currency.

A decline in the dollar would have a number of negative consequences for the US economy. It would make it more expensive for businesses to import goods and services, which would lead to higher prices for consumers. It would also make it more difficult for the US government to borrow money, which would limit its ability to respond to economic shocks.

In addition to the economic consequences, a decline in the dollar would also have a political impact. It would make the US less influential in the world, and it could lead to a loss of confidence in the US government.

The risks posed to the US economy are complex and multi-factorial. However, the factors outlined above are some of the most important ones to consider. If these factors continue to deteriorate, it could lead to a decline in the dollar, which would have a significant impact on the US economy and the global economy.

What Happens If US Debt Gets Too High?

The US national debt is a major threat to the dollar’s status as the world’s reserve currency. In 2022, 7.4% of federal tax payments were allocated to pay off the interest on the national debt. But interest rates were still hovering at all-time lows back then.

Fast forward a year, and interest rates have risen at the fastest pace on record. This means that a greater percentage of tax payments will be allocated to service interest on debt. Worse still, as debt levels balloon, a gravitational force grows and pulls down the value of the dollar.

Another contributing factor to the demise of the dollar is the US trade deficit. When more goods are imported than exported, it means that the US is spending more money than it is taking in. This weakens the dollar, as it makes it less valuable relative to other currencies.

An often under-appreciated force working against the dollar is the aging US population. As the population ages, the workforce shrinks. This means that there are fewer people to produce goods and services, which can lead to inflation. Inflation, in turn, can further weaken the dollar.

Political tensions also add to the pressure on the dollar. China, the world’s second-largest economy, is increasingly flexing its muscles and challenging US dominance. As China’s confidence in the US government declines, it is selling off US bonds. This is a sign that China is losing faith in the dollar as a safe haven currency.

The reduced trust in the US government necessarily leads to a less attractive dollar as the world’s reserve currency. If the dollar continues to weaken, it could have a significant impact on the US economy. Businesses would have to pay more for imports, which would drive up prices for consumers. The value of US assets, such as stocks and bonds, would also decline.

In short, the US national debt is a major threat to the dollar’s status as the world’s reserve currency. If the debt continues to grow, it could have a devastating impact on the US economy.

What Does It Mean If US Dollar Collapses?

The dollar is the world’s reserve currency, but what would happen if it lost that status? Most Americans can’t imagine the fallout, but history provides some clues.

In the Weimar Republic, hyperinflation wiped out the value of the German mark, leaving millions of people destitute. In Venezuela, the bolivar has also been devalued to the point where it’s worth less than toilet paper.

A weakening dollar would have a similar effect on the US economy. Wages would fail to keep pace with asset growth, the middle class would be squeezed, and poverty would rise. Crime would also increase.

In this environment, there would be growing support for protectionism and isolationism. People would be less willing to trade with other countries, and the global economy would become more fragmented.

The end of the dollar hegemony would be a major event with far-reaching consequences. It would be a challenge to the US’s global power, and it would make the world a more uncertain place.

What Causes The US Dollar to Decline?

When Russia invaded Ukraine, the US government imposed harsh economic sanctions. The theory was that restricting economic trade would weaken the Russian heartland.

The response by Putin was to move away from the US dollar and instead use the euro and yuan. 

But a little-known consequence was the effect sanctions had on the ruble. Restrictions were placed on payments made in rubles so Russia could no longer, by law, make payments on some of its debt obligations. That had the effect of, albeit indirectly, canceling debt, which in turn led to a much stronger ruble.

A currency whiplash took place whereby the aim of weakening the ruble resulted in precisely the opposite happening. It is in fact the dollar that is suffering from these sanctions as sovereign foes strike deals to transact in currencies other than the US dollar.

How The New Silk Road Will Affect The US Dollar

In 2023, China, Russia, and Iran announced the formation of a new currency alliance.

The alliance, called the “New Silk Road Currency Alliance,” aims to promote trade and investment between the triumvirate of nations. 

It is also seen as a challenge to the US dollar hegemony because it is based on the yuan, Russian ruble, and Iranian rial. 

It will allow the three countries to trade with each other absent dependence on the dollar. This will help to reduce their reliance on the USD and insulate their economies from US sanctions.

What Will Happen If Dollar No Longer Reserve Currency?

As the dollar hegemony declines, what should you expect? 

In a word: volatility.

Naturally, the effect of a weakening dollar is higher undulations in nominal values of share markets. 

When the 1987 stock market crash occurred, the Dow fell by 500 points. In the intervening decades, the dollar has weakened to such an extent that a 500 point move daily is now not uncommon. 

Of course, the percentage move back in 1987 was much larger for the same point move, but the broader takeaway is that asset prices have risen in part because of an increase in productive capacity but also due to the weakening currency.

To speak plainly, if you bought a pack of chips in 1990 for $0.30 but it costs $1.00 today, you’re receiving the same amount of “goods” then and now but paying more in nominal terms to acquire it.

So, share prices will undulate to a greater extent. What else can you expect?

What Is The Next World Reserve Currency

As the dollar weakens, and trade takes place in other currencies, expect a multipolar world to form. 

The rise of China in particular will mean capital flows from the US dollar to the yuan. Just as capital flows from Europe post-WWII led to a massive economic boom time in the USA, so too will China reap the rewards of its fiscal conservatism by attracting capital that would otherwise have landed on US shores.

To combat the multi-polarity of the world, the US is strategically aiming to weaken its arch-rivals. Its two primary foes are Russia and China.

Some wonder why no leaders are stepping up to advocate for peace in Ukraine. The answer is simply that the longer the war goes on between Russia and Ukraine, the more Russian reserves are depleted. As Russia falls, China remains the only rival left standing.

But what about all the armaments shipped to Ukraine, don’t they hurt the US? 

Not necessarily. 

It’s not widely known that the US military is not simply handing over weapons to Ukraine. The former Soviet-bloc country is on the hook to pay back the costs of weapons via future debt obligations that it will likely be saddled with for generations to come.

The continuation of the war also allows the US to “battle-test” its latest weapons via a proxy war versus the more risky proposition of doing so in the heat of direct battle with China or Russia directly.

What Does The Death of the Dollar Mean For You

How will the demise of the dollar affect you? We can summarize the effects as follows:

Financial markets will experience much greater volatility, leading to sharper and steeper corrections and bounces over the medium to long-haul.

The US standard of living will continue to decline leading to even greater wealth gaps between rich and poor. As the middle class is increasingly squeezed, poverty will rise and crime, which is heavily correlated with economic weakness, should spike.

Protectionism will increase with politicians growing louder in their chorus to move away from a globally interconnected world towards a world where supply chains are brought on short. 

Few, if any, politicians are currently asking: what is the cost of economic security through such actions? 

The quick answer is inflation that will be higher and last longer than most expect.

How to Prepare For Dollar Collapse

As the dollar enters its sunset period, it is important to build as strong an asset base as possible. 

A gold bar 2000 years ago is worth the same as a gold bar today. It’s simply priced differently. Real assets largely hold their value over time; it’s just their nominal prices that vary.

The more tangible assets you can hold, the better off you will be to hedge against the effects of rampant inflation. There’s a reason, after all, that Bill Gates is the largest land owner in the US now. 

Another important consideration is diversifying your currency investments to include those priced in euros and yuan primarily. Exposure to emerging markets seems counterintuitive in an increasingly protectionist world, but it adds a layer of much-needed diversification. You don’t want all your investment eggs in the US currency basket.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.