Is the dollar about to collapse and if so when? Today is Friday 17th May 2019, and we are going to cover a subject which most pumpers and conspiracy theorists have got wrong time and time again – the imminent demise of the US dollar
For many years now the gold and silver pumpers and conspiracy theorists have talked up the imminent demise of the US dollar with the argument that all fiat currencies fail, and the dollar will be next with China, Russia and a number of other major economies dumping US Treasuries.
Well first of all, let’s briefly look at the definition of a fiat currency.
Fiat currency refers to any currency that a government declares to be legal tender. Legal tender in this context means that the money has the full backing of the government that issues it, but not necessarily supported by any commodity or tangible items such as precious metals for example.
Throughout history, fiat currencies have risen and eventually collapsed, often due to devaluation.
Initially, paper money gets introduced into an economy whereby it creates an economic boom. Over time, however, it gets overprinted, slowly building inflation and losing value. Eventually, it devalues enough to lead not only to its own collapse but also that of the economy connected to it.
But for a fiat currency to collapse there have to be essentially 3 conditions:
1. First, there must be an underlying weakness. Between 2002 and 2018, the dollar has declined 6 percent according to the U.S. Dollar Index.
The main reason is that U.S. debt almost more than tripled during that period, from $6 trillion to $22 trillion with a debt-to-GDP ratio more than 100 percent. The argument goes that this increases the chance the United States will let the dollar's value slide as it would be easier to repay its debt with cheaper money – you have to ask however why is the FED raising interest rates then?
2. 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 half 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.
So there has to be a replacement – the Yuan- which devalues frequently and China’s economic system is not complex enough as yet to fulfil World Currency reserve status. Bitcoin which is unsupervised, open to the ‘dark web and as we have seen lately a value so volatile one is a millionaire one minute and a pauper the next - we suspect not.
3. A huge economic negative event has to occur that destroys confidence in the dollar.
Well the pumpers state foreign countries own more than $6.2 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. Treasury’s. 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 Treasury’s. It also wants to keep the yen low to stimulate exports to the United States.
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.
whilst we all accept that over time fiat currencies devalue, (but bear in mind too that often wages and benefits increase to help offset much of this devaluation) it is the inter-relationship between currencies that matter in terms of comparative wealth.
Yes, small countries’ currencies will come and go, but one the size of the US dollar – the global reserve currency – is extremely unlikely to collapse before most of the others. What we are more likely to see is its gradual decline in importance as countries slowly reduce their dependence on the US and goods are traded in other currencies or formats such as, potentially gold.
This process however is likely to take decades and those claiming the imminent collapse of the US dollar are either economically ignorant or deliberately attempting to deceive you as they likely have something to sell in its place.
Caveat Emptor!
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