Is the US dollar going to collapse? Why, When, & How?
It’s not just the de-dollarization. De-dollarization might just be a measure to limit the impact of a very probable upcoming collapse of the USD.
It’s the way our economy is structured -fundamentally, that allowed the US central bank (federal reserve) to abuse the privileges of USD being the world’s reserve currency. It is the ability of our central banks to create money or ‘promissory paper’ out of nothing, without balancing it with real value. Which now have compounded into this big bubble. Our economy is debt-based, modeled after the US central bank. In simple words, this is what it means, considering the recent fall of SVB and other banks, when they defaulted -that means they don’t have enough money to give back to their depositors, then the US federal reserve stepped in and rescued the depositors. How will it pay them? By creating more money, which is just digitally altering numbers; and that’s the problem. Whenever there is a disaster or a minor hit to the economy, central banks opt for quantitate easing as a short-term solution, then the economy grows, people’s purchasing power increases, and everything goes well. But over the long run, it causes inflation, and high inflation is very bad for the respective economy, so to control that central banks then opt for quantitative tightening that limits the money flow, hurts businesses and the economy. That’s a disaster, and then the cycle repeats. Although not for the same reason, every time this cycle repeats the bubble gets bigger. FYI this is not the only reason, in the case of the US, its trade deficit, debt-to-GDP ratio, and volume of liquid assets are way beyond what the US economy can individually sustain. But it’s been holding up since the USD is the reserve currency.
Example of money creation:
When there is a lack of money or when a government needs funding for something, maybe to support a program, a project, or for any reason, that government issue bonds (debt), then the central bank buy those bonds by creating new money. Of course, it’s more complex than that, but that’s basically it, that’s how money is created. FYI, there are different types of bonds issued by different institutions, and individuals & organizations can also buy them.
Central banks have the authority to create money, that’s what the internal government debt is.
Facts:
- No sovereign nation wants its Economy, National Security, Foreign Policy, and Internal Politics to be influenced by external forces.
- The trade deficit of the US in 2022 was 948 billion USD, that’s more than the GDP of 177 nations out of 196. And unlike other countries, its trade deficit has been increasing.
- Good or bad, the decisions of the US affect everyone and cause economic instability.
- More and more countries are decreasing their dependence on the USD and trading in their regional currencies.
- The debt to GDP ratio of the US was 123% in 2022, 128% in 2021, and 134% in 2020.
- 33% of US debt is owned by people and corporations outside of the US.
- The total US currency in circulation in cash is 2.3 trillion dollars. Plus, most liquid assets such as bonds and stocks are approximately 20 trillion USD.
- Total gold above the surface is 208,874 tonnes, valued at 13.2 trillion USD -based on the rate of 63.27 USD per gram.
- The US dollar is the world’s reserve currency, which is backed by nothing but its global acceptance.
- Most of the world’s debt is in US Dollars.
- When there is a tremendous amount of money in hand but imitated things to buy, hyperinflation happens.
Disclaimer:
I’m not an expert but I know some facts and basic economics, which I believe is enough to understand this crisis. Based on the above facts, you can derive your own assessment, I’ve provided mine as follows. I’m not an economist, and neither do I have any educational background in economics so I may not be aware of some things and might turn out to be wrong, so do your own research before making choices.
How:
Note: It is true that the currency of a nation is largely dependent on the strength of its economy, and the US is indeed a very powerful economy -it generates a lot of value, but it consumes more than it generates, way more. The contribution of the US to world GDP is 15%, but it accounts for the consumption of 25% of the world’s resources and goods-that includes limited resources like energy & metals, and goods like clothes, toys, and electronics. That’s what the 948 billion dollars of annual trade deficit means. So, the strength of its economy isn’t baking the US dollar. The US is able to afford the ~trillion dollar trade deficit without facing the consequences only because USD is the world’s reserve currency; since it can just print the money without having to generate the equivalent value.
It will start when countries start to decrease their USD reserves and use their own/regional currencies for trade. The red alert will be the dumping of the Petro-dollar, introduction of BRICS currency, or collective reduction of USD reserves. As more and more people see this imbalance of value bobble and other problems, people will start dumping the US treasury bonds, and since USD isn’t much dependent on the strength of its economy, it will lose value as people lose their faith in it. Also, 33% of US debt is outside of the US, it will kick start an irreversible domino effect and panic sellout. Since the recovery of the USD will be less likely in the short term, people would want to get rid of the US dollar and assets backed, and based on it, this will result in money flowing to the US and will cause hyperinflation. Consequently, all currencies will gain value against the dollar but not relative to each other. This will result in large sums of money disappearing from the derivatives market. Also, a lot of the world debt is in USD, and a fall would mean a decrease in the overall value of the world debt.
The entire economic system might collapse, if not, it will have to restructure itself without the USD anyway. But the world doesn’t have a strong alternative, and no one fully trusts China, that’s why there will be a lot of economic uncertainty and distrust. But a collective currency will help, that’s why BRICS is a big deal.
Saudi Arabia is open to selling oil in currencies other than the USD. Russia-Iran, Russia-China, China- Brazil, Russia-India, and many more nations are already settling their bilateral trade in their regional currencies. Although that’s a very small fraction of all transactions, it’s a start.
Why
Reason 1
US Dollar has nothing to stand on, and there is a lot of it. The only strength it has is the collective confidence of most of the nations, which it is very rapidly losing due to a lot of obvious reasons. To give you a perspective, there is not enough gold in the official holdings of all countries combined to account for the amount of USD there is. The total US currency in circulation in cash is 2.3 trillion dollars. Plus most liquid assets such as bonds and stocks are approximately 20 trillion USD. Whereas the total gold in official holdings of all countries combined is 34,211 tonnes -valued at approximately 2.1 trillion USD. The US gold reserve is 8,134 tonnes, valued at 514 billion USD. (based on the current rate of 63.27 USD per gram)
Reason 2
Nations are more or less fed up by the bullying of the US Monetary System; USD being the reserve currency comes with some privileges which the US has been abusing to the full extent -that’s how it is able to afford the ~trillion dollars of trade deficit, and was able to reach the debt to GDP ratio of 134% in 2020 without collapsing. In practice, this is what it means, when a nation let’s say Japan or Nigeria manufactures something they are creating some value, and when they sell it in the US for USD, where did that money come from? The US doesn’t necessarily create value to buy value. Otherwise, how the US being 4.2% of the world’s population and 15% of the world’s GDP would be able to consume 25% of the world’s resources.
US trade deficit in 2022 was 948 billion USD, an increase of 103 billion from 2021. But unlike other nations, the US doesn’t face the consequences of having a large trade deficit since it indeed pays for it by creating money.
A fall of USD would mean the US will no longer be able to afford the cheap luxury. On a large scale that’s a loss of a very big market, US is the biggest market of Chinese goods, this will indeed hurt the Chinese economy. Which would mean things will get cheaper for the rest of the world. This will bring down inflation, and might even cause deflation in some parts of the world.
Reason 3
Whenever the US increases interest rates it hurts other nations, and its decisions, good or bad, cause instability in all economies. And no sovereign nation wants its Economy, National Security, Foreign Policy, and Internal Politics to be influenced by external forces. Also, there is a lack of accountability, USD being the reserve currency gives it too much control over other economies, which makes other nations afraid and cautious when dealing with the US. And who likes to be vulnerable or threatened? No one.
Moreover, the US federal reserve (central bank of the US) seems to be blind or ignoring it, and even worse, it is printing even more money on a large scale compounding the problem, whereas the US government is weaponizing it and threatening other nations.
Reason 4
Countries are in massive external debts, which is in USD, although the US is also in debt of 31.5 trillion dollars which it will never really have to pay it back since it possesses the authority to create it, whereas other nations are obligated to generate equivalent value to pay off their debt- so if the USD falls, the value of USD based debt will also fall.
When
It depends on how many people know it, and what other alternatives are there. Although every nation wants to decrease its dependence on USD, the entire economic system was built around it, and you cannot change the fundamental structure of your economy overnight. Also, the world is still very much dependent on the USD, that’s why the economic uncertainty caused by the panic sellout will hurt a lot of people in and outside of the US.
The red alert will be the dumping of the Petro-dollar, introduction of a strong BRICS financial system along with a BRICS currency, collective reduction of USD reserves, or all at once.
Since USD is backed by faith which is just the collective confidence of a lot of people, we don’t know when people will people lose faith in the US dollar. There are also other variables such as how the markets will react, what choices other nations will make, and what option will the US choose to rescue the dollar. Although the BRICS in itself is almost half of the world’s population, things might vary on how accepted it will be and what economic structure will it adopt. So giving an estimate is hard. It may happen just next year or may not happen for the next 15 years.
To whom this will hurt and how?
That depends on what option the US chooses to save itself, the most likely scenario is that the US will stop the inward flow of money, announce demonetization, convert its internal currency into something new, and absorb most of it in the process. This will immediately make the USD outside of US and assets based on it -junk. And unlike the US, other nations have paid equivalent value in exchange for the assets they have, which would mean a loss of billions and trillions of dollars in value for respective nations.
If the US doesn’t announce the demonetization, USD will still be in a free fall, which means the more USD and USD-based assets you have the more it will hurt you finically, and there might not be enough time to convert your assets before they become worthless.
Free advice: Convert your money into hard assets such as land and jewelry -especially gold, or into other currencies. If the fall happens, there will be a panic buying of hard assets such as jewelry and land, driving up the prices.
Why BRICS:
In simple words, BRICS is 41.5% of the global population, 31.5% of the global GDP, and 32.1% of the global GDP PPP. More than enough to force countries to maintain a significant amount of BRICS currency in their reserves- if introduced. Even if not, they are all set to make trade settlements in regional currencies and that’s almost half of the world’s population dumping the dollar. Enough to start the domino effect.
India and China are strong rivals, although this is a big obstacle for a BRICS currency, if they both agree on something that can potentially affect both of their economies, it must be well thought out. It will serve as an assurance for other nations. Also, no individual nation will be able to abuse the privileges, it will only make their respective economies stronger. Everyone knows what privileges the US enjoys, and after the fall of the USD, not many countries will support a currency of a single nation especially not of China. Most likely there will be a set of mutually accepted currencies, such as BRICS, Euro, and Afro (made-up currency of the African Union) and all countries will maintain a diverse stock of these currencies so that the world will be protected from the USD-like disaster.
According to Russian Foreign Minister Sergey Lavrov, around 20 countries are wanting to join BRICS. Among them are Egypt, Mexico, Saudi Arabia, Turkey, Indonesia, and a number of African countries. Bangladesh, Egypt, and UAE have already joined the BRICS development bank. Algeria, Argentina, and Iran have officially applied for BRICS membership. On 16 March 2023, Russia announced that it supported Algeria’s bid to join BRICS. Saudi Arabia has initiated the formal process to join.
I don’t know what the structure of BRICS financial systems will be, related information will be released at the next BRICS summit in August 2023. Whether it will be an independent currency backed by other nations, will it be linked to solid assets of all group nations, or all BRICS nations will use one currency for domestic and international use like the EU. Depending on the model things might vary.
If BRICS is planning to expand, they need a new name like ‘Economic Alliance of Emerging Nations (EAEN)’.
Additional readings:
Towards de-dollarization:
Can BRICS De-dollarize the Global Financial System?
What it means for the US:
What the US can do to prevent it?
1. Recognize that all nations want to decrease their dependence on USD and act accordingly to gain back reputation and trust. Take necessary measures to decrease the trade deficit, act responsibly, be more accountable, and change some fundamental policies to give assurance to other nations.
2. Or cause a strategic war. People get dangerous when they lose power, and the US is indeed very influential and has the most powerful military. As it may lose economic leverage and influence over other nations, more and more countries would want an independent foreign policy and pursue their own interests. Thus, groups and countries that are getting more and more influential in the economy, geopolitics, and world order will be considered a threat by the US and will take countermeasures.
It’s unlikely that it’ll do it, but the US does indeed have the ability and power to throw the world into a war. Or cause a war between major nations like India and China.
What if the fall happens anyway?
USD being the reserve currency allowed the US federal reserve to create a lot of money without facing hyperinflation, which resulted in a lot of money in the system –more than the US economy can sustain individually. When the USD starts to lose value, there will be a panic sellout resulting in money flowing to the US, which will cause hyperinflation. To prevent hyperinflation the US most likely will stop the inward flow of money and announce demonetization and convert its currency into something new in a way that will decrease the collective purchasing of its citizens.
The US is one of the most developed nations in the world, its educational, tech, and business infrastructure is the best in the world. And it creates a lot of value, so it might still be the richest nation in the world, or maybe the second richest. It will still be the most powerful nation by military and influence. But it will no longer be able to afford the cheap luxury, it will have to account for its trade deficit resulting in massive budget cuts.
What it means for India:
It’s an opportunity or a disaster depending on how we handle it. The US most probably will dump the USD maybe that’s why they are creating so much money -to get the most out of it.
India has a lot of USD in its reserve, we should maintain the bare minimum, and convert the rest into solid assets. Decrease the quantity of the US treasury bonds, and restructure the economy for a diverse stock of reserve currencies. BRICS is already a very powerful economic body, and India’s UPI could be a game changer, which will bring transparency to the financial system so that China doesn’t play a double game with the BRICS currency.
Lesson for the world:
First printing money that causes inflation and then increasing the interest rate to control it, which then heart the industry and economic growth, and to solve that -the cycle repeats. This entire process has no base to stand on, and all the central banks in the world are modeled after this structure of US federal reserve. We need to invent a new economic system so that there will be no need to print more money, keeping inflation within limits, and the economy will be predictable and the system will be stable.
If economy is backed by something physical which is limited, the purchasing power will never go beyond a point, keeping the inflation always in limit and the economy stable. Whereas our current economic structure is based on collective faith, which is not something solid to be dependent on.
We need to fix the definition of growth, increasing the total amount of money doesn’t make any difference, since it causes Inflation and keeps the purchasing power constant. Or is it the healthy flow of money?
If there is a hard asset, suppose gold, which is limited then inflation will never increase beyond a point. This type of economy will be dependent on a healthy flow of money, so if one block or a nation gets too powerful, the assets will be concentrated to it.
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