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. Treasury bonds and other assets. 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.
Two Conditions That Could Lead to the Dollar Collapse
Two conditions must be in place before the dollar could collapse:
- An underlying weakness in the U.S. dollar, and
- The presence of a viable currency alternative.
1) An Underlying Weakness in the Dollar
First, there must be an underlying weakness in the U.S. dollar.
Between 2002 and 2018, the dollar has declined 6 percent according to the U.S. Dollar Index. Why? The U.S. debt almost more than tripled during that period, from $6 trillion to $22 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 as it would be easier to repay its debt with cheaper money.
2) The Presence of a Viable Currency Alternative
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 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.
Suggested Alternative 1: The Euro
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.
Suggested Alternative 2: The Yuan
China and others argue that the world should use an entirely new currency as the global currency norm. China would like it to be its currency, the yuan. That would boost China’s economic growth.
It is not a surprise that the dollar’s drop in value alarms China. That’s because it is the largest foreign holder of U.S. Treasury bonds, so it has been watching its investment deteriorate.
The dollar’s weakness makes it more difficult for China to control the yuan’s value, which is pegged to the dollar.
Suggested Alternative 3: Bitcoin
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.
The Economic Event that Could Trigger a Collapse
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 $6 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 notes. 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 notes. It also wants to keep the yen low to stimulate exports to the United States.
Japan is moving 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.
Effects of the Dollar Collapse
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 Treasury notes 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.
Introduction to a Gold standard
Since the days of King Solomon of Israel, civilizations around the world have been fascinated by gold’s monetary qualities.
Gold settled international debts. You could also exchange it for paper money. And under what’s referred to as “the gold standard,” all the world currencies were defined by a set quantity of gold.
As simple as it sounds, the gold standard was a truly complex system. Read more to find out what many experts have to say about it.
We will show what historians, gold buyers, and economists are referring to when they reference the gold standard. We will also include the many ways its demise could affect the U.S. economy even today.
How Did the Gold Standard Work?
“The principle behind a gold standard is to make a currency that is as stable in value, neutral, unchanging, and reliable as possible—the monetary equivalent of a standard measure like a kilogram or meter.”Nathan Lewis, Forbes Contributor
In short, the goal is to prevent the monetary distortion that results from a currency’s market volatility.
Under the gold standard, a country’s money supply was tied to gold. Fiat currency—or paper money—like cash, could be converted into gold on demand. This naturally limited the supply of currency in circulation since it had to stay within a certain ratio to the supply of gold.
In addition to functioning as a tool for regulating the quantity and growth of a country’s domestic currency supply, the gold standard was also used on an international level.
Under the standard, two countries with different currencies could easily determine the market value of one currency in terms of the other, and vice versa.
Since participating countries maintained a fixed price for gold, they also fixed the rates of exchange between currencies tied to gold.
The dollar, for instance, “was defined as roughly one-twentieth of an ounce of gold, the pound sterling as roughly one-fifth of an ounce of gold,” writes financial market veteran Jim Grant. “The dollar-sterling exchange rate was therefore fixed at roughly $5,” or $4.867 to be exact.
This predictability and fixedness, says Grant, encouraged trade and limited the aggressive money-policy interventions that we see today. “As there was only so much gold, there could be only so many dollars, pounds, French francs or German marks.”
The Rise and Fall of the Gold Standard
By 1900, all countries, except for China and some countries in Central America, had adopted some form of gold standard.
According to the World Gold Council, the widespread adoption of the gold standard was highly successful for the world economy. World trade expanded and many countries benefited from rapid growth and low instability.
As such, conditions were favorable to the degree that there were substantial flows of “direct investment that opened up the ’emerging markets’ of the era, such as the Americas, Australia, New Zealand, and South Africa.”
This lasted up until WWI, when the cost of war weighed so much on countries that they abandoned the gold standard and resorted to inflationary policies to finance the demands of war, and later, reconstruction. (Remember, under a true gold standard system, paper money is limited.)
Despite periodic attempts in various countries to return to a gold standard after the war, most did not survive the Great Depression of the 1930’s.
The U.S., in particular, severed its last ties between the dollar and gold in 1971 when President Richard Nixon announced that the U.S. would officially no longer back the dollar with gold reserves.
Gold prices then rose 2,330 percent that decade from $35 per ounce to $850, reports Kitco Contributor and CEO of U.S. Global Investors Frank Holmes.
Runaway Debt in the U.S. Beats GDP Growth in Trillions of Dollars
The purchasing power of the dollar also fell severely, declining by 85 percent since the U.S. moved away from the gold standard in 1971, according to calculations by Peter Ferrara, former Associate Deputy Attorney General of the United States under President George H.W. Bush.
His estimates further show that a dollar saved in 1971 was worth just 12 cents by 2012.
While governments have always had tools with which to steer the economy, the fall of the gold standard opened up wider avenues for them to do so.
A Return to the “Golden Period of the Gold Standard”
For many, the advantages of the gold standard remain strong. With it, central banks have less unchecked power, world price levels are effectively anchored, and international exchange rates are more predictable.
Even former Fed Chairman, Alan Greenspan, has returned to being a proponent of the gold standard after speaking out otherwise for more than a decade.
In a July 2016 interview discussing U.K.’s Brexit referendum, U.S. economic growth, wage stagnation, and more, he suggested that the world may have been better off if the U.S. had never abandoned the gold standard.
In the wake of Brexit especially, Greenspan believes a “debt crisis will be inevitable,” as he has no faith that political leaders will “restrain entitlement spending” when another crisis breaks out.
“[I] would not be surprised to see the next unexpected move to be on the inflation side,” he says. What is his solution to high inflation? Good old gold.
“Now if we went back on the gold standard and we adhered to the actual structure of the gold standard as it exists let’s say, prior to 1913, we’d be fine. Remember that the period 1870 to 1913 was one of the most aggressive periods economically that we’ve had in the U.S., and that was a gold period of the gold standard.”Alan Greenspan, Former Fed Chairman
Bottom Line: The Golden Solution
As economies all over the world continue to struggle with a variety of problems, gold could be a solution to protecting your money and increasing your wealth potential.
Unlike the dollar, gold cannot increase its own supply to suit the day’s political agenda.
In fact, “physical gold is very scarce,” says author and gold market veteran Jim Rickards, and no one is sure how much gold remains embedded in the earth or how much it would cost to mine it.
Whether the U.S. returns to a variation of the gold standard in the future or not, you can work to safeguard your wealth by owning gold.
“It’s scarce, durable…beautiful and portable. At a glance, anyone can tell it’s valuable,” says financial markets analyst Jim Grant.
Read more about why we recommend a gold IRA as your best option for investing in gold.
Do you have any questions on the fall of the U.S. dollar and the inevitable return to the gold standard? Ask below!
I did not know that we were so close to a return to the gold standard. A lot of people knew that the dollar was collapsing and that it was not much time left to go before a change had to be made to the way economics was being done- or even better a return to the way things were that kept civilization’s economies strong for centuries. I welcome the return to the gold standard
Hello Jon! I would like to add that the gold standard will also welcome you more the more heavily you invest in physical gold or precious metals from a time like this. Thank you for sharing your insight about the article!
Very interesting article. The entire post was well structured and informative. I liked the discussion concerning alternative currencies.
Just a question… Didn’t the U.S. actually go off of the gold standard in 1939? I thought I remembered something happening to our financial structure back then.
On another note, isn’t it likely that if the U.S. economy collapsed a domino affect would occur and thus undermine most of the other currencies in the world?
Keep up the good posts.
Hello John and thank you for your inquiries! It was Britain and many other European nations who were forced off the gold standard in 1939 from the effects of the Great Depression, but the U.S. officially declared itself free from the gold standard by Nixon in 1971 (“The Nixon Shock”), but references to gold convertibility were not eliminated from statutes completely until 1976.
If the U.S. economy collapsed, it would raise the value of the currencies of the countries who are not dependent on the dollar but devalue the currencies of the countries who rely on the dollar (which currently is most of the world hypothetically, yes).
Thank you for the inquiries and comments!
Very thought provoking article! I have many times pondered the possibility of collapse among global currencies, if not only the US Dollar. Because the US dollar seems likely to collapse at some point in the next few years, I see the value in gold and other hard commodities.
I have also imagined a scenario where the dollar collapses, everyone tries to sell their “dollar dominated assets”, as you call them, and everyone trying yet failing because there is no demand. The investment in to Gold is a wise one, and while I haven’t done it myself yet, I have been planning on it for quite some time now. Also, I find the concept that “the world may have been better off if the U.S. had never abandoned the gold standard.” a very interesting one. Lots to think about! Awesome article, tho! I look forward to hearing more quality content from you in the future!
Hello Koda! They would have been better off if they did not leave the gold standard but if we look at things in a positive way, at least we know how bad the economy gets if it runs on fiat currency (this bad!). I’m looking forward to a better economy in the future and I hope you keep up with my posts! Thank you very much!
I had no idea there were many different kinds of IRA options. I enjoyed reviewing this site because it contains a lot more content about a topic I only knew some information about when I used to work for a multi-line insurance company that included a securities section.The title is catchy. Obviously, the bold design on ‘gold’ assets and the keys to investing are pretty plain and easy to understand. While I’m no financial expert, if I wanted to learn more about the pros and cons of investing gold IRA options, the alternative currencies to the US dollar and even cryptocurrency IRA options. The layout and design of the website is very in-depth despite only having (3) main categories. The sub-categories covers a gamut of topics and the ads placed strategically to the right of the articles reflect what the site is about and it even includes the option of a reader contacting an specialist for further questions. Impressed and a little intimidated as a consumer, but quite impressed as a fellow learner. Gold is definitely a marketable asset that can possibly outlive the dollar. It definitely outweighs it in gold.
Hello haiku67girl and thank you for the compliments! I’m glad to hear that the website is well-structured and geared for good marketing and I assure you that it is really because I believe that the product (a Gold IRA with our best gold IRA company, Regal Assets) is worth it. Thank you for dropping by!
What a nice article with so much information, I love reading such articles. Indeed Dollar is the widely or generally used currency in the world, but however if another currency like the Yuan compete with Dollar as a second generally used currency, Dollar will definitely decrease in value. China has been recorded as the most populated country and most technologies in the world are been produced by China, and it’s a big treat to U.S.A.
Hello Chris and thank you for your insight! Yes, using the yuan currency is a strong competitor to the dollar and while we do not know what will happen to foreign policies in the future, we do know that using a gold standard is better than any fiat currency, yuan or dollar. Thank you and I hope to hear more insightful comments from you!
The caption of this article is catchy. With all these dramas around the US dollar, there is a need for reconsideration of the gold standard. The gold standard hasn’t been used in the US since the 1970s, but in the last couple of years, there’s been some speculation that US President Donald Trump could bring it back. According to Kimberly Amadeo, due to trade, money supply, and the global economy, the rest of the world would need to go back to the gold standard as well.
If the US went back to the gold standard and set the price of gold at $500 per ounce, the value of the dollar would be 1/500th of an ounce of gold. This offers reliable price stability.
This article actually opened mind. Thank you
Hello again, Chidiking88! I didn’t know that the current President is considering returning to the gold standard, but now you have definitely given me a new article to research and write about! Thank you for your insight and comment!
This is a goog informativr article on the dollar valuation and possible collapse. With the dollar declining and the debt increasing this makes it a very real possibility.
Viable alternative currency options are a much needed option including the yuan, bitcoin or Euro. Good description of what the effects would be from a dollar collapse.
I agree with the introduction of the gold standard and limiting the amount of fiat currency can regulate can regulate the quantity and growth of a country’s domestic currency supplyy. I agree that gold definitely can be the solution to this monetary challenge.
Hello Joseph and I’m glad you agree with all the points of the article. However, even though we may believe it is the best option to go to the gold standard it is still up to the policy-makers to decide that and for us to keep proposing the idea until they agree. Thank you for coming by!