The U.S. Dollar will collapse and lose its reserve currency status… but NOT for a LONG TIME (years, if not decades).
There have been mainstream and social media headlines everywhere over the last week proclaiming that the dollar is now facing its imminent demise.
But, we have been seeing similar headlines since the 1980s, and the dollar has yet to come close to losing its value.
When the Dollar Does Collapse the Consequences Will Be Horrific
(1) the cost to import goods will skyrocket because foreign companies will no longer want dollars; (2) our government will lose its ability to borrow at its current levels – forcing it to raise taxes or print money to cover its shortfalls; (3) inflation will be at levels we have never seen because of higher import-costs and mass money printing; (4) the economy will pretty much collapse too in the face of double-digit inflation, the shut off of government spending, and/or the crushing burden of much higher taxes; and (5) interest rates will shoot through the roof too – crushing the real estate market.
What Does It Mean to Be the World’s Reserve Currency
The world’s reserve currency is the primary currency held by central banks, governments, and companies around the world as the primary store of value and currency for global trade. Being a reserve currency gives the related country far more political clout and power than it otherwise would have, and it allows that country to borrow far more money at much cheaper rates because of the excess demand for that currency. The dollar became the primary reserve currency in the 20th century as the U.S. emerged as the largest economy in the world and, equally important, the strongest military power.
“BRICS” Stoking Recent Concerns of the Dollar Demise
The BRICS, or a consortium comprised of Brazil, Russian, India, China, and South Africa, have been trying to establish an alternative currency for trading purposes for years, and they have recently stepped up their efforts. China in particular has been encouraging the use of its currency for trade.
Oceans of Dollars vs. Lake Michigan of Yuan – Primary Reason the Chinese Yuan Can’t Take Over for Years
The dollar system is simply far too huge to be overtaken for years. Almost 90% of foreign exchange transactions and 60% of all world trade take place in dollars – and the overall numbers are just staggering. It would be like if the U.S. owned all of the oceans of the world and had a monopoly over their usage, and then the BRICS suddenly bought Lake Michigan. Lake Michigan is huge as lakes go and formidable, but it is a mere spec compared to all the oceans – and it would take years if not decades for the BRICS to come up with enough Lake Michigans to usurp the U.S.’s ocean monopoly.
All of the Reasons Why the Dollar Won’t Collapse in the near Future
(1) The dollar is the primary currency for world trade, and no other currency comes close to offering the necessary supply and replacing such a huge trade/currency system will take years;
(2) A reserve currency needs a strong and liquid bond market for that currency, and China’s bond market does not even come close;
(3) A reserve currency needs to have no capital controls or restrictions like China has now – where it won’t allow capital to leave the country;
(4) A reserve currency needs trust, and the BRICS don’t even trust each other;
(5) A reserve currency country needs to run huge trade deficits to ensure there is a sufficient a supply of that currency in the world;
(6) A reserve currency country needs a very strong military to back its currency, and China is not strong enough yet;
(7) Countries and international companies will need dollars for years still to pay off the trillions of dollar denominated debts they have accumulated.
Brent Johnson has been trying to explain this for years, and I HIGHLY RECOMMEND THIS 6-MINUTE VIDEO which explains his Dollar Milkshake Theory – and why the dollar will not collapse soon.
I also recommend following Mr. Johnson on Twitter too, as he constantly clowns on the dollar-doomsday-crowd, and it is both interesting and amusing. In this recent tweet, Mr. Johnson points out how ALL of the BRICS currencies have fallen against the U.S. Dollar since 2009, DESPITE our QE and out-of-control spending and borrowing.
In addition, this extremely interesting tweet shows how the dollar’s share of global transactions has held steady since 1989 – despite all the “de-dollarization bullshit” according to the author of the tweet.
Readers should also follow Jeff Snider on Twitter, as he too constantly points out how huge the overall dollar market is and how it cannot be replaced for years simply because of its size and complexity.
And lastly, in this recent Blockworks podcast, The End of the U.S. Dollar?, at about 16 minutes in, the hosts repeat many of the reasons I set out above (in case readers need more evidence).
TLDR: The dollar is not going anywhere in the near future and will actually shoot up in value before it collapses (per Mr. Johnson), as there is and will be a “dollar shortage” (watch the dollar milkshake video above to understand this).
BUT the dollar will collapse at some point, and that is a huge reason why everyone should own residential real estate with fixed-rate debt!
When inflation runs out of control, we can all pay off our mortgages with worthless dollars and watch our property values (as hard assets) soar with inflation.