The major misunderstanding about the collapse of the dollar (I think) is not that the dollar goes away or disappears, because there are a lot of them around. The problem is they are worthless, worth less and less and less. What good is a basket full of dollars that won’t buy a single potato because the potato cost more?
SO WHAT CAN YOU DO TO GAGE/measure THE IMPACT, PREPARE FOR IT AND SURVIVE THROUGH IT?U.S. Economy Collapse
What You Should Know in Case of US Economic Collapse
What Is a U.S. Economy Collapse?A U.S. economic collapse is when when the economy no longer functions to provide the daily necessities. Any of the following scenarios could create an economic collapse. First, if the U.S. dollarrapidly loses value it would create hyperinflation. Second, a bank runcould force banks to close or even go out of business, cutting off lending and even cash withdrawals.
Third, the internet could become paralyzed with a super-virus, preventing emails and online transactions. Fourth, interstate trucking stops, thanks to parallel terrorist attacks or a massive oil embargo, and grocery stores would run out of food. In the worst case, the U.S. economy collapses due to widespread violence, like the Watts riots in the 60s, the Arab Spring uprisings in Egypt, or even a civil war.
When Was the U.S. Close to Economic Collapse?There were two times in modern U.S. history when the economy was close to collapse -- The Great Depression of 1929 and the 2008 financial crisis. During the Great Depression, at least 25% of the labor force lost their jobs. There was no Social Security or unemployment benefits, so they depended on soup lines to survive. Many families lost their farms thanks to the Dust Bowl, and packed all their belongings into trucks and headed to California. There, they lived in tent cities called Hoovervilles. Many others lost their life savings in the 1929 stock market crash, some even committing suicide as a result.
Others couldn't get their money out of banks that closed on Friday, and opened on Monday to offer only ten cents on the dollar. It took a decade before the economy started functioning again.
The second time was recently, during the financial crisis. The U.S. was within weeks of economic collapse on September 17, 2008. That's the day that panicked investors withdrew a record $140 billion from money market accounts. This meant that banks were no longer lending to businesses, or each other, for even overnight loans. This short-term cash is what businesses rely on to fund day-to-day operations. If this panic had continued for even a week, trucks would stop rolling, grocery stores would run out of food, and businesses would shut down. For more, see September 2008 Run on Money Markets.
In this case, quick thinking by Ben Bernanke, Chairman of the U.S. Federal Reserve, and then Treasury Secretary Hank Paulson supplied the cash to keep banks afloat and stem the panic. Bernanke was an expert on the Great Depression, and happened to know exactly how to stem a run on the banks. Another person in his role might not have understood the situation, or known what to do. Paulson was a Wall Street veteran, and recognized what was happening in time to do something about it.
Most people don't realize how close the U.S. economy came to a real collapse -- or how vulnerable it is to another one.
If the U.S. Economy Collapses, What Will Happen?If the U.S. economy collapses, you will not have access to credit. Even cash will be devalued. This means high demand, and low supply, of food, gas and other necessities. If the collapse affects local governments and utilities, then water and electricity is no longer be available. As people panic, self-defense becomes more important. The economy quickly reverts to a traditional economy, where those who grow food barter for other services.
A U.S. economic collapse would create global panic. Demand for the dollar, and U.S. Treasuries, would plummet, sending interest rates skyrocketing. Investors would rush to other currencies, such as the yuan, euro, or even gold. This would create not just inflation, but hyperinflation as the dollar became dirt cheap.
How Can I Protect Myself from a U.S. Economy Collapse?It's difficult to completely protect yourself from a U.S. economic collapse because it can happen very quickly. In most catastrophes, people survive through their knowledge, wits and by helping each other out. Therefore, make sure you understand basic economic concepts so you can see warning signs of instabilitySecond, keep as many assets as liquid as possible, so you can withdraw them within a week, if needed. In addition to your regular job, make sure you have skills that are needed in a basic economy, such as farming, cooking or repair. Make sure your passport is current, and you know where you would go, in case you'd need to quickly leave the country. To be completely prepared, research target countries now and travel there on vacation so you are familiar with your destination.
Keep yourself in top physical shape, always a good idea anyway. Know basic survival skills, such as self-defense, foraging/hunting and farming. Practice now with camping trips. If you are really concerned, it might be best to move near a wildlife preserve in a temperate climate. That way, if a collapse occurs, you can live off the land in a relatively unpopulated area.
As for cash, it's almost pointless to have it in a real economic collapse because its value might be decimated. Gold isn't much help, either, because it's heavy to transport and fairly useless in a real survival situation. (You can't eat gold.) However, it would be good to have a stash of $20 bills and gold coins, just in case. During many crisis situations, these have been generally acceptable bribes when needed. (think barter items)
When Would the U.S. Economy Collapse?It's possible that a combination of events could overwhelm the government's ability to prevent or respond to a collapse. Others are convinced that the Federal Reserve, the President or an international conspiracy are driving the U.S. toward economic ruin. If that's the case, the economy can collapse in as little as a week. That's because it's basically run on confidence--that debts will be repaid, that food and gas will be available when you need it, that you'll get paid for this week's work. If a large enough piece of that stops for even several days, it creates a chain reaction that leads to a rapid collapse.
Will the U.S Economy Collapse?The U.S. economy is so large and resilient, it is highly unlikely that even these events could create a collapse. Hyperinflation is easily tamed by the Federal Reserve's contractionary monetary tools. The FDIC insures banks, and the Treasury can print all the money needed to make sure depositors get their funds.Homeland Security can address the cyber-threat. If not, eventually the economy can always return to how it functioned before the Internet. The Strategic Oil Reserves can be released to offset an oil embargo. The U.S. military can respond to a terrorist attack, transportation stoppage, or rioting/civil war. In other words, most Federal government programs are designed to prevent just such an economic collapse. Article updated August 19,2014
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Value of the U.S. Dollar: What the 3 Methods of Measurement Tell YouTrends Over Time, Causes of Dollar Changes, and Impacts to the Economy
The value of the U.S. dollar is measured in three ways: exchange rates, Treasury notes and foreign exchange reserves (the amount of dollars held by foreign countries). The most common is exchange rates, but you should be familiar with all three to understand where the dollar might be headed next.
Recent Trends
All three measurements show an increase in the dollar's value since 2011. Here's why:
1. The dollar is a safe haven during any global crisis. That means investors purchase U.S. Treasuries to avoid risk as the world recovers from the 2008 financial crisis and recession.
1. The European Union still struggles to resolve the Greece debt crisis. This weakens demand for the euro, the world's second choice for a global currency.
2. China's attempts to reform its economy slowed growth in 2014, pushing investors back into the dollar.
3. Despite reforms, both China and Japancontinue to purchase dollars to push the value of their own currencies down. This helps them boost exports by making them cheaper.
4. The dollar benefited from a temporary flight to safety, as investors worried about the outcome of the 2012 Presidential campaign, the fiscal cliff in 2012 and the government shutdown in 2013.
The recent strengthening reversed a downward decline that began in 2002. However, the following three pressures still exist, and should eventually push the dollar's value down again in the long term.
1. The U.S. debt is more than $18 trillion. Foreign holders of this debt are always uneasy that theFederal Reserve will allow the dollar's value to decline so U.S. debt repayments will be worth less in their own currency. The Fed's quantitative easing program monetized the debt, artificially strengthening the dollar to keep interest rates low. Now that the program has ended, investors are concerned the dollar could weaken.
1. The large debt puts pressure on the President and Congress to either raise taxes or slow spending (most recently through sequestration). This dampens economic growth, sending investors to chase higher returns in other countries.
2. Foreign investors prefer to diversify their portfolios with non-dollar denominated assets.
The Dollar's Value As Measured by Exchange Rates:
The dollar is most commonly measured by its exchange rate, which compares its value to other currencies. Currency exchange rates allow you to determine how much of one currency you can exchange for another. Exchange rates change every day because currencies are traded on the foreign exchange market. A currency's forex value depends on a lot of factors, including central bank interest rates, the country's debt levels, and the strength of its economy. When these are strong, so is the value of the currency. For more, see How Does the Government Regulate Exchange rates?
Most countries allow their currencies to be determined by the forex market. This is known as a flexible exchange rate. Find out the dollar's value compared to the rupee, yen, Canadian dollar, and the pound inU.S. Dollar Rate.
Dollar Value Compared to Euro
• 2015 - The euro to dollar exchange rate fell to a low of $1.05 in March, before rising to $1.13 in May. For more, see Euro to Dollar Conversion.
• 2014 - The euro to dollar exchange rate fell to $1.21, thanks to investors fleeing the euro.
• 2013 - The dollar lost value against the euro, as it initially appeared the EU was finally solving theeurozone crisis. By December, the euro was worth $1.3779.
• 2012 - By the end of 2012, the euro was worth $1.3186 as the dollar weakened.
• 2011 - The dollar's value against the euro fell 10%, then regained ground. As of December 30, 2011, the euro was worth $1.2973.
• 2010 - The Greece debt crisis strengthened the dollar. By year end, the euro was only worth $1.32.
• 2009 - The dollar fell 20% thanks to debt fears. By December, the euro was worth $1.43.
• 2008 - The dollar strengthened 22% as businesses hoarded dollars during the global financial crisis. By year end, the euro was worth $1.39.
• 2002-2007 - The dollar fell 40% as the U.S. debt grew 60%. In 2002, a euro was worth $.87 vs $1.44 by December 2007. (Source: Federal Reserve, Exchange Rates)
The Dollar's Value As Measured by Treasury Notes
The dollar's value is usually in sync with demand for Treasury notes. The Treasury Department sells notes for a fixed interest rate and face value. Investors bid at a Treasury auction for more or less than the face value, and can resell them on a secondary market. High demand means investors pay more than face value, and accept a lower yield. Low demand means investors pay less than face value and receive a higher yield. That's why a high yield means low dollar demand -- until the yield goes high enough to trigger renewed dollar demand.
• 2015 - The dollar strengthened in January, as the yield on the benchmark 10-year Treasury note fell from 2.12% in January to 1.68% in February. However, the dollar weakened as the yield rose to 2.28% in May. (Remember, high yields means a weak demand for Treasuries and dollars.)
• 2014 - The dollar strengthened through the year, as the yield on 10-year Treasury fell from 3.0% in January to 2.17% by year-end.
• 2013 - The dollar weakened slightly, as the yield on the 10-year Treasury rose from 1.86% in January to 3.04% by December 31.
• 2012 - The dollar strengthened significantly, as the yield fell in June to 1.443% -- a 200-year low. The dollar weakened towards the end of the year, as the yield rose to 1.78%.
• 2011 - The dollar weakened in early spring but rebounded by the end of the year. The 10-year Treasury note yield was 3.36% in January, rose to 3.75% in February, then plummeted to 1.89% by December 30.
• 2010 - The dollar strengthened, as the yield fell from 3.85% to 2.41% (January 1-October 10). It then weakened due to inflation fears from the Fed's QE2 strategy.
• 2009 - The dollar fell as the yield rose from 2.15% to 3.28%.
• 2008 - The yield dropped from 3.57% to 2.93% (April 2008-March 2009), as the dollar rose.
• Prior to April 2008, the yield stayed in a range of 3.91%-4.23%, indicating a stable dollar demand as aworld currency. (Source: U.S. Treasury, Daily Treasury Yield Curve Rates)
Value of the Dollar as Measured by Foreign Currency Reserves
The dollar is held by foreign governments in their currency reserves. They wind up stockpiling dollars because they export more than they import. They receive dollars in payment. Many of these countries find it's in their best interest to hold onto dollars because it keeps their currency values lower. Some of the largest holders of U.S. dollars are Japan and China.
As the dollar declines, the value of their reserves also declines. As a result, they are less willing to hold dollars in reserve. They diversify into other currencies, such as the euro or even the Chinese yuan. This reduces demand for the dollar, putting further downward pressure on its value.
As of Q4 2014 (most recent report), there was $3,826 trillion in foreign government reserves held in dollars. This is down from the third quarter's record of $3.857 trillion. That's because governments are diversifying, as this represents only 62.88% of the total measurable reserves, down from 67% in Q3 2008. Since the percentage of dollars is slowly declining, this means that foreign governments are slowly moving their currency reserves out of dollars. In fact, the value of euros held in reserves increased from $393 billion to a record of $1.397 trillion in Q3 2014, and down to $1.352 in Q4 2014. That's despite the eurozone crisis. Nevertheless, holdings in euros are still less than half the amount held in dollars. (Source: IMF, COFER Table)
How the Value of the Dollar Affects the U.S. EconomyWhen the dollar strengthens, it makes American-made goods more expensive and less competitive when compared to foreign-produced goods. This helps decrease U.S. exports, slowing economic growth. It also leads to lower oil prices, since oil is priced in dollars. Whenever the dollar strengthens, oil-producing countries can relax the price of oil, because their profit margins in their local currency aren't affected.
For example, the dollar is worth 3.75 Saudi riyals. Let's say a barrel of oil is worth $100, which makes it worth 375 Saudi riyals. If the dollar strengthens 20% against the euro, the value of the riyal, which is fixed to the dollar, has also risen 20% against the euro. To purchase French pastries, the Saudis can now pay less than they did before the dollar got stronger. That's why the Saudis didn't need to limit supply as oil prices fell to $50 a barrel in 2014. Find out more ways it affects you in The Value of Money.
The Value of the Dollar Over Time
The dollar's value can also be compared to what it bought in the U.S. in the past. Make some comparisons with the past in Today's Dollar Value.
The growing U.S. debt weighs in the back of the minds of foreign investors. That's why, long-term, they may continue to gradually move out of dollar-denominated investments. It will happen slowly, so they don't diminish the value of their existing holdings. The best protection for an individual investor is a well-diversified portfolio that includes foreign mutual funds. Article updated May 14, 2015.
useconomy.about.com/od/tradepolicy/p/Dollar_Value.htmU.S. Dollar Collapse: Causes, Impact, and When It Would HappenAre We in for a U.S. Dollar Collapse or Is That Just Alarmist Thinking?
useconomy.about.com/od/criticalssues/p/dollar_collapse.htmWhat Is a Dollar Collapse?A dollar collapse is when the value of the dollar falls so fast that all those who hold dollars panic, and sell them at any cost. In this scenario, sellers would include: foreign governments who hold U.S. Treasuries, traders in exchange rate futures who trade the dollar versus other currencies, and individual investors who 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, driving the value of the dollar down to near zero.
What Would Cause This to Happen?
Several conditions must be in place before the dollar could collapse. First, there must be an underlying weakness. Second, there must be a viable currency alternative for everyone to stampede into. Third, a triggering event would need to occur.
The first condition does exist. The dollar declined54.7% against the euro between 2002 and 2012. Why? The U.S. debt nearly tripled during that time period, from $5.9 trillion to $15 trillion. This increases the chance the U.S. will let the dollar's value slide, allowing it to repay the debt with cheaper money.
Is There a Viable Alternative to the Dollar?
The dollar became the world's reserve currency whenPresident Nixon abandoned the gold standard in the 1970s. The dollar is used for 43% of all cross-border transactions. The dollar's value is strong as measured by central bank reserves -- 61% of the these foreign currency reserves are in dollars.
The next most popular currency? The euro, which comprises less than 30% of reserves. The eurozone debt crisis has only weakened the euro as a viable alternative to the dollar as a global currency.
China and others have argued for a new global currency. China's central banker argues that the yuan should replace the dollar to maintain China's economic growth. However, replacing the dollar would be a massive undertaking, would require great global resolve and not happen quickly.
Some see Bitcoin as a new world currency. That's because it is not managed by any one country's central bank. Instead, it is created, managed and spent online, although it can be used at brick-and-mortar stores that accept it.
What Event Could Trigger a Collapse?
Altogether, foreign countries own more than $5 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 more than $1 trillion in U.S. Treasuries. That's because China pegs its currency, the yuan, to the dollar. This keeps the prices of its exports to the U.S. relatively cheap. Japan owns more than $800 billion in Treasuries, also keeping its currency, the yen, low to stimulate exports to the U.S. Japan is trying to move out of a 15 year deflationary cycle, and the 2011 earthquake and nuclear disasterhasn't helped.
China and Japan Can, But Won't, Trigger a Collapse
Would China and Japan ever really do this? Only if they saw their holdings declining in value too fast AND they had another market to sell their products to. The economies of Japan and China are dependent on U.S. consumers. They know that if they sell their dollars, their products will cost more in the U.S., and their economies will suffer. Right now, it's still in their best interest to hold onto their dollar reserves.
China and Japan are selling more to other Asian countries, who are gradually becoming wealthier. However, the U.S. is still the best market in the world. (See Demand in the U.S. Economy)
If It Did Occur, What Would Happen Next?
A sudden dollar collapse would create global economic turmoil as investors rush to other currencies, such as the euro, or other assets, such as gold or other commodities. Demand for Treasuries would plummet, driving up interest rates. U.S. import prices would skyrocket, causing inflation.
U.S. exports would be dirt cheap, boosting the economy briefly. Unfortunately, uncertainty, inflation and high interest rates would strangle possible business growth. Unemployment would worsen, sending the U.S. back into recession or even creating a depression.
How to Protect YourselfProtect yourself from a dollar collapse by first defending yourself from a gradual dollar decline. Keep your assets well-diversified by holding foreign mutual funds, gold and other commodities. A dollar collapse would create global economic turmoil. To respond to this kind of uncertainty, you must be mobile. Keep your assets liquid, so you can shift them as needed. Make sure your job skills are transferable. Update your passport, in case things get so bad for so long that you need to move quickly to another country.
When Will It Happen?
A dollar collapse is not imminent. In fact, it's highly unlikely that it will collapse at all. That's because any of the countries who have the power to make that happen (China, Japan and other foreign dollar holders) don't want it to occur. It's not in their best interest. Why bankrupt your best customer? Instead, the dollar will probably continue to decline gradually, as these countries slowly find other markets. For more, see Dollar Decline or Dollar Collapse? Article updated January 14, 2015.
