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The U.S. dollar really is everyone’s problem. There are more dollars in circulation worldwide than any other currency. As of 2024, nearly 60% of the world’s foreign reserves are denominated in the U.S. dollar, down from over 70% in the early 2000s.
It’s also true that the majority of all dollars circulate outside of the United States. They have long been the choice of exchange on the world’s black markets. The reason is that they are so recognizable and accepted everywhere else; in other words, liquid and fungible.
U.S. dollars have also tended to keep their purchasing power value relatively constant until recently. That’s why many nations peg their currency to the dollar. It also helps that it is still the world’s reserve currency.
Is the Decline of the U.S. Dollar Just A Matter of Time?
The law of supply and demand states that the more of something there is, the less value it has, and the less demand there is for it. The world is becoming saturated with the U.S. dollar and many are looking for alternatives.
Despite predictions of dollar collapse over the past decades, the currency has proven resilient. However, structural issues remain.
As such, it could just be only a matter of time before the dollar fails. When, how, and at what speed are all that is left for debate.
What Would the Decline of the U.S. Dollar Mean For America – and the World?
Failure of the dollar would be noticeable in many ways and when it does fail, we won’t have to ask if it has; we’ll know. Failure of the dollar will mean many things. It will mean that it is no longer recognized as having or retaining value. In other words, confidence in the dollar will be greatly or entirely diminished.
We only hold dollars (or any currency), not because they have value themselves, and not that we find them useful, but because of the perception that others will accept them for goods or services. We hold them because we have confidence that we will be able to pass them on at a later date.
A failure of the U.S. dollar would mean that, at a minimum, the cost of everything, but especially anything we import, would rise dramatically. In a worst case scenario, the dollar would not be accepted in any quantity for goods or services, either domestic or foreign.
What Would Some of the Possible Triggers Be For a Decline in the U.S. Dollar?
- Treasury Liquidation: The Chinese have been steadily reducing their holdings of U.S. Bonds and Treasuries. A total liquidation would make interest rates rise, collapse demand for new offerings, and make dollars return to the U.S., thus stoking domestic inflation.
- Loss of Reserve Status: The dollar could suddenly or gradually stop being the world’s reserve currency. This would cause the value of the dollar on the Forex (currency market) to fall against other currencies, possibly setting off a self-fulfilling hyper-inflationary event.
- Gold-Backed Competitors: Another currency could become backed by gold before the dollar. This would set off a scramble to convert dollars into that currency and causing the dollar to fail as people try to get rid of them to buy the other currency.
The above are just a few of the possible scenarios that could precipitate the failure of the dollar. However, the U.S. dollar’s advantages remain, anchored by a petrodollar system that still dominates energy trade, the sheer scale of U.S. military backing, and the massive network effects that make it the “default” currency for global finance.
How Could the Demise of the U.S. Dollar Be Avoided?
- Fiscal Sanity: We could collectively start living within our means. This would stop the debasement of the dollar, but such an effort would be politically and socially unacceptable to both the government and the people.
- The “Reset”: The U.S. could implement a new currency. The problem with such a “solution” is that the problem wouldn’t go away by simply erasing zeros on the currency or introducing a new name for the dollar. The inflation dynamic would still be present if no other action were taken in conjunction with such action.
- Hyper-inflation: The Fed could hyper-inflate the economy. Such an effort would only be a temporary solution and not a cure, however. The U.S. Government has already caused a bubble in the Dollar, Bond, and Treasury markets. The monetary expansion and stimulus programs of the last few years necessitated that tens of trillions of new dollars be created. This is the path we have been on for some time and it has masked the problem to a certain extent, but this “solution” would by no means be a cure.
- Default: The U.S. government could default on its debt obligations. The U.S. already defaulted on its internal obligations in 1933 and on its external creditors in 1971. With the national debt now over $38 trillion, the math for a third default is more visible than ever. The U.S. continues in default every day by issuing more dollars than can ever be redeemed at their current purchasing power. It is the chosen path, the inflation path. The question, however, is whether the U.S. would default en masse on all of its remaining obligations all at one time? If so, it would be a moon shot for gold, silver, and all commodities immediately following the default. This would likely be done at the most advantageous time (night, holiday) for the government and the worst time for you, leaving you without time to prepare or protect yourself.
- Revaluation: The Fed could revalue the U.S. dollar in terms of gold. This is already happening gradually and goes hand-in-hand with the previous two scenarios. In this scenario, instead of the U.S. defaulting on its obligations or revaluing the currency, it could revalue the price of gold in dollars, announcing that it would pay (buy) a certain (higher) price for gold on the open market. This would have the effect of immediately revaluing every ounce of gold on the planet. It would then be possible to cover our outstanding debt with our gold reserves (if they’re all there), leading to a de facto gold standard.
- Return to a Gold Standard: This seems to be inevitable at some point. How we get there and the ultimate price established for an ounce of gold, are up for debate. In all likelihood, plans are already afoot and this will be a “surprising” event for most when, not if, but when it does happen.
- A combination of the above: This is also very likely. The price of gold will simply be allowed to rise to clear the market. They revalued gold with the stroke of a pen in the 1930’s and could very well do it again. All that needs to be done is for the government to state that it will now purchase gold for a set dollar amount and then all gold, everywhere, would be worth that amount. Like an equity trading on a stock market, it’s the last trade at the margin that sets the value of every other stock of the company.
Conclusion
The U.S. dollar’s advantages remain, anchored by a petrodollar system that still dominates energy trade, military backing, and the massive network effects of global finance.
These pillars are formidable, but history shows that even the strongest systems eventually shift. We should remember that the British Pound Sterling was the world’s undisputed reserve currency for over a century, only to be unseated by the U.S. dollar following the Bretton Woods Agreement in 1944.
In government, as FDR suggested, nothing happens by chance. Rest assured, there is a plan for what comes next. Your priority should be ensuring you aren’t caught off guard by a “surprise” event, whatever it may be and whenever it occurs.
And remember, holding physical gold could be your lifeline if the U.S. dollar fails.