Over time, investors have wondered whether or not the U.S. dollar will collapse. This has been more of a question as the global economic landscape has changed since the early 2000s, primarily with China becoming an economic powerhouse over the last two decades, and some nations considering trading oil without the petrodollar. It is an interesting question that might superficially appear plausible, but a currency crisis in the United States is unlikely.
Key Takeaways
- Currencies collapse when faith in the stability or usefulness of the currency as a store of value or medium of exchange ceases.
- This lack of faith or usefulness comes about for many reasons, such as improper valuations, pegging, sustained periods of low growth in the nation, and inflation.
- The value of a currency is determined by the demand for it.
- The demand for the U.S. dollar is high, primarily as the U.S. is the largest economy in the world and the country is considered to be a stable nation, both politically and economically.
- Demand for the U.S. dollar is also high because it is the world's most prevalent reserve currency; many nations hold large reserves of the dollar.
- For these reasons, among many others, the likelihood of the U.S. dollar collapsing is zero.
WhyCurrencies Collapse
History is full of sudden currency collapses. Argentina, Hungary, Chile, Angola, Zimbabwe, and Germany have all experienced terrible currency crises since 1900. Depending on the definition of "collapse," the Russian currency calamity in 2014 could be considered another example.
The root of any collapse stems from a lack of faith in the stability or usefulness of money to serve as an effective store of value or medium of exchange. As soon as users stop believing that a currency is useful, that currency is in trouble. This can be brought about through improper valuations, pegging, chronic low growth, or inflation.
Strengths of the U.S. Dollar
Ever since the Bretton Woods Agreement in 1944, other major governments and central banks have relied on the U.S. dollar to back up the value of their own currencies. Through its reserve currency status, the dollar receives extra legitimacy in the eyes of domestic users, currency traders, and participants in international transactions.
Most global oil transactions are conducted in petrodollars, meaning sales and revenues of oil transactions are denominated in U.S. dollars.
The U.S. dollar is not the only reserve currency in the world, though it is the most prevalent. The International Monetary Fund (IMF) has approved four other reserve currencies: the euro, the British pound sterling, the Japanese yen, and the Chinese yuan.
It is important that the dollar has competitors as an international reserve currency because it creates a theoretical alternative for the rest of the world in case American policymakers lead the dollar down a damaging path.
Finally, the American economy is still the largest and most important economy in the world. Even though growth has slowed significantly since 2001, the American economy still regularly outperforms its peers in Europe and Japan. The dollar is backed up by the productivity of American workers, or at least so long as American workers continue to use the dollar almost exclusively.
Weaknesses of the U.S. Dollar
The fundamental weakness of the U.S. dollar is that it is only valuable through government fiat. This weakness is shared by every other major national currency in the world and is perceived as normal in the modern age; however, as recently as the 1970s, it was considered a somewhat radical proposition. Without the discipline imposed by a commodity-based currency standard (such as gold), the worry is that governments might print too much money for political purposes or to conduct wars.
In fact, one reason the IMF was formed was to monitor the Federal Reserve and its commitment to Bretton Woods. Today, the IMF uses the other reserves as a discipline on Fed activity. If foreign governments or investors decided to switch away from the U.S. dollar en masse, the flood of short positions could significantly hurt anyone with assets denominated in dollars.
If the Federal Reserve creates money and the U.S. government assumes and monetizes debt faster than the U.S. economy grows, the future value of the currency could fall in absolute terms. Fortunately for the United States, virtually every alternative currency is backed by similar economic policies. Even if the dollar faltered in absolute terms, it may still be stronger globally,due to its strength relative to the alternatives.
Will the U.S. Dollar Collapse?
There are some conceivable scenarios that might cause a sudden crisis for the dollar. The most realistic is the dual threat of high inflation and high debt,a scenario in whichrising consumer prices force the Fed to sharply raise interest rates.
Much of the national debt is made up of relatively short-term instruments, so a spike in rates would act like an adjustable-rate mortgage after the teaser period ends. If the U.S. government struggled to afford its interest payments, foreign creditors could dump the dollar and trigger a collapse.
If the U.S. entered a steep recession or depression without dragging the rest of the world with it, users might leave the dollar. Another option would involve some major power, such as China or a post-European UnionGermany, reinstating a commodity-based standard and monopolizing the reserve currency space; however, even in these scenarios, it is not clear that the dollar necessarily would collapse.
The collapse of the dollar remains highly unlikely. Of the preconditions necessary to force a collapse, only the prospect of higherinflation appears reasonable. Foreign exporters such as China and Japan do not want a dollar collapse because the United States is too important a customer.
And even if the United States had to renegotiate or default on some debt obligations, there is little evidence that the world would let the dollarcollapse and risk possible contagion.
What Would Happen If the U.S. Dollar Collapses?
If the U.S. dollar collapses, the cost of imports will become more expensive, the government will not be able to borrow at current rates, resulting in a deficit that will need to be filled by increasing taxes or printing money, inflation will skyrocket due to the higher cost of imports and the printing of money, resulting in an overall collapse of the economy.
What Would Happen to My 401(k) if the Dollar Collapses?
If the dollar collapses, your 401(k) would lose a significant amount of value, possibly even becoming worthless. Inflation would result if the dollar collapsed, decreasing the real value of the dollar when compared to other global currencies, which in effect would reduce the value of your 401(k).
What to Do Before the Dollar Collapses?
Though the U.S. dollar collapsing is unlikely, ways to hedge against it include purchasing the currencies of other nations, investing in mutual funds and ETFs based in other countries, and purchasing the shares of domestic stocks that have large international operations.
The Bottom Line
Though the U.S. dollar may have a lower value than other currencies, the commercial viability of the U.S. is unchallenged. The dollar is used globally as a currency in worldwide transactions, the majority of oil trades are done in U.S. dollars, and the country itself is the largest economy in the world and a politically and economically stable nation. There is no reason to expect the U.S. dollar to collapse in the near future.
FAQs
Currencies collapse when faith in the stability or usefulness of the currency as a store of value or medium of exchange ceases. This lack of faith or usefulness comes about for many reasons, such as improper valuations, pegging, sustained periods of low growth in the nation, and inflation.
What would happen to the US if the dollar collapses? ›
(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- ...
What are the chances of the US dollar collapsing? ›
It's not a likely outcome at all in most countries around the world, and that's particularly true for the United States. This is down to the U.S. dollar's status as the global reserve currency. So while technically the U.S. dollar could collapse, the chances of that happening any time soon are incredibly slim.
How do I prepare for the collapse of the dollar? ›
If you want to weather the next storm, there are a few key steps to better prepare for an unexpected crisis.
- Maximize liquid savings. ...
- Make a budget. ...
- Cut back on unneeded expenses. ...
- Commit to closely managing your bills. ...
- Take inventory of your non-cash assets. ...
- Pay down your credit card debt.
#1 – The Euro. The euro has emerged as a major global currency and has gained importance as a reserve currency.
What is the US dollar backed by? ›
Today, like the currency of most nations, the dollar is fiat money, unbacked by any physical asset. A holder of a federal reserve note has no right to demand an asset such as gold or silver from the government in exchange for a note.
What will weaken the dollar? ›
Relatively speaking, higher inflation depreciates currency because inflation means that the cost of the goods and services are rising.
What to buy if the dollar collapses? ›
Gold, Silver, and Other Precious Metals
When there is a political or economic disaster, precious metals are traditionally considered a safe haven asset. And there is a reason for that. Precious metals can't be printed like paper money, which makes them a good hedge against economic collapse.
Where should I put my money if the dollar collapses? ›
Here are seven ways to invest in a falling dollar:
- U.S. companies generating international sales.
- Commodities.
- Gold.
- Cryptocurrencies.
- Emerging markets.
- International stocks.
- International currency ETFs.
As much as we believe it is unlikely that the U.S. dollar will lose its position on the global economic stage, even if it were to be displaced, the implications may not be as dire as currently anticipated.
What will happen to my 401k if the dollar collapses? Then your 401k will be effectively worthless until the dollar recovers. Let's say you have $100,000 saved up. If the dollar collapses, the result is inflation.
What happens if the U.S. dollar is no longer the world currency? ›
That said, if the dollar gradually loses its place atop the world financial pyramid, what would happen next? For the U.S., it would likely mean less access to capital, higher borrowing costs and lower stock market values, among other effects.
What happens to my savings account if the dollar collapses? ›
The agency collects insurance premiums from banks so that in the event that bank becomes insolvent deposits at the financial institution are guaranteed up to a limit, at no expense to the US taxpayer. The standard deposit insurance coverage limit is $250,000 per depositor, per ownership category, per FDIC bank.
Will gold be worth anything if the economy collapses? ›
It's important to remember that gold and silver hold their value under a collapsing currency, so it's best to keep your holdings in precious metals until the need arises.
What will happen to silver if the dollar collapses? ›
Silver's Value Could Increase
One reason is because there's a limited supply of silver, meaning as demand increases if the dollar collapses, the value of silver will actually go up, since there's not an indefinite amount of silver left.
What is the strongest currency in the world? ›
Kuwaiti Dinar (KWD) is the strongest currency against USD and the most valued currency in the world due to the country's strong economy. 1 KWD = $3.25. Data is current as of May 15, 2023.
What currency is stronger than the U.S. dollar? ›
Kuwaiti Dinar (KWD)
The Kuwaiti dinar is the strongest currency in the world, with 1 dinar buying 3.26 dollars (or, put another way, $1 equals 0.31 Kuwaiti dinar). Kuwait is located on the Persian Gulf between Saudi Arabia and Iraq, and the country earns much of its wealth as a leading global exporter of oil.
What countries are moving away from the U.S. dollar? ›
The same month, Brazil and China entered into a preliminary agreement to trade in national currencies instead of US dollar. In May 2023, South Korea and Indonesia signed a memorandum of understanding to promote bilateral trade in national currencies, moving away from the US dollar as an intermediary.
How many countries rely on the US dollar? ›
The American dollar was introduced as the official currency of the United States in 1785 and is used as official currency in 17 countries. In addition, there are numerous countries where the U.S. dollar is readily accepted even in regular retail transactions.
Will the US go back to the gold standard? ›
The gold standard as it existed under the Bretton Woods system until 1971 is likely never coming back. There are a myriad of reasons for this but the most important lie with the US government's ability to control the economy.
Fiat money is backed by a country's government instead of a physical commodity or financial instrument. This means most coin and paper currencies that are used throughout the world are fiat money. This includes the U.S. dollar, the British pound, the Indian rupee, and the euro.
Will U.S. dollar weaken in 2023? ›
The US dollar could weaken 10%-15% by the middle of 2024, Stephen Jen at Eurizon SLJ Capital wrote in a note. As inflation continues to cool, the central bank could cut rates in 2023, which would lead to the dollar's depreciation, Jen said.
Is the US dollar losing value 2023? ›
The dollar index is up over 1% for 2023 largely because of stronger-than-expected U.S. economic data and a corresponding change to expectations of interest rate hikes by the U.S. central bank.
Who benefits most from a weak dollar? ›
A weak dollar can be a good thing for U.S. firms who want to sell goods in foreign markets. Because foreign products and services become relatively more expensive, U.S. products and services become more competitive overseas.
Will gold go up if the dollar collapses? ›
If the US dollar were to experience a crash, it is plausible that the price of gold would rise. This is because individuals often perceive gold as a secure investment during periods of economic uncertainty or instability.
Is it good if the dollar goes down? ›
The Negative Effects From a Weak Dollar
Not only does a weaker dollar lead to higher commodity prices, it also drives up the prices of imported goods, which adds to pressures on consumer spending and could lead to higher wage demands.
Does the dollar lose value during a recession? ›
There is no hard and fast rule about what will happen to the value of a currency during a deep recession – though, a currency is likely to fall because country becomes a less attractive place to invest.
How to use gold if the dollar collapses? ›
Once holders of currencies begin to lose faith in the currencies, they'll attempt to exchange the currencies for tangible goods or other items that may be in high demand. This means that, at least for a time, you may be able to exchange your gold and silver coins for dollars to purchase goods and services, as needed.
What is the dollar forecast for 2023? ›
USD/JPY is expected to hit 135 in March 2023, before trading at 133 in June 2023, 130 in September 2023 and 128 in December 2023.
Can banks seize your money if economy fails? ›
The short answer is no. Banks cannot take your money without your permission, at least not legally. The Federal Deposit Insurance Corporation (FDIC) insures deposits up to $250,000 per account holder, per bank.
How long is the lifespan of U.S. paper money?
| Denomination | Estimated Lifespan* |
|---|
| $1 | 6.6 years |
| $5 | 4.7 years |
| $10 | 5.3 years |
| $20 | 7.8 years |
3 more rowsMar 9, 2020
China's yuan is unlikely to replace the US dollar within the next 20 years, according to Niall Ferguson. The Stanford historian pointed to several challenges China has in displacing the greenback. Still, he acknowledged there were risks facing the dollar amid shifting trade dynamics.
What is the reserve currency of the world 2023? ›
Other IMF analysis notes that the dollar is the dominant reserve currency by default. The absence of an alternatives to the safety of dollar-trade invoicing, international funding markets, and the large supply of guaranteed Treasury bonds suggests that the dollar's role in the global economy is secure.
Should I cash out 401k before crash? ›
Don't Panic and Withdraw Your Money Too Early
Surrendering to the fear and panic that a market crash elicits can cost you. Withdrawing money early from a 401(k) can result in hefty IRS tax penalties, which won't do you any favors in the long run.
Where is the safest place to put your retirement money? ›
Most of our experts agree that one of the safest places to keep your money is in a savings account insured by the Federal Deposit Insurance Corporation (FDIC). “High-yield savings accounts are an excellent option for those looking to keep their retirement savings safe.
How can I protect my money from the economic collapse? ›
Build up your emergency fund, pay off your high interest debt, do what you can to live within your means, diversify your investments, invest for the long term, be honest with yourself about your risk tolerance, and keep an eye on your credit score.
Can the U.S. dollar be too strong? ›
The high U.S. dollar value bumps up the cost of interest payments for foreign entities and citizens with U.S.-based loans. And, while a stronger dollar is slowing the rate of inflation in the U.S., it is increasing the rate of inflation in much of the rest of the world. The global economy is weakening, as a result.
Should I withdraw my money from the bank 2023? ›
Do no withdraw cash. Despite the recent uncertainty, experts don't recommend withdrawing cash from your account. Keeping your money in financial institutions rather than in your home is safer, especially when the amount is insured. "It's not a time to pull your money out of the bank," Silver said.
Should I take all my money out of the bank? ›
It doesn't make sense to take all your money out of a bank, said Jay Hatfield, CEO at Infrastructure Capital Advisors and portfolio manager of the InfraCap Equity Income ETF. But make sure your bank is insured by the FDIC, which most large banks are.
What happens to your mortgage if the economy collapses? ›
Recessions and housing market crashes may cause your house's value to decrease. However, your set mortgage rates won't lower, meaning your monthly payments will be higher than your home's worth. While many may dip into their savings to help pay the steep bills, others may need outside assistance.
If the dollar collapses, gold will likely appreciate in value as it has an inverse relationship to the price of the dollar. As a result, many market speculators believe that gold is an efficient hedge against the dollar.
Will gold and silver ever be worthless? ›
Gold and Silver Have Intrinsic Value
No matter what any of the markets do, your gold and silver will always have intrinsic value. There is a limited supply of these precious metals.
What happens to stocks if dollar collapses? ›
This is because, when the dollar crashes, the value of foreign stocks and mutual funds, which are typically priced in the local currency, becomes more expensive for US investors. As a result, the value of their investments in foreign stocks and mutual funds may decrease.
What can cause the US dollar to collapse? ›
A U.S. debt default could trigger dollar's collapse | Analysis
- Dollar's collapse. ...
- Loss of political power too. ...
- Rivals rewarded. ...
- Severe consequences.
We also tip silver as the precious metal to buy for 2023.” Avi Gilburt: “Long-term, I'm looking for silver to hit $50, but that might take a few years. Prices could easily double in 2023 and the first half of 2024.”
What is the safest currency? ›
The Swiss franc is the official legal tender of Switzerland and its tiny neighbor Liechtenstein, and the currency is seen as a safe haven due to Switzerland's political stability.
What happens to gold if the dollar collapses? ›
If the dollar collapses what will gold be worth? According to Peter Schiff, the CEO and chief economist of brokerage firm Euro Pacific in a article from Capital, in the event of a loss of faith in the US dollar and rampant inflation, the value of gold could skyrocket tenfold, reaching $20,000 (£15,170) per ounce.
Will gold replace the dollar? ›
Dollar up or Dollar down, gold prices have repeatedly risen every time the US currency has passed through its current level against the rest of the world's money. No, there isn't enough gold in the world to 'replace' the Dollar. And no, gold shows zero sign of returning as a currency for international trade.
Where is the US dollar the strongest? ›
The Best Places to Visit Where the Dollar is Strong
- Peru. Peru/Peruvian Sol. ...
- Mexico. Mexico/Mexican Peso. ...
- South Africa. South Africa/South African Rand. ...
- Egypt. Egypt/Egyptian Pound. ...
- Japan. Japan/Japanese Yen. ...
- Argentina. Argentina/Argentine Peso. ...
- Chile. Chile/Chilean Peso. ...
- Hungary. Hungary/Hungarian Forint.
The Kuwaiti dinar continues to remain the highest currency in the world, owing to Kuwait's economic stability. The country's economy primarily relies on oil exports because it has one of the world's largest reserves. You should also be aware that Kuwait does not impose taxes on people working there.
1. Iranian Rial (IRR) 1 INR = 516 IRR. The Iranian rial tops the list of the cheapest currencies in the world.
What is the number 1 weakest currency? ›
Today 1 Indian Rupee = 516.79 IRR.
Currently, the Iranian Rial is considered the world's least valuable currency. This is the result of factors like political unrest in the country. The Iran-Iraq war and the nuclear program also played a huge part.
What is the weakest currency? ›
The Iranian rial is the weakest currency in the world, with 1 rial buying a mere 0.000024 dollar (or, put another way, $1 equals 42,300 Iranian rials). Iran's currency has been squeezed by economic sanctions, including those the U.S. reimposed in 2018 and others the European Union has repeatedly imposed.
What should I invest in if dollar collapses? ›
Investing in U.S. exporters, tangible assets (foreigners who buy U.S. real estate or commodities), and appreciating currencies or stock markets provide the basis for profiting from the falling U.S. dollar.
Is silver good if the dollar collapses? ›
It's important to remember that gold and silver hold their value under a collapsing currency, so it's best to keep your holdings in precious metals until the need arises.
