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A dollar collapse
Question: My husband's paranoid web sites are now predicting the collapse of the dollar by the end of the year. They say that other countries are no longer buying dollars and that the Fed is printing money like crazy to make up for the lack of foreign investment.
What do you think? If the dollar did collapse, what would that mean for the average citizen? Cheryl, Boulder, CO
Answer: The dollar has been weak in the international currency markets. At the moment, a weaker dollar has improved the competitive position of American exporters against their foreign rivals. I'm skeptical that we're seeing a "run on the dollar," however. For instance, the dollar rallied during the global financial crisis. The greenback is still the world's safe haven during times of trouble. So, some of the retreat in the dollar's value reflects a calmer mood among global traders.
I'm also in the camp that believes the Federal Reserve will be able to successfully mop up money in the aftermath of its extraordinary campaign to prevent another depression. It won't be easy or smooth, but I'm convinced the Fed is well aware of the problem ans has the intellectual and monetary tools to cope.
Still, the risk that the dollar will spiral sharply lower is there. We all know that the risk of catastrophe can't be simply dismissed simply because it's unlikely, not following the once "unthinkable" government takeovers of Fannie Mae, Freddie Mac, AIG, GM and Chrysler.
So, you asked what a dollar collapse might mean for the average citizen. Basically, it would be a disaster. My guess is that the financial markets would crater as financings denominated in dollars plunged in value. The price of oil and other critical commodities could skyrocket. Inflation would certainly take off. Americans would find it harder to borrow with the rest of the world wary of lending to us. After all, who wants to get paid back with depreciating dollars? Interest rates would sky rocket. The Federal Reserve would feel forced to tighten monetary policy to stem to panic. Trade wars could erupt. And so on.
Peter Coy of Business Week has a good article directly looking into your question, What Happens if the Dollar Crashes. You can read it here.
I fall somewhere on the middle of expecting the Fed to clean up the mess and total economic collapse.
The Fed has doubled the size of the money supply ( http://research.stlouisfed.org/fred2/graph/?s[1][id]=AMBNS ). Most of that has gone into running up the stock market, buying up home loans to keep rates down, and buying dodgy assets from insolvent banks who are practically required to deposit the money at the Fed who pays them interest at our expense.
So simply stated, if the Fed doesn't "burn" half the doubled money supply, over time the value of the dollar will decrease by half. Given the Fed's unwillingness to recognize the abuse of our currency in international investment and stock inflation, I doubt the fed will adequately reign in the money supply and we will face inflation. In an inflationary period, owning dollars and bonds is less desirable than owning real assets, owning stocks and being slightly in debt (I don't like debt. Debt should be used for leverage rather than mere excessive consumption and you better have means to cover it, negating some of debts value).
Even if total economic collapse did come, gold certificates, foreign assets and reserves only would help you if we or the foreign countries still have the rule of law to let you claim them. The safety of assets in the BRIC countries is commonly distrusted and these countries would suffer along with us.
If you're worried about a total collapse of the economy, a natural disaster, or just the loss of your job, owning life sustaining assets is advantageous. Water purification and storage, 72-hour kits, Food storage, medical supplies, etc. will have the greatest value in a short term crisis of any kind.
I personally believe we will face moderate inflation over the long term, so prudent diversification in all asset classes (domestic and international), real assets, extra personal goods and your own skills will help you weather any storm.
I fall somewhere on the middle of expecting the Fed to clean up the mess and total economic collapse.
The Fed has doubled the size of the money supply. Most of that has gone into running up the stock market, buying up home loans to keep rates down, and buying dodgy assets from insolvent banks who are practically required to deposit the money at the Fed who pays them interest at our expense.
So simply stated, if the Fed doesn't "burn" half the doubled money supply, over time the value of the dollar will decrease by half. Given the Fed's unwillingness to recognize the abuse of our currency in international investment and stock inflation, I doubt the fed will adequately reign in the money supply and we will face inflation. In an inflationary period, owning dollars and bonds is less desirable than owning real assets, owning stocks and being slightly in debt (I don't like debt. Debt should be used for leverage rather than mere excessive consumption and you better have means to cover it, negating some of debts value).
Even if total economic collapse did come, gold certificates, foreign assets and reserves only would help you if the we or the foreign countries still have the rule of law to let you claim them. The safety of assets in the BRIC countries is commonly distrusted and these countries would suffer along with us.
If you're worried about a total collapse of the economy, a natural disaster, or just the loss of your job, owning life sustaining assets is advantageous. Water purification and storage, 72-hour kits, Food storage, medical supplies, etc. will have the greatest value in a short term crisis of any kind.
I personally believe we will face moderate inflation over the long term, so prudent diversification in all asset classes (domestic and international), real assets, extra personal goods and your own skills will help you weather any storm.
