Below you will find my three reasons why I believe a U.S. dollar collapse is a real possibility.
There are two ways to look at this:
- A lower-valued U.S. dollar will increase the costs of goods consumers bring into this country. Since most of the stuff we buy these days is made abroad, a lower-priced U.S. dollar will cause inflation.
- On the other side of the coin, a lower-valued U.S. dollar will make our goods more attractive to foreign buyers. The problem is that we don’t manufacture much here in America anymore, so the positives of a lower U.S. dollar value are minor compared to the negatives.
If you are China or Japan, you want a lower-valued domestic currency because each of these countries is primarily a manufacturing-based economy. The U.S., on the other hand, has become more of a service economy and those services are consumed by its citizens, rather than foreigners.
31-Year Downtrend in Value of U.S. Dollar
Let’s start by looking at the long-term chart below of the U.S. dollar index. This is the value of the U.S. dollar compared to other major currencies, specifically the euro, yen, pound sterling, krona, franc, and Canadian dollar.
Chart courtesy of www.StockCharts.com
See the black line in the chart above? The U.S. dollar has clearly been trending downward since 1985. That’s a 31-year downtrend! Only over the past two years has the U.S. dollar increased in value relative to other major currencies. In technical analysis, this is considered a dead-cat bounce. (Imagine if the euro and the yen didn’t take a hit in the past two years; there would be no dead-cat bounce.)
Too Many U.S. Dollars in Circulation
Another problem with the U.S. dollar is that there is too much of it in circulation and Economics 101 says too much of something leads to lower prices.
The money supply in the U.S. economy continues to skyrocket. Please look at the chart below. In this chart, the green line represents the U.S. dollar and the red line represents the money supply in the U.S. economy.
Chart courtesy of www.StockCharts.com
Notice how as the money supply started increasing in 1984, the value of the U.S. dollar compared to other world currencies declined? To stimulate the economy following the Credit Crisis of 2008, the Federal Reserve created trillions of dollars in new paper money. This increased the money supply dramatically, as the chart above indicates.
Throughout history, countries that have continued printing more of their money eventually saw the value of that money collapse.
U.S. Dollar Backed by Too Much Debt
The next problem with the U.S. dollar is that there is too much debt behind hit. The U.S. national debt continues to rise and currently sits at $19.0 trillion. Unfortunately, positive annual federal budgets are not in the cards for years to come.
At Profit Confidential, I’ve written many times before how I believe our national debt could hit $32.0–$34.0 billion within the next 15 years. To me, it looks like a Trump or Clinton Administration will only make the debt bigger.
U.S. Dollar Collapse a Real Possibility
And it doesn’t help the U.S. dollar when the president of the Minneapolis Federal Reserve, Neel Kashkari, says “it’s possible” the U.S. dollar could lose its status as reserve currency during his lifetime. (Source: “Fed’s Kashkari says dollar could lose reserve currency status,” Reuters, July 15, 2016.)
Dear reader, I know my warnings sound dire, but you should know that the U.S. dollar is more vulnerable now than ever before.
I also want to be very clear: I don’t expect the U.S. dollar to collapse in a day. I expect this phenomenon to occur over time, as more central banks throughout the world reduce the amount of U.S. dollars they have in their reserves.
My question is this: how would one protect themselves from a U.S. dollar collapse?
The only thing I see that could help in the case of a U.S. dollar collapse is gold. The precious metal has acted as a hedge against currency collapses for a very long time. Count on it to do the same when the U.S. dollar loses its “world’s currency” status.