What It Would Take for the U.S. Dollar to Collapse (2024)

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 United States 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 U.S. economy still regularly outperforms its peers in Europe and Japan. The dollar is backed up by the productivity of American workers, or at least as 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 U.S. 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 compared to other global currencies, which in effect would reduce the value of your 401(k).

What Can Be Done 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 exchange-traded funds (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.

Some countries aim to de-dollarize or reduce their dependency on the U.S. dollar, but it is still essential for global business and a widely held reserve currency. There is no reason to expect the U.S. dollar to collapse in the near future.

What It Would Take for the U.S. Dollar to Collapse (2024)

FAQs

What would it take for the U.S. dollar to collapse? ›

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 cause the dollar to fall? ›

These include monetary policy, rising prices or inflation, demand for currency, economic growth, and export prices.

Is the U.S. dollar in trouble in 2024? ›

Despite uncertain macro conditions, the dollar has continued to demonstrate strength — largely thanks to sticky inflation, a resilient U.S. economy and year-to-date highs in yields. Indeed, in a display of U.S. exceptionalism, the greenback has gained against just about every other major currency in 2024.

What is the best currency if the dollar collapses? ›

Diversifying your portfolio into precious metals like gold and silver, cryptocurrencies such as Bitcoin and Ethereum, and hard currencies like the Euro and Japanese yen can serve as a hedge against a dollar collapse due to their tendency to retain value.

What happens to your house when the dollar collapses? ›

A collapsing dollar typically leads to inflation, which can inflate your home's nominal value but also increase everything else dramatically. This means while your home might be worth more on paper, everyday expenses like groceries, utilities, and repairs become so much more expensive.

Why are countries ditching the US dollar? ›

The US dollar has been the world's reserve currency for decades, but its dominance is fading. Sanctions against Russia have spurred other countries into considering backup currencies for trade. US monetary policies, the strong USD, and structural shift in the global oil trade also contribute.

What is the strongest currency in the world? ›

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.

Is the world moving away from the US dollar? ›

The dollar and dollar payment system remain overwhelmingly dominant. According to the Bank for International Settlements' latest triennial survey, the dollar as of 2022 was part of 88 percent of all international transactions. That percentage is only slightly lower than in 1989, testimony to the dollar's resilience.

What would most likely happen if the value of the US dollar fell? ›

A falling dollar diminishes its purchasing power internationally, and that eventually translates to the consumer level. For example, a weak dollar increases the cost to import oil, causing oil prices to rise. This means a dollar buys less gas and that pinches many consumers.

What happens if the U.S. dollar value goes down? ›

Devaluation may result in an increase in the cost of imported commodities and raw materials, which is known as imported inflation. This might weaken consumers' purchasing power and lower their standard of living by increasing inflationary pressures in the country.

What currency is worth the most? ›

The highest-valued currency in the world is the Kuwaiti Dinar (KWD). Since it was first introduced in 1960, the Kuwaiti dinar has consistently ranked as the world's most valuable currency. Kuwait's economic stability, driven by its oil reserves and tax-free system, contributes to the high demand for its currency.

What is the U.S. dollar backed by? ›

Prior to 1971, the US dollar was backed by gold. Today, the dollar is backed by 2 things: the government's ability to generate revenues (via debt or taxes), and its authority to compel economic participants to transact in dollars.

Is the US dollar in danger of collapse? ›

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.

What happens if the US dollar loses its status as the world's major reserve currency? ›

Economic Implications

Trade and Competitiveness: A weaker dollar could boost the competitiveness of US exports, making them more attractive to foreign buyers. However, it could also lead to higher import costs, potentially fueling inflation in the domestic market.

Top Articles
Latest Posts
Article information

Author: Rev. Leonie Wyman

Last Updated:

Views: 6150

Rating: 4.9 / 5 (59 voted)

Reviews: 82% of readers found this page helpful

Author information

Name: Rev. Leonie Wyman

Birthday: 1993-07-01

Address: Suite 763 6272 Lang Bypass, New Xochitlport, VT 72704-3308

Phone: +22014484519944

Job: Banking Officer

Hobby: Sailing, Gaming, Basketball, Calligraphy, Mycology, Astronomy, Juggling

Introduction: My name is Rev. Leonie Wyman, I am a colorful, tasty, splendid, fair, witty, gorgeous, splendid person who loves writing and wants to share my knowledge and understanding with you.