Is a Crash of the Dollar Inevitable At This Point?

The battle to save the global economy from a complete implosion has been very similar to a war.

Governments across the globe threw all of their resources into battling an enemy that was threatening to destroy the world. This time, it wasn't the Germans that the world was fighting - instead, it was a complete global economic meltdown.

Many now agree that a complete collapse of the system has been averted, at least for the short-term.

However, now that the worst days seem to be behind us, the damage and costs of fighting the war are starting to be calculated.

When you are engaged in the battle, the long-term costs are ignored. There is only one thing that matters, and that is winning the war. The costs will be paid later.

The global economic meltdown (and near complete collapse) that occurred from 2007 until now sucked an unprecedented amount of resources from the major economic powers of the world.

The United States arguably paid the deepest cost of any country in the world.

Trillions upon trillions of dollars in various bailouts, loans, stakes and guarantees. The propping up of many different industries. An eye-popping increase in near-term deficits. A staggering addition to an already massive pile of debt. Borrowing against the future to put out fires today. The printing of untold amounts of money to try and stabilize and re-inflate the US economy, as well as the global economy in general.

Economists are now starting to tabulate the costs of fighting this epic war. There are, they warn, going to be dire consequences for the actions of the past few years. No one is arguing that these steps (bailouts, etc) were unnecessary - instead, they are merely pointing out that there will be a cost to be paid.

There are a growing chorus of people who predict that the US dollar will crash over the coming years. Some of the reasons for this crash that are cited include: massive deficit spending, an ever-increasing debt load (estimated to be around $20 trillion dollars in a decade), loss of the dollar's status as the world's reserve currency, loss of the United States' AAA credit rating, the printing of money by the Fed that will eventually lead to wealth-destructing inflation, weak economic growth in the United States, major holders of US debt refusing to purchase any more debt offerings, etc. etc.

There are many reasons that they give for their view that the dollar is about to crash.

Given the horrific performance of the dollar over the past week, more and more people seem to be of the opinion that a crash in the dollar is nearly a sure thing.

Not so fast, other analysts and economists are arguing.

Some point out that the Euro will actually weaken against the dollar over the coming months. Europe has certainly not skated through this meltdown unscathed, and many European banks will be forced to swallow up to a trillion dollars in new losses from Eastern European investments. This would come on top of all of the government-sponsored bailouts of the past few years in the Euro zone - it wasn't just the United States that was handing out trillions of dollars in bailout money.

Many European countries are battling sky-high unemployment rates and soaring debt levels. In the end, currency is all relative. The United States is in a tough spot right now, but so is Europe and practically every other region of the world.

Others completely discount the idea that the US dollar will lose its reserve currency status, and openly think that this is nothing more than tough talk from countries such as China and Russia. They also believe that countries will continue to pour money into US treasuries, as it continues to be the safest (and most liquid) investment in the world.

Some also argue that a profound change in the spending habits of the average U.S. citizen will result in shrinking trade deficits, which will end up strengthening the US dollar.

The recent downturn in the dollar seems to be fear-driven - it was only a few months ago when the dollar was seen as a safe haven in a world filled with turmoil.

That being said, it's hard to imagine a strong US dollar over the long-term if these massive deficits aren't brought under control. Will the US continue to run trillion dollar deficits over the next 10-20 years? Which regions of the world will emerge from this downturn first? Will countries continue to sop up US treasuries? How many more dollars will have to be printed? Will the United States retain their AAA rating? Will the US dollar retain its reserve currency status?

So many questions and unresolved issues to come to a definitive conclusion, at least in my mind.

What do you think?

Filed under: The Economic Meltdown

COMMENTS

Comment by Manoj on July 28, 2009 @ 10:03 am

All doomsday predictions. I don't think dollar will fall so much. All other economies are vested in dollar and their future will also collapse with dollar collapse so the situation is not as grim as it looks today.

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Comment by MarcY on July 10, 2009 @ 10:53 am

Collapse of the dollar is inevitable. Predicating it's demise on the parallel course of the Euro is like saying my neighbor didn't die from cancer so I won't either. The fact is, despite the connections between economies in the world, the strong Texas economy has not been able to stop Michigan or California from approaching the edge of the precipice, and Europe and Asia will not be able to stop the US economy from crashing. They will suffer as a result, but cannot shield us from the incredibly bad judgement we have used. The blame lies with Congress, Senate, all Presidents since Reagan, greedy corporate leaders, criminal wall street players, undisciplined consumers and most of the rest of us with high consumer debt. Did I leave anyone out? Unfortunately, everyone will suffer, even if they were acting responsibly. Where will it lead? A very dark place......

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Comment by Joe Grady on June 16, 2009 @ 9:37 am

The point isn't an either/or between the dollar and the euro falling. Recently the euro has been dropping at a faster rate, but when the dollar collapses (not if but when), the euro will continue to drop, but at a much slower rate than the dollar. Both currencies will drop compared to, say, the Chinese Yuan. The European economies will stabilize much faster, but the dollar will continue to fall, probably precipitating the total collapse of the US economy. When the prices of all imports rise beyond the buying power of the average US consumer, much of our retail-based economy will be wiped out. It will become redundant really fast with thousands of stores closing and millions more jobs lost. The whole thing will be like a positive feedback loop, exacerbating itself. The problem is that the US economy is too dependent on service and retail, and during an economic shock, those are the most fragile and vulnerable sectors, so they will largely disappear. As the jobs hemorrhage, so too will "productive" capacity, leading to more hardship, anger, consumer confidence and buying power.

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Comment by P Alfonso on May 29, 2009 @ 12:33 am

Good article, meant to put forth a lot of questions to motivate answers. I guess that is a good way to find answers. So I’ll tell you what I think.
I am not an economist but more of a common sense guy looking for answers from commons sense people. Let’s look at it this way: Our economy and the world’s have been inflated by spending and debt. Spending is what makes the economy’s fire burn and debt is the rain that wants to put it out. A good fire will continue burning for some time even under rain. You can continue to throw everything that will burn into the fire but if the rain persists eventually will put out the fire.
What brought about the current crisis was lack of common sense, short term planning and greed. What will bring an ultimate collapse of the world economy is that they are trying to fix it by doing the same things that got us where we are, spending and debt. Short term fixes are no fixes at all and the rain is getting stronger while governments are running out of things to throw unto the fire.
Common sense should tell us that we are heading for a Depression and most of the world’s inflated wealth will be lost. It may turn out to be a good thing as long as we keep our liberty. We may wake up one morning in the near future and will worry about where to find the next meal or how to pay our rent. There will be no time or money for gambling, drugs or Disney and the next American idol will be the person that will offer you a job.
I will take poverty just don’t mess with my liberty.

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