Fiat Currency Collapse: What to Own When the Dollar Collapses
We delve deep into the vulnerabilities of fiat currencies and explore the potential consequences of a fiat currency collapse in this article.
With increasing economic uncertainty over the US dollar, it's important to have a plan in place for when the dollar collapses. In this article, we'll discuss how the global monetary system is changing by analyzing the signs of a possible dollar collapse, assessing how likely it is, as well as predicting how long it might take.
Then we'll outline the steps you can take to protect yourself from, and discuss the role of alternative investments, including real estate, precious metals and cryptocurrency as a hedge against US dollar currency collapse.
The Greek drachma, the Roman denarii, the Venetian ducat, and just a hundred years ago, the British pound sterling, were all the dominant currencies of their time. All of them were eventually replaced. There's no reason the US dollar will be any different.
Whether the US dollar's collapse takes one, five, or even fifty years, it's a safe bet to assume it loses out eventually and that you should make sure you're ready for when it happens. That means it's more important than ever to understand what might happen, and how to protect yourself.
What is Fiat?
Like most of the world's currencies, the US dollar is a type of fiat currency. A fiat currency is simply a currency that is not backed by a physical commodity, such as gold or silver, but by the government's promise to pay the bearer.
Unlike asset-backed currencies, fiat gives central banks greater control over monetary policy, allowing governments to decide how much currency to print and set interest rates, which in turn, influences the currencies value.
As government's print more fiat and increase the monetary supply, the value of fiat goes down. Consequently, economies experience inflation as prices rise to find an equilibrium with currency devaluation.
The World's Reserve Currency - What is the Dollars role?
The US dollar has been the world's dominant reserve currency ever since the end of World War 2, when the US emerged as the world's premier economic superpower.
Today, almost all international trade, investments and debt is settled and denominated in dollars. National governments also hold a majority of their international currency reserves in US dollars, with roughly 60% of all foreign exchange reserves held in dollars, followed by the Euro at 20%.
Many countries also use the dollar as a benchmark to peg their own currencies to. Pegged currencies do not use a floating exchange rate, and are instead rely on fixed exchange rates.
To do this, governments must hold extremely high currency reserves in order to maintain the peg, often in the form of US government treasury bonds. This in turn helps to reinforce the dollars role as the world's reserve currency and lowers the cost of US government borrowing.
As long as there is high demand for the dollar, the risk of a complete collapse remains low. The exact demand for the dollar depends on a number of factors, including its perception as a store of value, the US central bank's interest rate policy, its usefulness as an international medium of exchange, and above all else, the US's position as the global economic leader.
Signs that the US Dollar May be at Risk of Collapse
US National Debt Default
The biggest driver of currency crisis is usually debt. Or in other words, the threat of or actual failure to repay back loans. Today, the US has a federal debt of over $28 trillion, well over 100% of its annual GDP output. And this number is continuing to grow rapidly.
However, the US debt is also denominated in dollars. Unlike other countries, this makes it virtually impossible for the US government to default on their debt, as they can always just print more dollars. Of course, turning on the money printers comes with its own risks...
Money Printing and Inflation
Potentially the biggest driver of a US currency collapse is the risk of rapid inflation. Over the last decade, loose monetary policy has seen the money supply rapidly expand, resulting in huge asset-price inflation.
In other words, the US central bank (aka The Federal Reserve) has printed too much money; in 2020 alone, 23% of all US dollars in existence were printed. As the federal reserve prints more money, the relative value of each dollar goes down.
If the value of a currency rapidly depreciates, then inflation, or even hyperinflation can quickly result in currency collapse.
Geopolitical Shifts
A huge component of US dollar demand is driven by its role as the international reserve currency. By extension, if the dollar ever loses its global reserve currency status, we can expect the dollar's value to decline significantly.
As the US's relative economic power continues to decline, other countries such as China, Russia and even France are slowly pushing to reduce the role of the US dollar as the sole global reserve currency.
The US's recent moves to exclude certain adversaries from the global economy has also accelerated concerns about the dollar's dominance, and has catalysed efforts by China, Russia and others, to reduce the world's international reliance on the US dollar.
When will the dollar collapse take place?
History never repeats itself, but it often rhymes. Thus by looking at past currency collapses, we can try to make an informed prediction about what the US dollar's collapse might look like.
Past Examples of Fiat Currency Failures
German Hyperinflation
History has shown that fiat currencies can and often do fail, sometimes spectacularly. The most famous example is the German hyperinflation of the 1920s.
The huge burden of paying back reparations after WW1 forced the German government to print money to service their debt. The more they printed, the quicker the German mark fell, causing rapid inflation. In 1919, one dollar was worth 49 German marks. By 1923, it was worth a whopping 4,210,500,000,000.
Nevertheless, the comparison doesn't entirely work. Whilst the US does face an increasing debt problem and higher than normal inflation, it is both a much stronger economy than Germany was in 1918, and its debt is denominated in dollar's, making the possibility of a debt defaults and complete economic collapse less likely.
Roman DenariI
The collapse of the Roman denarii, and along with it, the empire itself took over two centuries. As Rome rapidly grew and conquered its neighbours, the costs of its military went up too. So how did the roman emperors afford it?
The solution was to debase (devalue) their currency. In other words, print more money, similar to what the US is doing today. The denarii was initially backed 1:1 by silver, but over the course of 200 years, the denarii was slowly diluted by subsequent roman emperors until, at last, it was only backed by 5% silver.
As a result, confidence in the Denarii fell, inflation increased, and eventually, the ensuing economic crisis destroyed the Roman empire itself.
The Pound Sterling
Perhaps the most relevant comparison is the British pound sterling. During the latter half of the 19th century, at the zenith of the British Empire's commercial and military power, around 60% of the world's trade was settled in sterling.
Even as the empire's influence faded, and Britain's economy was surpassed by the United States in the 1920s, the pound sterling remained the world's dominant reserve currency until the 1950s, where racked by debt from WW2, a crumbling empire, soaring inflation and a huge current account deficit, it was finally pushed aside by the greenback.
But this process still took over 30 years, and the British economy then, whilst not entirely dissimilar, was in a much worse state than the US today, suggesting that the dollar's decline, whilst certainly coming, could take some time yet.
What does this all mean?
Nevertheless, there is a common theme amongst all these example. A formerly rich economy, burdened by extreme debt (often from military interventions), declining economic confidence, and rival economic forces emerging to challenge or replace it. All of these factors are true for the US today.
How long exactly it takes for the US dollar to reach its inevitable conclusion is anyone's guess. But nevertheless, it pays to prepare early rather than too late.
How to protect yourself from a US Dollar Collapse
So, now you know that the question of a dollar collapse is a question of when, not if, the real question is what you should do protect yourself. Luckily for you, we're here to help.
Ultimately, the effectiveness of your strategy will depend on how exactly the collapse plays out. A total implosion? Shotguns and lots of ammo might be your best bet. A gradual decline on the other hand? Then a range of more traditional investments will probably make more sense. Either way, we've got all the bases covered with our comprehensive guide on what to own when the dollar collapses.
Foreign Currency
If the dollar goes down, then it automatically implies that foreign currencies must go up. That makes owning foreign currencies a good hedge against the dollar, especially currencies which have proven themselves to be effective stores of value.
The most popular reserve currencies other than the dollar include the Euro, the Chinese yuan (aka renminbi), the British pound sterling and the Japanese yen. Nevertheless, most of these currencies have actually weakened against the dollar over the last 20 years.
Some smaller currencies on the other hand, may prove better bets. The Swiss franc, for example, is up 100% against the dollar over the last 40 years. Another options could be the Norwegian kroner, a country with zero debt known for its economic stability, however, even so it's still declined in strength relative to the dollar.
Precious Metals and Commodities
Whilst fiat has a theoretically endless supply, precious metals and other commodities with fixed (or at least bounded) supply such as gold, oil or corn could be a better bet. Not only is the supply of these products limited, their demand is driven by real-world usage rather than simply popular perception.
The most popular store of value has always been physical gold. Up until the 1970s, most currencies were even backed by gold or other precious metals including silver. And this historical perception of gold as the 'gold-standard' of safe haven assets still exists today, making it a good option as a hedge against economic uncertainty.
This effect can be observed in the 2007-2008 financial crash, where the price of gold over doubled in less than three years as investors fled towards the world's most traditional 'safe haven' asset.
Alternatively, you could look at other commodities with more practical demand. This could include rare earth metals used to build batteries and other tech products, good old-fashioned grubby oil, or even food and crops such as wheat. People will always need phones, transportation and food after all. The best way to get exposure to commodities is often through an index fund.
If climate change is going to be as bad as many predict it will be, then even water could be a good bet.
Cryptocurrencies
Cryptocurrencies are a form of decentralized currency that are becoming an increasingly popular investment class in recent years, with some people believing that they could play a significant role in the decline of the Dollar monetary system.
Unlike fiat, cryptocurrency supply is not controlled by the government. Most are decentralized and designed with a fixed maximum supply, like Bitcoin, or in other cases even have deflationary total supply.
This means that, unlike fiat currencies, the scarcity of many cryptocurrencies will only ever increase, making them a potentially useful store of value. In many countries with unstable fiat currencies, such Turkey where inflation has wiped out people's savings, Bitcoin has become a popular alternative, where it is often seen as a form of 'digital gold'.
Many cryptocurrencies are also known as 'utility tokens' meaning that they accrue value via demand for their services, these include cryptocurrencies such as Ethereum, Filecoin or Creditcoin.
However, it is essential to remember that cryptocurrencies are still a relatively new technology and can be volatile. Some cryptocurrencies even have token supply systems (tokenomics) which are even more inflationary than fiat.
Real Estate Investments
Real estate can be an excellent investment both before and after a currency collapse. Before a collapse, it may be wise to invest in property that can be used for self-sufficiency, such as a farm or a home with a large garden. After a collapse, real estate may be one of the few assets that still holds value, as people will always need a place to live.
One thing to note about this strategy is that the best time to buy is often in the midst of a financial crash. Economic crisis often result in people losing their jobs and defaulting on their mortgages, resulting in lots of properties hitting the market. This means lower prices to buy. Indeed, if you look at US housing price indexes, you'll see that the best time to buy is shortly after a sharp economic contraction, as was the case with the 2007-2008 financial crash.
Investing in a foreign property market may be particularly lucrative, although this can come with legal challenges and additional risks. Moreover, it's not just the US where property markets are overheated, it is currently a global phenomenon.
Emergency Supplies
If a worst case scenario event really does happen, and the US goes the way of the Weimar Republic, then it's essential to have emergency preparedness plans in place. This includes having a stockpile of food, water, medicine and other necessities that can last for several weeks to several months. Plus, having extra supplies isn't a bad thing, as you can always barter them for other valuable goods if needed.
Additionally, having a backup source of power and a way to protect oneself and one's property. If you live in country where firearms are legal, then why not stock up and get ready.
Self-sufficiency is also crucial. This means being able to grow one's food and provide for oneself without relying on the government or others. This can include learning how to grow a garden, raise animals, and make basic household items. This means books might also be a good investment, and unlike a kindle or phone, you can still use them without internet access.
Having said all this, total anarchy isn't our prediction, despite what some doom mongers may say. Certainly, we wouldn't recommend losing any sleep over it.
Alternative Investments
There's also some other investments you could make. Fine art for example has performed well over last century. Wine, Whiskey and other scarce luxury goods could work too. The challenge here is storage, and uncertainty of whether luxury goods will hold their value in the face of an overwhelming economic catastrophe.
Conclusion and Final Thoughts
In conclusion, while it is impossible to predict when or if a currency collapse will occur, it is wise to be prepared. Whilst we believe there's no reason to panic just yet, you should start planning your long-term investment strategy around the very real likelihood of a gradual dollar decline.
This includes having emergency preparedness plans in place, and diversifying yourself across a wide variety of different investments, including real estate, commodities, cryptocurrencies and other alternative investments.
By taking these steps, you'll be in the best position possible if the dollar ever goes the way of the dodo.
Benedict Clark