You decide to go out and do some shopping.
All you really need is some bread, milk, cereal, some toothpaste and some toilet paper.
Ok, so first things first, you have to load up your wheelbarrow with bills, like really
stack the thing, because your currency has lost its value.
This happened in the 1920s in Germany and people did quite literally go shopping with
wheelbarrows full of cash.
It was down to something called hyperinflation, and it made the German mark pretty much worthless.
Back then, one dollar was worth 1 trillion marks.
Could this ever happen to the dollar, and what would happen if it did?
That’s what we’ll find out today.
First of all, this hasn’t just happened in Germany.
Currency collapses have happened in Argentina, Ukraine, Iceland, Hungary, Zimbabwe and Venezuela.
It basically involves a country's currency being deemed as having very little value.
There’s no trust in that currency, and so it becomes almost worthless.
So, if we take a hypothetical situation in which the dollar suddenly started losing its
value, what would follow is anyone who owns dollars would want to sell them, but no one
of course would want to buy them.
People would start panicking.
Foreign governments that owned dollars in the form of Treasury bills, notes, and bonds,
would want to get rid of them.
Investors would also scramble to off-load their dollars.
This would be the beginning of a collapse, and the worst possible scenario is the dollar
becoming pretty much worthless.
If the dollar was worthless, imported goods would cost more.
When imported goods start costing more, the price of things goes up.
This is called inflation.
So, when you have hyperinflation, a loaf of bread might cost a million dollars.
It sounds a bit crazy, but it’s happened in other countries.
People might then start getting paid millions and millions, just so they can buy things.
Outside the country, the currency is down on its knees.
There are two scenarios in which this could happen to the dollar.
Before a total collapse, the dollar would have to weaken somehow, which is kinda the
start of the crisis.
It’s the match that lights the fire.
The dollar has declined before, and in the years between 2002 and 2018 it lost 6 percent
of its value.
That basically made it weaker, and so you could get more dollars when buying them with
another currency such as the Euro.
You might ask why it lost its value during that time period, and the reason was because
the U.S. debt went up from $6 trillion to $22 trillion.
At the end of 2019 it was $23.2 trillion.
The dollar could become weaker if the government decided to weaken the dollar so it could pay
off its debts.
There’s another reason why the dollar could suddenly lose lots of its value.
As you may know, the dollar is the world's reserve currency.
That’s good for the strength of the dollar since countries use it as a global currency.
In fact, about a half of border to border transactions are made with the U.S. dollar.
For this reason, the Central Banks of the world must have a reserve of dollars.
This includes entities such as the U.S. Federal Reserve System, the Bank of England, the Bank
of Japan, the European Central Bank and more.
About 61 percent of foreign reserves are in U.S. dollars.The Euro is the next favored
currency, but it only accounts for about 30 percent of foreign currency reserves held
in Central banks.
Okey dokey, that’s all fine and dandy, but what if the dollar loses more value and countries
holding it start thinking, hey, our currency is better and can be trusted more than your
dollar.
What if China said, look, the yuan should be the world’s reserve currency.
What if the EU says the Euro is the top dog.
If all these countries are holding so many dollars and it starts to weaken, they would
be right to be just a little bit concerned.
A lot of the U.S. debt is owned by the U.S. government, the Federal Reserve and investors,
but around six trillion dollars is owned by other countries.
The biggest owners of U.S. debt are China and Japan.
These debts are in the form of those treasuries we just talked about.
So, what if China and Japan just decided to dump their treasuries and cash out?
This would cause widespread panic, but would that really happen?
Well, if they did sell their dollars and the dollar lost value, they would be in trouble.
That’s because their major consumer is the USA.
If they do something that puts the dollar into a decline, how will America be able to
buy their products?
It would be like cutting off your nose to spite your face.
As one expert put it, why would you want to make your best customer go bankrupt.
But just for the sake of today’s show, let’s say China and Japan did dump their dollars
and others followed, and the dollar decline went into full swing.
Globally people would be off-loading their dollars and buying more stable currencies
such as the Euro.
Or, they might put their money into commodities or something such as gold.
This would lead to interest rates in the U.S. going up and it would lead to inflation.
Ok, so with a weak dollar the U.S. could export lots of stuff at a cheap price, but over time
the inflation and high interest rates would cause trouble.
Then you’ve got a recession on your hands, and at worst, a depression.
But what about you during all this turmoil.
Well, if you’ve been clever, you’ve diversified investments not attached to the dollar.
Hey, you might even have a bit of gold, maybe even a great big pot of gold at the end of
a rainbow.
You might have transferable skills and be able to do business in other countries.
You should probably have a passport, too, because you might want to travel and find
work elsewhere.
If we look at the Great Depression of 1929 in the U.S., unemployment increased by 25
percent and the number of homeless people also increased.
Housing prices went down 30 percent and lots of banks failed.
International trade was down 65 percent.
What also happened is agricultural products lost their value and farmers in the Midwest
suffered what was called the Dust Bowl Drought.
Average incomes all over the U.S. dropped by 40 percent, and some of the worst hit became
homeless or lived in slums.
In 1928 the unemployment rate was 3.2 percent and five years later it was a massive 24.9
percent.
It was a grand old mess and made the lives of many American’s miserable.
The good news is, we don’t see this happening and neither do economic experts.
The global implications would be too catastrophic and the dollar as the reserve currency isn’t
going anywhere for now..
We think you now need to know a bit more about the U.S. debt, so we advise you to watch one
of these videos.
Head to, “What If The US Paid Off Its Debt?” or take a look at this, “How Can the US
Keep a Trillion Dollar Debt?”