Our Dollar in Danger: Bad News if the World Stops Using it for Trade
If you think things are bad now with inflation, if the world decides to replace the dollar as international currency things will get worse
Inflation has already taken a chunk out of the value of that dollar bill in your pocket, but various actions on the world stage are threatening to reduce its value to less than that roll of Charmin in your bathroom.
I’m not an expert in international finance but I do understand the basics, which are: The U.S. dollar is valuable around the world, but China and to a lesser degree Russia would like to replace it, and if that happens our current 8 percent inflation rate will seem quaint.
Our Dollar Has Special Status Worldwide
Since 1944 the U.S. dollar has been the world reserve currency, which means it has been the standard most countries have used when conducting international commerce. That means if, for example, France wanted to buy something from India, the transaction would take place in U.S. dollars.
The reserve currency just makes things simpler – no one has to worry about exchanging one currency for another, deciding which country had the more valuable currency, etc. Before the dollar, the British pound had been the reserve currency going all the way back to 1815.
Having our dollar as the reserve currency comes with perks for us – our money has more stability, we can import products more cost efficiently, our companies have easier access to capital and we can sell our debt to other countries, which keeps our tax rates and interest rates lower.
Basically, we can afford to buy more stuff because the dollar is the world reserve currency.
Of course, there are also drawbacks. It essentially has given our government the equivalent of one of those black credit cards with no spending limit. As a result, we’re horribly in debt. Our national debt is around $30 trillion, which is 125 percent higher than our income, known as the gross domestic product (GDP).
In regular people terms, this would be like having an annual income of $100,000 and a debt of $125,000. Even if you could devote your entire year’s income to it, you couldn’t pay it off. But not only aren’t you paying it off, you keep buying more stuff on credit.
What’s crazy is that in 2010, the debt was $10 trillion – our government managed to overspend by $20 trillion in the past 12 years. The one thing our government is very efficient at is spending money – $20 trillion in 12 years figures out to nearly $3.2 million per minute!
The reason they could do this is because a lot of other countries were willing to finance our debt to get more of the valuable U.S. dollars.
The Dollar in Danger
But the dollar is getting shaky at the knees and other countries are beginning to wonder if it is still worthwhile to pursue. In fact, some countries have already begun using the Chinese yuan instead of the dollar in trades with China. Several other countries are planning on switching from the dollar to the ruble in exchanges with Russia.
China, especially now that Russia has invaded Ukraine, would love to kick aside the U.S. dollar and become the world reserve currency. That also could mean that the yuan would be the standard rate for pricing oil, which is currently also in U.S. dollars (called petrodollars in the world market). Saudi Arabia is already considering using the yuan instead of the dollar.
Why You Should Care About This
OK, you’re not doing any international trading so what do you care? Well, you should care and care a lot because if the yuan or the ruble replaces the dollar, your lifestyle and mine will change drastically.
It’s impossible to predict exactly what would happen, but it would mean that the government will owe more on its debt and financing more debt won’t be as easy. That means the government will have to cut back on its spending (hahahahaha – that’ll never happen). So if they won’t quit spending then they’ll have to either find a way to increase our GDP or raise our taxes (you know which one they’ll choose).
But that won’t be the only way it’ll affect us.
Companies will have to spend more to import items because of having to exchange dollars into yuans, which means they’ll have to raise prices. But it will also be harder for companies to borrow the capital they need and what they can get will be at higher interest rates – increases which get passed on to the consumer.
In fact, it will become even more attractive for companies to move overseas, especially to China, to do business. So there will be fewer American companies, meaning fewer American jobs, which means a decrease in the number of people the government can tax. So there goes your tax rate again.
Plus the government will be tempted to print more money, which is how they responded to the recession in 2008 and to covid in 2020. This seems like a simple solution: If you want $1,000 just print 10 $100s, right? But the more money that’s printed, the less value it has, which is the basis for inflation. So the cost of goods go up some more.
Let’s see, if we lose the dollar as the world reserve it means goods cost more because of the currency exchange, higher interest rates and inflation; the amount of available jobs and goods produced on American soil will decrease; and the government is going to try to make up its deficit by raising taxes. This does not look good for the average American.
Do We Have Any Hope?
How likely is it that this will happen? Unfortunately, it has grown more likely in the past year. Confidence in the dollar has shrunk as the country’s leadership has looked increasingly weak and confused. President Biden’s plan to remove sanctions from Iran’s nuclear program make it far more likely that Saudi Arabia and other oil-producing countries will switch to the yuan in retaliation.
If Russia successfully takes over Ukraine more countries within Russia’s sphere of influence will switch to the ruble. If European countries have to depend on Russian oil, some of them may follow suit.
China’s outreach already extends into parts of Africa and South America, as well as Asia, which could shear off another block of countries from the dollar.
It may look hopeless, but as I’ve said in past blogs, we have to remember that we hold the ultimate power with our votes. There are plenty of candidates out there, at local, state and national levels, who want to make America their first priority. That’s who we need leading us. Find out who they are and when the elections come around, vote for them. Let’s loan our power to the people who will use it to fight for us instead of against us.
Otherwise, you might as well exchange your dollar bills for that roll of Charmin.