It is highly unlikely, but not impossible, for the US dollar to collapse. If the US dollar were to crash, it would also lead to the collapse of the global economic system, as the dollar serves as its anchor.
All global reserves, amounting to 58.36% as of the fourth quarter of 2022, are denominated in US dollars. The status of the dollar as a currency peg and its dominance as a reserve currency are closely tied to the global economy. Currently ranked ninth, the US dollar holds the position of the global reserve currency among the top 20 strongest currencies.
Several drastic alterations to the global economy, such as altering the global reserve currencies and breaking all currency pegs, would have to take place prior to the collapse of the US dollar. It is highly unlikely for the US dollar to crash independently due to this factor.
Even in an unforeseen catastrophe, there would be significant repercussions to other global economies before the US currency ever crumbled.
When a currency collapses, it can lead to a general breakdown of a country, political instability, high debt, and high inflation. Generally speaking, there are complex reasons for a currency to lose its value, which can occur when a population or government completely abandons or loses faith in its currency.
The Venezuelan Bolivar (VEF), along with several other currencies that have experienced economic collapse, is included in our list of the top 20 weakest currencies in the world. This collapse was caused by the government hastily adopting a floating exchange rate and the shocks from the collapsing oil price, which sent the economy spiraling downwards.
Investors may be reluctant or withdraw completely, as the absence of confidence in an economic system and the currency is also what will contribute to additional decrease.
What could occur if the dollar were to experience a collapse?
Furthermore, it should be noted that these countries would also suffer economic collapse, with the United States being the exception. Many people often forget that the US dollar is the official currency of 11 countries. If the US dollar were to collapse, it would most likely be the main cause of the worst economic downturn in history. Such an event, which was once deemed impossible, is now becoming increasingly plausible.
The severe economic troubles in Venezuela, for example, can often cause governments to go bankrupt and become worthless to global reserves. It is estimated that %58.36 of the world’s wealth would also become worthless if the dollar were to collapse. These currencies, which are directly pegged to the US dollar, would instantly need to become free-floating, just like the Venezuelan bolivar.
The potential fallout from their own economies could devastate the global economy, as rivals such as China and Russia also have an interest in keeping the US dollar afloat. This means that the US dollar underpins almost all world economies.
The value of the US economy, sitting at the top with a GDP of $23.3tn, is also based on the necessity of the country’s economy and the trust in its currency, which means that the economy of the US will drop anytime soon from this spot.
The challenge of the US dollar, even before it could go to other leagues, is that cryptocurrency could become a currency to replace the entire banking system. As we cover in our article, cryptocurrency is a more efficient mode of exchange, while a lot of cryptocurrency enthusiasts speculate that it is necessary to replace banks and fiat currency.
The dominance of the US dollar
The fact that the US has achieved economic success is a testament to its foreign policy and deliberate economic tactics. Additionally, the US dollar’s status as the underlying currency of the global economy also contributes to its economic success.
The US allowed the Bretton Woods System to help repair the world economy after the Second World War, cementing itself as the leading economy. All 44 allied nations agreed to a system where their currencies were pegged to the US dollar at a fixed exchange rate. This system allowed for a proxy gold standard, where the price of gold would be fixed to the US dollar and their currencies would be pegged to the US dollar at a fixed exchange rate.
The Hong Kong dollar (HKD) and the United Arab Emirates dirham (AED), like the Hong Kong dollar, continue to depend on the dollar to stabilize their respective currencies. Although the system only existed from 1944 to 1971, it was sufficient to establish a subtle dominance of the American currency.
The establishment of the Bretton Woods conference also led to the creation of the World Bank and the IMF, both of which operate internationally to provide loans and foster economic stability and development in low and middle-income countries. However, these two organizations have been accused of creating a state-dominated economic system and showing favoritism, drawing criticism due to their dominance and sheer size.
The decisions made, such as selecting leadership and determining which countries to support, are inherently biased due to the fact that both organizations are American and influenced by a few economically dominant countries that provide funding. The term “global apartheid” has been used to describe global economic inequality, which many argue is caused by and perpetuated by this phenomenon.
The Oil Dollar
The use of US dollars is enforced to create simplicity in international trading, and this is one of the reasons for the dominance of the American economy. Currently, oil is traded in dollars at around $83-84 per barrel, depending on the type of oil.
The US has put oil at the heart of its foreign policy with a de facto deal with Saudi Arabia in 1975, consolidating approximately $2bn worth of military contracts and trading for the assurance that oil sales were exclusively made in dollars. OPEC was also convinced to reinvest their surplus petrodollars into US government debt securities, further strengthening the economic and military protection levels in exchange.
Recent actions from Saudi Arabia have indicated that the dominance of the petrodollar, which has held the top position for the first time, may be challenged, although there is no sign of losing its value.
Therefore, it is highly unlikely that the US dollar, which is deeply intertwined with the world economy, might collapse, even though it is possible.
The remaining portion of the global economy is impacted by imbalanced repercussions brought about by fluctuations in the US economy, as exemplified by the Great Recession. Despite this, the instability of the US economy persists, with the possibility of a collapse appearing highly unlikely. The focus lies not on whether the US dollar is excessively robust, but rather on whether it is poised for a collapse.
The US dollar, despite concerns of a recession and inflation troubles, continues to hold its place as the world’s currency reserve, with China’s GDP still trailing behind at $5.6tn. While it has faced certain challenges, the US dollar remains one of the most secure currencies in the world, indicating no signs of losing its position.