The internet is loaded with rumors about the U.S. dollar collapse. They say is about to be replaced as the world’s reserve currency. Are these just conspiracy theories, or is there really hard evidence to support these claims?
Adding to the confusion of the demise of the dollar internet scuttlebutt, many of the people predicting the U.S. dollar collapse are well known public media figures. Are they correct, or is this a ploy to capture media headlines?
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Background of the Dollar as the World Reserve Currency
The U.S. Dollar replaced the British Pound as the world’s reserve currency in 1945. This happened for a number of reasons. The U.S. was the global leader in the manufacturing industry, and held the majority of the world’s gold. At the time, the dollar was the only currency still backed by gold.
When the ‘Great Depression’ hit the United States in the 1930s, the country was still on the gold standard, and the Federal Reserve could only increase the money supply in the form of gold. In other words, they could not print money like they are doing today. Printing money by the Fed lends credence to the theories of the U.S. Dollar collapse.
The Federal Reserve could only borrow and lend according to the amount of gold that was available to back it up. This created a problem during the depression, because the U.S. was not the only country suffering from the Great Depression.
In 1944, a majority of the world’s central bankers met in Bretton Woods, New Hampshire to discuss the creation of a new global monetary system. One goal was to create a system to facilitate trade between nations. To accomplish this, they needed a strong common currency that could be used in international trading. The dollar was then chosen to be the common global currency.
They also decided that the value of other currencies would be tied to the dollar, and the dollar would be tied to gold at 35 U.S. Dollars per oz.
Function of the Reserve Currency
A reserve currency is a common currency used when countries trade with one another, and since the dollar was chosen, other countries would maintain a healthy supply of dollars. Since the U.S. Dollar is the reserve currency, it creates a stronger demand for the dollar, which helps support its value.
The value of the dollar will fluctuate based on a variety of conditions, including actions taken by the Federal Reserve. For example; when the Federal Reserve expands the money supply (prints money), the value of the dollar tends to fall. When the dollar value declines, it helps boost U.S. exports.
This is due to the fact that a weaker dollar makes U.S. goods cheaper to the rest of the world. Exports are a component of total Gross Domestic Product (GDP), although not a very significant one. The dollar trended lower from (approximately) the middle of 2001 through to the middle of 2008. In August 2014 the dollar began to strengthen.
Why did this happen? There are a number of reasons that contributed to this (housing bubble, credit crisis, and job losses), but the Fed had also signaled its intention to discontinue its monetary expansion (stop printing money), which it finally did on October 29, 2014. Less supply equates to higher valuation, this is simple supply and demand, and why the U.S. Dollar collapse is not emanate.
Will the Dollar Lose its World Currency Status?
What would happen if the U.S. Dollar collapse took place, and was replaced as the world’s reserve currency? There are several possibilities for this scenario. Example; countries holding the U.S. Dollar might sell. If every nation sold their supply of dollars at the same time, the market would be flooded with U.S. Dollars. This would cause the dollar’s value to plummet, and cause inflation to spike.
The Fed is not printing money at this time, so it is safe to say that the dollar is stabilized for the moment. To suggest that the U.S. Dollar will be replaced is actually a bit crazy if you think about it. What could, or would the dollar be replaced with?
Even with our debt and fiscal issues, what other currency has the status to become the new reserve currency? Not the Euro, it is in deeper distress than the U.S. Dollar with all the fiscal troubles socialism has brought to them.
Not the Chinese Yuan, their economy is in severe contraction. This is something that’s been expected for a while due to all the hyping up of their economy through construction and other means (complicated issue).
Some of the gossip on the internet suggests that the IMF is going to create a new reserve currency this October. Is this a real possibility? If you think it is, then perhaps I could interest you in a bridge in Brooklyn really cheap?
Although the U.S. definitely has its share of troubles, the U.S. Dollar collapse is not expected, nor is it going to be allowed. Simply put, the bankers and national leaders will not let this happen, and should retain its status for some time to come. Thus my theory, and application for the winning Best Forex Strategy.