Will the US Dollar Collapse in 2021?

Will the US Dollar Collapse in 2021?

The year 2021 could see the end of the US dollar’s reign as the world’s reserve currency.

A reserve currency is the fiat currency central banks and corporations use for international transactions. The US dollar became the reserve currency when America emerged as the world’s dominant power during World War II.

The dollar could collapse because a reserve currency requires three attributes America could lack. Those attributes are:

1. Issued by a militarily dominant power.

2. Issued by the largest and most influential economy.

3. Issued by a stable country with a stable government.

The United States is a militarily dominant power, but military power is not that important in today’s world. Remember, there has not been a great power war since 1945 and the existence of nuclear weapons makes great power conflict improbable.

That means America’s vast military power is irrelevant to international relations. Remember, you cannot spend aircraft carriers and nuclear bombs.

 In the 20th Century, the Soviet Union learned that military power alone does not make a superpower. I think the United States will soon learn that lesson.

Is China Richer than America?

America’s role as the world’s largest economy is already in doubt. Investopedia estimates China has already surpassed the USA in one criteria used to classify economies.

To explain the People’s Republic of China had a Purchasing Power Parity (PPP) Adjusted GDP of $23.52 trillion in December 2020. In comparison the USA had a PPP Adjusted GDP of $21.43 trillion. On the other hand, the United States had a Nominal Gross Domestic Product (GDP) of $21.43 trillion to China’s $14.34 trillion in 2020. Conversely, The Washington Post claims China’s GDP surpassed $15 trillion for the first time in 2020.

Additionally, China’s GDP could soon soon exceed America’s. China’s National Statistics Bureau estimates the People’s Republic’s GDP grew by 6.5% in fourth quarter. However, China’s annual GDP only grew by 2.3% in 2020 because of coronavirus.

In contrast, America’s annual GDP shrank by 3.6% in 2020 because of COVID-19, The Global Times estimates. Thus China’s economy is growing while America’s economy shrinks.

Moreover, Chinese officials claim the People’s Republic’s export volume hit an all-time high of $2.6 trillion in 2020, The Washington Post reports. Similarly, China’s trade surplus with the USA hit a record high of $316.9 billion in 2020.

Consequently, many people wonder how long the US can retain its dominance with China growing so quickly. Predictably, leaders in many countries share such doubts and act on them.

Notably, the European Union (EU) acknowledged Chinese dominance with a Comprehensive Agreement on Investment (CAI) between the European Commission (the EU’s executive body) and the People’s Republic of China. The CAI will make it easier for Europeans to invest in China. However, the European Parliament will need to approve the CAI.

The CAI has upset many Americans; including President-Elect Joe Biden (D-Delaware), because the Europeans did not include Americans in the talks. However, it is a defeat for America because the United States has no way to stop it. In fact, Europeans are ignoring American demands for input on the CAI.

China could be the world’s largest Economy in 2028

One reason for the EU’s action is the Centre for Economics and Business Research (CEBR) prediction that China will become the world’s largest economy by 2028. The CEBR is a British think tank, CEBR economists calculate the United States will become the world’s third largest economy behind China and India by 2030, the BBC reports.

In detail, CEBR economists predict China’s GDP will grew by 5.75% annually until 2025 an 4.5% annually between 2026 and 2030. However, CEBR’s experts think the US economy will only grow by 1.6%-1.9% annually in the same period.

Thus, the United States could no longer be the world’s largest economy just seven years from now. I cannot see how the dollar will remain the world’s reserve currency if the USA is the number two or three economy.

Will American Instability kill the Dollar?

The 6 January 2021 seizure of the US Capitol by a mob of rabid Trump supporters is the only the latest example of American political instability.

America is politically unstable because of an ineffective government. The capitol seizure is only the latest failure of American government. An even greater failure is the USA’s inability to cope with coronavirus and its economic effects.

The instability and ineffective government shows the United States is no longer a credible super power and possibly not a great power. Europe is turning to China because its leaders have concluded they can no longer rely on America.

How the Dollar Dies

I think the best indicator of the US Dollar’s decline is the sudden explosion of the Bitcoin (BTC) cryptocurrency’s price.

For example, Mr. Market paid $8,808.81 for a Bitcoin on 15 January 2020 before coronavirus and $35,816.48-$36,763.14 for a Bitcoin on 18 January 2021 after a year of COVID-19. Bitcoin’s dollar price quadrupled in a year.

I think Bitcoin’s Coin Price exploded because millions of people all over the world are seeking a dollar alternative. Enormous numbers of people suspect the dollar is about to collapse so they are seeking an alternative. Notice that the worse things get in the USA the higher Bitcoin goes.

Obviously, Bitcoin is a terrible dollar alternative, it is clunky, unscalable, hard to access, and illegal in some places. However, Bitcoin is the only practical dollar alternative millions of people have.

Is dollar collapse unavoidable?

I cannot see how the United States will avoid inflation and a flight of capitol if the dollar’s decline continues. Unfortunately, I cannot see how the United States can reverse that decline without major structural changes and political reforms that could take decades.

Additionally, such reforms could be impossible in the present American political environment. I think the events of 6 January 2021 show America could be on the verge of a long period of civic unrest or some sort of revolution.

Notably, 6 January had a revolutionary flavor the horde that stormed the capitol behaved like a lynch mob. News reports claim some members of the mob were seeking political leaders with an intent to kill them.

For example, some mob members chanted “Hang Mike Pence,The Washington Post reports. Pence is US Vice President Mike Pence (R-Indiana) who was in the capitol at the time. News photographs show mob members built a scaffold with a noose on it outside the Capitol.

I think all it will take is one more explosion; such as the Capitol Riot, to sink the dollar. Thus all investors and speculators need to ask what will happen if the dollar collapses.

What will happen if the dollar collapses?

Some possible effects of a US dollar collapse could be:

  • Inflation in the United States.
  • Capitol flight from the United States.
  • Lack of foreign investment in the United States.
  •  Collapse or decline in the US stock market. Note: I think American stock prices will remain high for a year or longer, because Americans have nowhere else to put their money.
  • Growth of the Chinese stock market. Notably, the Shanghai composite grew from 2,916.56 on 22 January 2016 to 3,566.38 on 15 January 2021.
  • Movement of money into dollar alternatives such as the Chinese or European stock markets, the S&P 500, Euros, Bitcoin (BTC), gold, Pounds, Swiss Francs, etc.
  • Efforts by the US government to prop up the dollar and preserves America’s economic dominance.
  • Efforts by the US government to sabotage or contain China’s economic growth.

How Reserve Currencies Die

Of these developments I think we need to fear efforts by the US government to prop up the dollar most. Historically, the principal effort to prop up the last reserve currency the British pound hastened that currency’s demise.

On 28 April 1925 Chancellor of the Exchequer Winston S. Churchill announced Britain’s return to the gold standard. Churchill’s hope was that the gold standard could return the Pound Sterling to its pre-World War I price. Instead, economists’ estimate that Churchill’s decision reduced the pound’s value by 10%.

Basing the pound on the price of gold increased its value. The overvalued pound wreaked on havoc with the British economy and weakened both the United Kingdom and the Empire.

The overvalued pound raised the price of British exports, which killed jobs in British industry and drove customers to American alternatives. Unemployment increased by 700,00 in the United Kingdom leading to social and political unrest and a national strike.

Less than 20 years later during World War II, the US Dollar officially replaced the Pound Sterling as the world’s reserve currency. Mr. Market; however, had already chosen the new reserve currency in 1925.

Why you need to Watch the Dollar

Smart investors and speculators need to watch the dollar because its days as the world’s reserve currency are numbered.

 

Unfortunately, I do not know what will replace the dollar as the reserve currency. Although I think the Euro could serve as a short-term replacement.

 

However, I predict those who bet against the US dollar could make enormous amounts of money in the next few years.

Originally published at https://marketmadhouse.com on January 18, 2021.