De-dollarization efforts and the emergence of central bank digital currencies have many worried about the future of their savings. Could the US dollar collapse, publication Investing said Commonwealth Financial Network Chief Investment Officer and Managing Director Brad McMillan.
I've been getting a lot of questions about the US dollar in recent weeks. De-dollarization seems to be on the cards, as are central bank digital currencies that make us worry about the fate of our savings. Many questions, in fact, boil down to one thing: how soon will the dollar fall and our savings depreciate?
This collapse cannot happen in the short to medium term for reasons we will discuss. Once we understand that, it will be easier for us to deal with the rest of the issues.
Habits decide a lot
Let's start with an imaginary experiment. Suppose I told you that Amazon was going to collapse this year and that people would abandon it and go to other retailers like Walmart. This argument has a right to life: Walmart is indeed a serious competitor to Amazon. This is a large business that is trying very hard and spending a lot of money to take business away from Amazon.
But, if you think about it, the idea seems rather silly. Personally, I have an Amazon Prime account, have several pre-orders, watch Prime videos, and so on. It would be inconvenient and problematic for me to refuse it, even if Walmart offered a full range of competitive services. Walmart may do that, but I haven't even looked at what they offer. Similarly, tens of millions of other people are unlikely to decide to create problems for themselves in the same place by switching from one company to another. So the idea that Amazon will suddenly collapse is simply not believable.
The dollar is safe
I think you understand what I'm getting at. The US dollar is Amazon and the Chinese yuan is Walmart. Yes, China would like to dump the dollar, but it is not that easy. As long as the US is the largest open economy, as long as everyone in the world wants access to the US economy, and as long as the transition requires a lot of effort and great inconvenience, the position of the dollar as a global reserve currency is secure.
China itself is a good example of this as it owns over a trillion dollars worth of assets. He does it not because he wants to, but because he has to. When China sells things to the US, it is paid in dollars. He must then invest those dollars. Since there are so many, the only real option is US Treasuries. Even China is forced not only to accept, but also to store US dollars. So if China is still on the hook and if Walmart is still doing business with Amazon, is Amazon really going to collapse?
There is no alternative to the dollar
Until now, we have assumed that there is a real alternative to the dollar. No. There are three things that make the dollar special.
First, it is a huge volume of the US economy. The only other currencies that could somehow match it in this regard are the yuan and the euro.
Second is the freely convertible nature of the dollar. The exchange rate of the renminbi is determined by the Chinese government, not the market. This makes it very risky from a political point of view.
And, thirdly, the relative political and economic stability of the USA compared to Europe and China. If you look at everything in parts, it turns out that the US dollar is not only an established choice and, in most cases, a smart choice, but also the only choice. There really is no alternative.
Why talk about collapse
Frankly, all the talk of the dollar collapsing is nonsense designed to scare you into buying what they are trying to sell us. I've been writing articles like this every year for at least the last two decades. When you do this for a while, you may see strange topics come and go. It was not true then and it is not true now.
I'm not the only one who thinks so. The dollar is now trading at about the same level against other currencies as it has been for the past few decades. It goes up and down, but we're still in the middle of the range.
As for the markets, the dollar is still where it has always been. If you look at the markets as a warning system, they are flashing green. When they start to turn yellow or red, then it will be time to worry, but now is not the time at all.
