Fears for the US Dollar and the possibility of debasement are rising among strategists. In the hypothetical situation that a collapse did occur, then we would see a swathe of investors and institutions holding assets backed by the dollar attempting to reduce their exposure, likely resulting in a sell off. Public and private entities would not be the only ones holding the greenback, so we would also see government entities, dumping their holdings too.
Should a scenario like this occur then the decline of the USD would have wider implications with commodities trade. If the USD has no value, then the holders of commodities would seek an alternative currency for payment. It would be a very messy situation, with supply and demand completely skewed to the supply side.
What’s required for a collapse?
Really as I see it there’s a few different things but the main one is an alternative. Which currency or asset would rule as the new reserve currency? Would a new global currency or perhaps a cryptocurrency be a suitable replacement? The Euro while a top contender just doesn’t have the widespread use that the USD has, and its not without its own challenges, the euro experiment has heralded many critics along the way to its successes. Bitcoin? Also not a particularly viable option due to the nature of its fluctuations in price, and its lack of a central bank also provides issues. And having a global currency causes its own host of valuation problems, solutions likely exist but they would not be a seamless transition.
Outside of the alternatives, then the next one for me is the sentiment of the USD, a crash would need a total loss in confidence for the currency and the US economy.
How would it collapse?
Let’s say it did, what causes it? A host of possibilities exist from the demise of America’s entire economy, to inflation reaching extremes, (and I mean absolute extremes) but foreign holdings in treasuries is the most likely theoretical culprit. Should the holdings of the largest foreign debt holders of the United States dumped their holdings simultaneously or even in short succession then it could lead to a panic, then mass hysteria, followed by effectively the largest run on a bank ever seen… except the bank is America.
Is it likely?
It would be like mutually assured destruction; a debasement and collapse of the US dollar would result in the economic hardships for the holders of treasuries too. So to me it’s not a likely scenario, I would put it in the its plausible, but unlikely; it would require planed execution from several nations, then it would require them to feel the exposure to pain was worth the economic harm.
What effects would we see if it did?
Pandemonium. Seriously it would create complete chaos, safe havens would see floods of demand, prices would skyrocket, along with commodities, gold, oil, volatility, interest rates and inflation.