I have been getting a lot of questions around the dollar in recent weeks. De-dollarization seems to be a thing, as do central bank digital currencies, along with the latest round of worries about what the government is going to do to our savings. There is much to talk about, but the root of most of these questions is this: the notion that sometime soon the value of the dollar will collapse, making our savings valueless.
Simply put, that collapse can’t happen in the short to medium term, for reasons we will discuss. Once we realize that, it will make it easier to deal with the remaining questions. So, let’s start with the dollar today and move on to the other questions in the days ahead.
A Thought Experiment
Let’s start with a thought experiment. Suppose I told you that Amazon would collapse this year and that people would abandon it and flock to other merchants (e.g., Walmart). That argument makes a certain amount of sense, in that Walmart is indeed a valid competitor, is trying very hard and spending a lot of money to take business from Amazon, and has the scale to do so credibly. In that sense, I have a good case that Amazon is going to collapse.
But when you think about it, the idea is kind of silly. Personally, I have an Amazon Prime account, I have multiple orders pre-set, I watch Prime video, and so on. It would be a lot of work and a major inconvenience to switch—even if Walmart offered a full range of competitive services. Walmart may do so, but I haven’t even looked, which kind of proves my point. Unless you believe that tens of millions of people are suddenly going to do the work and endure the inconvenience of switching, then the idea that Amazon will suddenly collapse simply isn’t credible.
The Dollar Is Secure
I think you see where I am going with this. The U.S. dollar is Amazon, and the Chinese yuan is Walmart. Yes, China would like to dethrone the dollar, but it isn’t that simple. As long as the U.S. is the largest open trading economy, as long as everyone in the world wants access to the U.S. economy, and as long as it is a lot of work and a great inconvenience to switch, the position of the dollar as the global reserve currency is secure.
China itself is a good example of this, as it holds more than a trillion (with a t) dollars’ worth of assets. It doesn’t do so because it wants to, but because it has to. When China sells things to the U.S., it gets paid in dollars. It then has to invest those dollars. Since there are so many of them, the only real option is U.S. Treasury securities. Even China is locked into not only taking but holding U.S. dollars. So if China is still on the hook and if Walmart is still doing business with Amazon, will Amazon really collapse?
No Alternative to the Dollar
It gets better. So far, we have assumed that there is a real alternative to the dollar. There isn’t. There are three things that make the dollar special. First is the sheer size of the U.S. economy. The only other currencies that even come close are the yuan and the euro. Second is the freely convertible nature of the dollar. The yuan’s exchange rate is determined by the Chinese government, not the market. This makes it very risky from a political perspective, which just leaves the euro as an option. And third is the relative political and economic stability of the U.S. compared with both Europe and China. When you look at all the pieces, the U.S. dollar is not only the established choice and, in most cases, the smart choice, but it is the only choice. There really is no alternative.
So, What’s Driving All the Collapse Talk?
Frankly, a lot of the talk is nonsense designed to panic you into buying something the doomsters are trying to sell, often gold. Looking back, I have written pieces like this every year or two for at least the past decade. When you do this for a while, you get to see fads come and go. It wasn’t true then, and it isn’t true now.
I’m not the only one saying this, either. The dollar is now trading at just about the same level against other currencies as it has for the past several decades. It goes up and down, but we are still at the middle of the range. As far as the markets are concerned, the dollar is still where it has always been. If we consider the markets as a warning system, they are still flashing green. When they start to turn yellow or red, then will be the time to worry—but that is not what we are seeing.
So, if the dollar isn’t falling apart—and it isn’t—what does that mean for the rest of the worries? We will talk about that on Thursday. (As a preview, those aren’t things to worry about either.)
Keep calm and carry on.