Could The US Dollar Collapse? – Forbes

Key Takeaways

• A currency collapse is when a country’s currency loses all its value and becomes practically worthless in day to day use
• This is generally as a result of political or economic upheaval, hyperinflation or war
• It’s not a common occurrence, but we’ve seen it happen before in various places around the world
• For investors, it’s a risk to be aware of, though luckily it’s fairly easy to protect yourself against it
• While technically the US dollar could collapse, it’s backing from the largest economy in the world and its status as the global reserve currency, makes that highly unlikely

Whoa, that’s a big statement˳ If you’re someone from Argentina, Venezuela or Russia, you understand the realities of what can happen when your home currency fails˳ It’s a big deal, and it can cause immense financial damage to the economy and individuals˳

But is it actually realistic to think that the US Dollar, the world’s reserve currency, could collapse too?

Look, we’ll cut to the chase˳ It’s unlikely˳ But, it’s not impossible˳ Nothing is in the world of money and finance˳ For investors, it’s important to understand the potential outcomes that could impact their finances, even if they’re unlikely˳

So in this article, we’re going to walk you through what actually happens when a currency collapses, how it could impact investors, and what they can do to protect against it˳

Want to get exposure to assets outside the US, as well as within it? Q˳ai’s Global Trends Kit invests in a wide range of different asset classes, all across the world˳ Every week our AI analyzes huge amounts of data, and predicts how these assets are likely to perform on a risk adjusted basis˳

It then automatically rebalances the Kit in line with these projections˳ Not only does it mean your portfolio is always up to date, but it means your funds are diversified into investments all across the world˳

Download Q˳ai today for access to AI-powered investment strategies˳

What is a currency collapse?

A currency collapse is when a currency loses all of its value˳ This might seem crazy, but it makes more sense when you consider that money is simply an IOU from the government˳ It used to be that paper money, coins and even numbers on a bank statement represented an amount of gold in reserve˳

In those days, money represented an IOU for that amount of gold˳ Now, the system isn’t fully backed by gold, but the concept remains the same˳ Now, they’re backed by the weight of the United States, reflecting everything within the economy˳

So in order for a dollar to have value, society needs to believe that the United States has value˳ Given how many taxpayers, businesses and valuable assets are in the US, it’s hard to argue that it doesn’t have value˳ In fact, the reason why the US was able to move off the gold standard was because it had so much economic value˳

So, a currency collapse is when there is no longer any trust that the asset, country or organization has sufficient value to reflect the currency˳

This can happen for a number of reasons˳

Hyperinflation

When hyperinflation occurs, every dollar becomes less valuable˳ $10 might buy you a 12 case of Pepsi today, and then tomorrow that same $10 only buys you six Pepsi’s˳ The currency’s value becomes less and less, and this can create a spiral that ends up in it becoming practically worthless˳

We’ve seen an example of this in Zimbabwe in the early 2000’s˳

Political Instability

While not something we expect to see in the US, governments can be overthrown˳ When there is a military coup, a war or another event resulting in political upheaval, a country’s currency can often be a casualty˳

High Debt

Many countries have high levels of debt these days, but this is all relative to the strength of the underlying economy˳ When a country has very high debt and a shrinking economy, this can cause a flight of assets and a collapse of the currency˳

These are just a few examples˳ Others include trade imbalances, loss of status as a global reserve currency, natural disasters or war˳ All of them relate to instability within a country, as the currency is reflective of the global financial systems trust in that country˳

The US dollar’s special status

Unlike any other country in the world, the US dollar has a special place in the global financial system˳ That’s because it is the global reserve currency˳ That means that it’s considered as the safest currency there is, with many other countries keeping US dollars in reserve˳

This isn’t just a theoretical detail, it’s a practical one too˳ For example, many global financial contracts are denominated in US dollars, and many countries who have struggled to maintain a stable currency use US dollars as their own national currency˳

Right now there are 11 foreign countries that use the US dollar as their official currency˳ These include Panama, El Salvador, Zimbabwe and Timor Leste˳

The US dollar has been able to gain and maintain this special status because of the strength of the economy˳ The US is still the biggest economy in the world by far, with an annual GDP of $23 trillion˳ Second is China with $17˳7 trillion, and way back in third is Japan with $4˳9 trillion˳

All of this is to say, for the US dollar to collapse would take something pretty major˳ Like, a WWIII type situation˳

And despite all of the uncertainty around the world, the US still remains one of the most stable countries there is˳ The chances that we see a collapse of the US dollar are very slim, and if it did happen, we’d probably have bigger problems to worry about than our investments˳

Like where to get clean water and what to hunt for our dinner˳

How does currency collapse impact investors?

Investments are inherently tied to the currency they’re held in˳ If you hold US stocks which are denominated in dollars, you need dollars to buy and sell them˳ That’s fine if the currency remains stable and you live in the United States, but it can cause havoc if it doesn’t or you don’t˳

When a currency collapses, investors can see their assets plummet in value, purely on the exchange rate alone˳ Not only that, but during times of economic and political crisis, governments will often restrict the movement of currency in an attempt to limit the damage˳

So currency risk is a really important factor for investors˳ Anyone looking to invest in assets denominated in a ‘risky’ currency, should understand the additional risks involved, and expect the potential for additional returns for taking that higher risk˳

The bottom line

Currencies can and do collapse, but it’s not a minor event˳ When a currency collapses, it’s down to a significant economic or political event in a country that has a huge impact on its citizens˳

It’s not a likely outcome at all in most countries around the world, and that’s particularly true for the United States˳ This is down to the US dollar’s status as the global reserve currency˳

So while technically the US dollar could collapse, the chances of that happening any time soon are incredibly slim˳

For investors, currency collapses can impact their portfolios if they invest globally (as they should be)˳ The best way to protect against this is through sufficient diversification˳ By having assets spread across different industries and in different currencies, it limits the potential damage of a currency collapse on a portfolio˳

If you prefer to stick to investing in the US for now, Q˳ai’s AI-powered Active Indexer Kit allows you to do just that, without having to lift a finger˳ It offers access to a range of ETFs that cover the entire US market, offering significant diversification with an AI edge˳

Download Q˳ai today for access to AI-powered investment strategies˳