The Dollar Won’t Collapse… Here’s What Happens Instead

I am often accused of predicting the dollar’s collapse.

I get that. It’s the easy, visceral synopsis of El Jefe’s Complete Guide to Tomorrow and Beyond.

It is, alas, wrong.

I don’t think the dollar collapses. Major currencies generally don’t work that way. They just grind lower over time, constantly and continuously whittling away at a citizenry’s wealth and, through persistent inflation, transferring that wealth to the government’s never-ending debt machine.

My thesis is more complex, though not terribly hard to understand.

It’s this: America faces a crisis in the very near future and that crisis will be tied to the dollar’s role as global reserve currency. That doesn’t mean a collapse. It means a rethink.

Does the dollar continue to lord over the world (not good for Americans)?

Or does the dollar abdicate the throne—by committee or unilaterally—and return to its pre-World War II role as America’s currency (much better for Americans, though the path to the end game is likely violently bad)?

I see the latter as our course forward.

Without question, the reserve-currency dollar was a sweet deal for Americans early on. The 1944 Bretton Woods agreement that elected the dollar as King of Currencies helped build the world’s first and greatest consumer class.

But it’s a big part of why American factories began shipping millions of jobs overseas—and why the middle class has hollowed out.

So, the Biography of the Dollar as Reserve Currency is the story of the good, the bad, and the ugly.

The Good: Post-1944, every country needed dollars to trade. All that demand kept the dollar stronger than it had any right to be. The International Monetary Fund has pegged the dollar as much as 20% overvalued.

That means everything America imports has a huge built-in discount. The rest of the world pays retail; America pays wholesale.

That, plus the money other countries spent in America rebuilding their own economies in the years immediately after the war, birthed the American middle class in the 1950s through about 1971. Tract homes in new suburbs. Station wagons for growing families. Newfangled color TVs. Refrigerators stocked from supermarkets with more choices than any generation before.

The Bad: That silver cloud had a dark lining.

In 1959, a Yale economist named Robert Triffin went to Congress with a warning: If the whole world runs on dollars, then the world needs a constant supply of them to trade, to save, and to grow the global economy. That, he warned, is going to be big bad news one day.

Because America is the only place dollars come from, the only way to meet growing global demand for dollars is to send out into the world far more dollars than will ever come home—sending aid abroad, building military bases, investing in factories overseas that then compete more cheaply against American factories—and eventually, buying more from the world than we sell to it.

By 1971, America was running its first trade deficit of the 20th century, about $2 billion… and it’s only exploded since. Last year, the deficit on goods alone hit $1.24 trillion… 70 times larger even after inflation.

In August 1971, Richard Nixon slapped a 10% surcharge on imports to force other countries to raise their currencies against an overvalued dollar. Exactly the crack Triffin warned about.

That fall, Nixon’s Treasury Secretary—a boisterous Texan named John Connally—told foreign finance ministers: “The dollar is our currency, but your problem.” Translation: We run the dollar for America, so tough s*** for you.

Which brings us to…

The Ugly: While American shoppers gained access to imports cheaper than they should have been, American factories paid for it—twice.

At home, they had to compete against those artificially cheap imports from rival foreign factories America helped rebuild. And overseas, the strong dollar made everything America built—from tractors to sneakers—more expensive, so they lost sales to those same rival factories.

Connally’s quip that “The dollar is our currency, but your problem” slowly flipped to “the dollar is your currency, but our problem.”

The end result: American factory jobs that peaked at 19.6 million in 1979 now number but 12.6 million.

So, 7 million jobs gone, even as the country added nearly 120 million people.

Paychecks have suffered too.

The average rank-and-file worker’s hourly pay, after inflation, is barely higher today than it was in 1973. That’s 53 years of labor for about a 3% raise, while housing, college, and healthcare costs exploded at a far faster pace.

As usual, decades of DC politicians willfully ignored Professor Triffin’s warnings. Instead, Washington happily made the trade on our behalf—factory jobs for cheap consumer goods at Walmart and Best Buy, and cheap money for Congress to buy votes and bail out Wall Street and the banks every time they got in trouble.

Because the world needs our dollars, foreign governments park them in the Treasury debt Washington sells to run the country. All that demand keeps interest rates artificially low. So Uncle Sam stays fat and happy on $40 trillion of borrowed money—while Congress keeps the masses quiet with cheap imports and artificially lower mortgage rates.

So that’s my real take on what’s going on.

The dollar will not collapse.

But it will relinquish its role as King of Currencies. It’s the only sane path forward.

Otherwise, Congresses of today and tomorrow will continue on the same road they’re currently on—spend, spend, spend and rely on the dollar’s reserve status to keep rates cheap.

And that is the path to collapse.