When the Dollar Dies—What Then?

Earlier this month I had the pleasure to speak at the Future of Wealth Summit in Dublin. Although the topics covered were many and varied, if I had to identify one thread that connected them all, it would be the state of the US dollar.

Afterward, it struck me that everyone in the conference hall had grown up with the dollar as the king of the global hill. And since that status confers upon Americans an “exorbitant privilege” (as a French Prime Minister once put it), coming to terms with its looming dethronement is particularly difficult.

To overcome that, it helps to understand how and why the dollar became King Currency in the first place. Knowing why the dollar has enjoyed privileged status helps us see what might depose it.

In the closing months of World War II, the Allies agreed to make the dollar the anchor of the global financial system. All major currencies were pegged to the dollar at fixed exchange rates. The dollar itself was pegged to gold at $35 per ounce. This approach had several benefits:

• It provided predictable exchange rates without handcuffing nations to the gold standard, widely thought to have made the Great Depression far worse than it might have been.
• Although exchange rates were fixed, they could be adjusted through negotiation. Nations needn’t suffer if economic fundamentals required their currency to appreciate or depreciate.
• The US was the only major global economy and political system relatively untouched by the war. The US understood its global responsibilities and was reliable.

Under this system, nations and businesses used dollars for foreign trade. That created a demand for the dollar that wasn’t tied to the US’s own economic performance. Alone amongst nations, therefore, Americans could enjoy strong purchasing power no matter what was happening to their domestic economy.

Even after the US abandoned the gold standard in 1971, the dollar remained dominant. Its economy remained the largest and most stable, backed by deep capital markets and strong institutions. Starting in the 1970s, oil was priced and traded in dollars, forcing countries to hold dollar reserves.

Gold was soon forgotten. US Treasury bonds came to be considered the safest, most liquid assets on Earth, making them the preferred collateral instrument.

In sum, no other currency offered a comparable mix of stability and scale, backed by trust. Once the dollar became dominant, it was self-reinforcing—global trade, debt issuance, and banking systems all relied on it.

Those elements are disintegrating before our eyes:

• Stability: Without the gold standard, the stability of the dollar depends entirely on the US’ ability to produce enough economic output to justify its valuation, plus enough additional output to pay off the US federal debt. That debt currently stands at $37.5 trillion, 125% of US GDP. Anything over 100% is considered dangerous.
• Scale: Nations must continue to use the dollar for their own international trade. If they begin to abandon the dollar, it will lose the benefit of scale… and self-reinforcing effects will work in reverse.
• Trust: Nations must trust that the dollar and the US economy will be managed with the world’s interests in mind. They must believe that the US will always honor its debts and be able to pay them. And they must believe that the dollar will always be available to every nation, even those the US doesn’t like.

In the mid-20th century, US politicians and business leaders understood that dollar dominance involved a trade-off.

The US would enjoy the exorbitant privilege of hosting the world’s reserve currency. In return, it would govern itself with the interests of the entire planet in mind rather than just itself. The US would have to give up certain things that might benefit it in the short term, but in the long term would hurt the global economy… and therefore the US itself.

The question is whether US leaders still understand those trade-offs… and what will happen to your wealth if the answer is no.