An annual budget deficit of over $1 trillion, annual trade deficit in the neighborhood of $728 billion, an official national debt of $16.7 trillion, and unfunded liabilities of $123 trillion.
And all liabilities are being carried by an economy generating $15.6 trillion each year in gross revenues (gross domestic product, or GDP).
How much longer can we continue to carry such enormous liabilities with such low income? Will we reverse the trend? Or will the dollar collapse under the weight of so much debt?
Purely as a matter of basic arithmetic, the betting has to be on a dollar collapse, at least eventually. It’s a matter of far too much debt and ongoing liabilities against too few resources. Can we escape that fate? That remains to be seen, but it is entirely possible.
Let me add a bit of a personal disclaimer here. This is an incredibly complicated topic, one in which emotion and politics play a major role. Personally, I don’t know how this will play out, or if it will ever reach a boiling point sufficient to cause a collapse. But as citizens of a nation with such a disturbing balance sheet, it is a topic we should visit from time to time. I’m not predicting a dollar collapse – though I’d hardly be the first if I did. But I will attempt to offer possible scenarios and some logical preparations for the purpose of opening up the discussion.
The floor is wide open for debate, disagreement and your own speculations. We are, after all, discussing future events that are merely possible, and entirely subject to change due to unforeseen circumstances.
What Might Cause the Dollar to Collapse?
The collapse of a nation’s currency is not an unusual event in history. In fact, it’s even more common in the past 100 years or so due to the advance of paper currency that is not backed by physical assets. For example, Roman coins continued to circulate as money well after the Empire collapsed because of their silver content. No country in the world today uses silver as a currency, or permits the redemption of currency for a certain amount of silver or gold. A nation’s currency then is entirely a product of how well the nation functions.
That being the case, a currency can collapse based ultimately on uncertainty. Here is a short list of factors that could cause sufficient uncertainty to result in a dollar collapse:
- A run on the dollar by foreign entities
- The government opting to print money to cover an out-of-control budget
- A significant increase in inflation (see #2 above)
- The U.S. loses a significant war
- The emergence of a currency that replaces the dollar as the international reserve currency
- A major negative event that we can’t comprehend right now.
Any change in the status quo could cause enough uncertainty to produce a dollar collapse.
A Currency Collapse is a Matter of Degree
When we talk about currency collapse – or in our case a dollar collapse – we’re actually talking about several possible scenarios.
In one instance, a dollar collapse could be a significant decline in the purchasing power of the currency. For example, a doubling of general price levels in a two or three year period would mean – in reality – that the value of the dollar has fallen by 50%.
A more severe version could be that we have an annual inflation rate of 50%. The dollar would continue to lose value in either scenario, but faith in the currency will decline along with it.
Either scenario might more properly be called a hyperinflation, but once that takes hold it can easily appear to be (or cause) a complete collapse.
There’s also the doomsday scenario – the value of the currency plunges to zero and is totally worthless. This is also by far the least likely outcome. It happens in countries that experience a complete collapse of the government, or by foreign invasion that makes the country disappear from the map.
This is virtually what happened in post World War I Germany, and in post-Soviet Russia. Both currencies effectively went to zero value. However, many years after the respective collapses, people were once again trading in marks and in rubles. Moral of the story: Nations and citizens love their currency! Even after a period of complete monetary breakdown!
How Bad Could Things Get?
This isn’t something I want to spend a lot of time on as I think we can all imagine that it won’t be at all pleasant. Simply put, 21st century America transacts business in dollars – we don’t know any other way. Except, of course, non-monetary trades of goods and services which is hardly worth mentioning.
Coming to grips with rapidly rising prices is very much like trying to catch a greased pig . . . no matter how hard you try you will always be behind. And the transition over to a barter-based economy will be longer, slower, and far less efficient than we can ever imagine. And in point of fact, the vast majority of the American workforce are hardly in a position to barter.
Okay, let’s not beat this part to death – you get the picture. It’s not pretty.
A Dollar Collapse is Not Inevitable
No discussion of a dollar collapse would be complete without considering that it may never happen. Here are some reasons why:
- The dollar is the world’s reserve currency – there is no suitable replacement now or even on the horizon. This allows for much greater currency distortions.
- We have been experiencing a very slow dollar collapse for the last several decades. As dysfunctional as that is, it is also entirely possible that it could go on for many, many more years. Let’s face it – we’re kind of used to it.
- The country might have a shift over to greater financial responsibility – the debt problems don’t necessarily have to be eliminated as much as we need to start heading in the right direction.
- The development of a new technology, or a combination of several, could unleash a wave of economic growth and capital formation that would minimize current imbalances.
- A major war. For whatever reasons, nations seem to better tolerate hyperinflation and crumbling finances during war time.
A dollar collapse is far from certain. Any of these conditions – and a few others – could prevent it from happening.
How to Protect Yourself During a Dollar Collapse
When you consider the circumstances that can either cause or prevent a dollar collapse it is absolutely clear that it is completely beyond our control at the individual level. Whatever the outcome, all we can do is prepare and try to do our best to live within conditions as they are. Here are some suggestions on what you can do if a dollar collapse were to occur (remember, not saying it necessarily will):
1. Put your trust in God.
It is regrettable – but true – that we may never put our trust completely in our Heavenly Father more than when it seems as if the walls are collapsing around us. And that is exactly what a dollar collapse will look and feel like. No matter how bad things get, God can guide us through the worst of it in ways that we can’t imagine. This is a good time to remember that God is bigger than our problems, even if they’re at the national level.
2. Develop hands-on job skills.
Most discussions of a dollar collapse center almost exclusively on how to preserve your investment portfolio (or savings) from the collapse. But most of us will have a far more basic problem – how will we make a living? Traditional jobs will disappear quickly, so think of skills that will enable you to either grow, build, or fix things. Growing food, generating power, repairing cars and computers, or even building (very) inexpensive homes will enable you to barter. Needs will be basic so the possibilities are pretty wide open.
3. Save up all the money you can now.
Even in a currency collapse, having money saved will be an economic virtue. At a minimum, you’ll need to have cash available to cover living expenses until you can figure out how to make a living. You may also need cash in order to help you retool to make your living. Of course, depending on if there was a partial or whole dollar collapse, this advice may or may not come in handy.
4. Have some money in precious metals.
When it comes to currency collapse, putting your money into precious metals is a default recommendation. I’m not completely convinced this will turn out to be true, but between gold and silver you might want to go with silver. It’s lower value will make it more practical as a barter asset. Just remember that a currency collapse will cause all types of distortions, some of which can have a negative effect on precious metals. Buy some, but don’t overdo it. Precious metals alone are unlikely to completely insulate you from the fallout of a dollar collapse.
5. Get closer with family, friends, church, neighborhood and community.
Crisis always brings us closer. We may not feel as much of a need for people and involvement during times of prosperity, but they’re God’s blessing in a disaster. We’ll need people and community to help and to be helped by, to barter with, and to entertain ourselves in ways we can no longer afford to.
What are your thoughts on a dollar collapse? Likely, unlikely, impossible? And if you think it is possible, what should we do to prepare for it? Leave a comment!
Source for numbers: USDebtClock.org