Most Americans don’t concern themselves with the value of US dollar. That’s because the dollar has been incredibly steady in recent decades. We’ve come to see currency problems as an issue for other countries, but not the US. However, America has not been immune to the ravages of a currency collapse. Are your investments prepared for a major fall in the US dollar?
If not, they should be. There are numerous potential threats to the US dollar even now, though they’re largely hidden by the prosperity of the moment. However, they’re building beneath the surface, and can erupt at any time. Once they do, the time to take advanced action will have passed. By then, your investment portfolio may have experienced a significant decline.
You can avoid that outcome, by being aware of what’s happening, and repositioning your investment holdings accordingly. This doesn’t mean dumping everything that you currently own, but rather adding some asset classes that you probably haven’t thought much about.
WHAT COULD CAUSE THE US DOLLAR TO EXPERIENCE A MAJOR FALL?
The last time the US dollar experienced a major decline was during the 1970s. That decade was marked by stagnating traditional assets, like stocks and bonds, and runaway inflation on the home front. Most believe that it couldn’t happen again. But there are major fronts that are looking threatening to the stability of the dollar.
A Government Debt Crisis
Most people consider this to be impossible given that it’s never happened in the past. But what opens up the possibility is the sheer size of America’s national debt. The current US National Debt is $20.5 Trillion, though it’s hard to pinpoint with any precision since it grows daily. That’s the federal government’s debt only. It doesn’t include debts owed by states, counties and municipalities. It also doesn’t include debt owed by individuals and corporations.
Meanwhile, the current annual budget deficit is running at $666 billion. This is a scary number given that the economy is in a growth cycle. But it means that the national debt is rising by more than $50 billion per month.
During the last recession, budget deficits rose to over $1 trillion. It’s possible that the current deficit level could double or triple in the next recession.
The problem will be compounded if that recession is either caused by or accompanied by rising interest rates. Interest on the national debt is currently running only a little bit over $250 billion. That reflects an average annual interest rate only a little bit more than 1.2%. Should rates rise to their historical norms in the 5% range, interest on the debt would quadruple. That means we’d be paying at least $1 trillion per year just to pay interest on the debt.
A Domestic Political Crisis
This is another major potential crisis that most discount, since it hasn’t happened since the Civil War. But since the election of Donald Trump to the White House in November 2016, there’s been a concentrated effort to remove him from office.
The advocates of Trump’s impeachment generally assume that repercussions will be minimal. However, his replacement will be Mike Pence, who will be the unelected successor of a failed presidency. That outcome has the potential to go in directions no one has fully considered.
And whether we want to admit it or not, major political disturbance has a pronounced negative affect on both economics and finance. Look for stocks, bonds and probably real estate to be among the casualties.
Loss in a Foreign War.
War in the 21st century is looking vastly different than what it did throughout human history. Virtually since the beginning of the century, America has been embroiled in a series of nontraditional and asymmetric wars. We’re no longer fighting countries, as much as we are people groups. This has led to unending, small-scale conflicts on multiple fronts.
While we’re tied up in those conflicts, other countries are gaining strength and becoming bolder. North Korea and Iran are two prominent examples. Meanwhile, China has been extending its control into the South China Sea. With the US military spread around the globe, the possibility of losing a foreign war is growing annually.
This is when it’s important to realize that the current financial construct in the world is built on a foundation of American military supremacy. Any serious threat to that dominance could prove catastrophic for traditional investments, like stocks and bonds.
WHAT WOULD BE THE OUTCOME OF A MAJOR FALL IN THE US DOLLAR?
Any one of the above crises could have a major negative impact on the US dollar. Currently, the dollar is the international reserve currency. Not only is it the primary currency held by foreign governments, but it’s also used to settle most major international transactions. Should anything threaten that arrangement, the US dollar could fall in a major way.
How would the scenario play out?
Foreign Dumping of US Assets
The primary reason why foreign governments and individuals hold US securities is because of the reserve currency status of the dollar. The US is simply seen as the most stable major economy in the world. But if that perception were to change, foreigners would begin dumping US securities. This would include stocks, bonds, and US Treasury securities. It’s also possible that foreigners will begin moving out of US real estate.
This would cause a widespread decline in US asset prices. That would mean that everyone holding those assets would become poorer.
Inflation – Possibly Hyper-inflation
As the value of investment assets decline, the price of consumer goods will likely rise. As foreign investors shed dollars and US assets, the cost of imports will increase. Since so much of what Americans use is imported, prices could skyrocket. This can result in a general inflation, and possibly even a hyperinflation if it gets out of control.
Since most Americans hold their investments primarily in paper assets, their wealth will be attacked on two fronts. They will experience both a rise in the cost of living, and a decline in their asset values.
WHAT ARE THE BEST INVESTMENTS TO PROTECT AGAINST A MAJOR FALL IN THE US DOLLAR?
In that kind of economic and financial environment, the only salvation will be to get out of paper assets, and into those that are either tangible or foreign sourced.
Gold and Silver Bullion
Gold and silver stand at the top of the list, since they are both real assets. They are also pure assets, which means that, unlike paper assets, they’re not simultaneously someone else’s liability.
For example, you may hold a bond as an asset. But a bond is someone else’s liability. Should that party default on the debt, your bond will become worthless. This is not the case with gold and silver. Each represents a real asset that has been traded by humankind for thousands of years. Each also has widely recognized value.
Gold could represent a form of portfolio insurance for your investments, while silver could become a barter asset in an economy where paper money has steadily less purchasing power. Gold can be an excellent hold either as bullion, or in a gold IRA, which can hold bullion as well.
Silver can be held in small denomination bullion, which would be perfect for everyday barter, or even an emergency fund.
It’s unfortunate that most Americans aren’t familiar with foreign currencies, and don’t hold them routinely. They could represent an important diversification away from the US dollar. This is because economic conditions could decline in the US, but not in other countries. The currencies of those countries would be more likely to hold their value.
Of particular interest could be exotic currencies. These represent special situations, particularly if the issuing country has strategic importance or internationally necessary resources.
One such exotic currency is the Iraqi Dinar. It currently isn’t used in foreign transactions. But should a crisis cause the price of oil to rise significantly, the Iraqi dinar could see considerable price appreciation.
Other exotic currencies could increase in value due to geography. For example, let’s say that the country of Chile proves to be largely unaffected by the global financial crisis. It’s currency,
the Chilean Peso, could rise in value as that country is seen as a safe haven.
Foreign Assets and Investments
This is another way to play a major fall in the US dollar, but in a more direct way. Instead of owning the currencies of foreign countries, or investing in the paper assets of those countries, you actually take a direct position in assets and investments.
In most cases, this will take the form of either owning property or having business interests in a country that is more stable than a crisis ridden US. However, the average person doesn’t travel very extensively to foreign countries, and usually lacks the money to sink into a capital-intensive, foreign-based asset.
The better option is to own foreign securities. This includes stocks of foreign-based companies, treasury securities issued by stable foreign governments, or mutual funds and exchange traded funds that invest in those securities.
However, in a general financial meltdown, it’s unlikely that even foreign securities will be unaffected by the troubles in the US. As the largest economy in the world, and the largest financial markets, major declines in US stocks would likely pull down stock prices in other countries.
For the vast majority of American investors, the two best choices to diversify their investments beyond the US dollar are to invest either in precious metals, or in foreign currencies, particularly exotic currencies.
Most Americans don’t think in these terms. But a general economic and financial meltdown, particularly one that specifically affects the US, could cause these opportunities to become more important.
The current level of the financial markets in the US suggests an economy, financial condition, and political situation that are much more stable than they really are. Now is the time to prepare your investments for a major fall in the dollar, that could result from crisis coming on multiple fronts. You can be one of the casualties of such a crisis – or you can be one of the winners.