US Dollar Catastrophe

Will the American dollar disappear as the world reserve currency, taking with it the American economy?

That is a question that quite a few gold bugs answer yes and I suppose it is not impossible for them to be right, but there must be an improbable conflation of circumstances to make this occur.

  1. The US would be powerless to stop or mitigate the activity.
  2. There will be some other currency or exchange asset that countries and businesses can hold in reserve
  3. There must be some other currency or other asset that can be used as the unit of exchange.
  4. There must be some reliable body to look after the new currency or other asset.

I am not a big fan of government intervention and currency management, but in the absence of a better alternative, I must live with that.

The gold bugs are telling only part of the story.  Yes, the US has been profligate and Yes, China is an emerging super-economy and Yes, gold is historically an objective store of value.  All true and all meaningless without the ability carry on commerce.

Gold is not of much use as anything but a reserve of value.  And, there is not really enough of it to satisfy world demand, even at much higher unit prices.

Gold is difficult to use as a medium of exchange.

Currently, even though it is distrusted by many, the US dollar is the unit of exchange for about 80% of all international settlements whether by business or by governments.

Who will replace that?  The Russians and Chinese together?  The Arab countries?  The Europeans?  Fewer people trust these than trust the US.  They don’t even trust each other.

Who would supervise?  The UN?  Seriously?

Solutions that solve only a single aspect of a problem are not really solutions.

I think it is a good idea to own insurance against improbable events, but only at a price.  Gold as insurance has an ongoing cash cost to store and protect, and no ongoing income, thus a significant opportunity cost.  Given the probability of a US dollar collapse being near zero, agreed we could argue about that, the premium for the insurance seems too high.

All insurance, no matter its purpose, must provide a cost benefit.  With catastrophic possible losses, the decision is harder.  The analysis is, nonetheless, useful.

Don Shaughnessy is a retired partner in an international public accounting firm and is presently with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario. Contact:  

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