What If The Dollar Falls? – Analysis
By Peter St. Onge*
The past few weeks, major countries have been moving away from the US dollar, raising doubts about the dollar’s long-dominant role in the world. Eight weeks ago, it was just pariah nations like Iran or Russia trying to de-dollarize. Now it’s Brazil, France, even Saudi Arabia—the lynchpin of the decades-long “petrodollar” arrangement.
If the dollar does lose its position as the global reserve currency, it will be catastrophic for the American economy. Catastrophic for the American people on whose backs 80 years of reserve status were built. And it will subject billions of foreigners, for whom the dollar has meant decades of being bullied, to history’s greatest bait and switch.
Dollar at Risk
In late March, Saudi Arabia announced it will price oil in Chinese yuan. Even CNN was worried, in a rare display of situational awareness, while Fox fretted about “Weimar”—hyperinflation. (See related: “Ron Paul: Will The End Of The Petrodollar End The US Empire? – OpEd“)
The dollar has been the undisputed global reserve currency since the 1940s. Reserve currency status looks great on paper: You get to print stacks of green paper and foreigners give you cool stuff for it, like toasters, luxury cars, and copper mines. The problem is who profits—who gets paid when foreigners crave the green paper?
Unfortunately, it’s not the American people; it’s whomever’s printing money: The Fed, meaning the Treasury, to whom they hand their ill-gotten profits, and—you guessed it—Wall Street. Commercial banks.
To see why, imagine foreigners didn’t want dollars. The Fed and banks could only print a little bit since printing a lot would create inflation, and voters would toss them out.
But if foreigners want a large number of dollars, the Fed and banks can print a matching amount. It’s like a river flowing into the money supply reservoir, matched up with a river flowing out to foreigners. The reservoir stays stable, and voters don’t riot.
But notice where the profits went. That river to foreigners didn’t go to we the dollar-holders—we are the reservoir; we are unchanged. The profits went right through us to the source of the river: the US Treasury and Wall Street.
So, like the rest of our crony financial system, it’s a hustle. The American people think they’re benefitting from reserve status, but the profits were sucked out and handed to the people who designed the institutional fleecing we call a financial system.
Now, here’s the problem. What if foreigners suddenly don’t want dollars?
Maybe China’s paying them to sell oil in yuan, or maybe the Fed lost the plot and creates too much inflation.
Demand dries up, the dollar starts to lose value, and foreigners start worry their life savings and corporate treasuries are melting. They sell out of the dollar. A little at first, more and more if it accelerates.
Now that river to foreigners reverses, it flows back into the reservoir. The dollar collapses. 70 years of Fed and Wall Street money printing comes rushing back like a tsunami running up a canyon. We’re talking double-digital inflation, over multiple years, at a minimum.
If they screw this up, reserve currency status could turn out to be a trap, an absolute catastrophe for the American people.
What Are the Stages of De-dollarization?
So what happens if the dollar falls?
For starters, foreigners don’t need as many dollars. Meaning there are extra dollars nobody wants. This makes the price of the dollar fall—it gets weaker.
It’s usually slow at first, then picks up speed if it keeps going, a progressive rush for the exits. This is because the first ones out only lose a little bit, but the longer they waited, the more they’ll lose.
Who’s left holding the bag as the dollar becomes increasingly worthless? Easy: Americans. The only people on earth who are actually obligated to use the US dollar, thanks to an obscure law passed in 1862 as a wartime emergency that nevertheless managed to stick around for 151 years.
So Americans have no choice: unless you swapped your dollars for gold, or Bitcoin, or goats, you go down with the ship.
What happens to those Americans? A falling dollar drives up the price of everything that comes into America. But it also drives up the price of anything traded on world markets. Meaning the raw materials and imported components that drive American factories and sustain American consumers.
The first to jump would be gasoline, heating fuel, and food prices—all of those are world markets. Along with prescription medicines since China has a creeping stranglehold thanks to our idiotic over-regulation—indeed, this is more or less true for every consumer product that China dominates: we shot ourselves in the foot, and now it’s coming back to bite us.
Next, those expensive commodities and input prices pour out through the supply chain. Yanking prices up in industry after industry—cars, construction materials like steel or concrete, clothes, furniture, TVs, computers, and medical devices.
Gone are the days of affordable luxuries—now you gotta work for them.
The Main Event: Capital Flows
And that’s when the main event begins: capital flows.
If foreigners get nervous, they sell not only dollars, they sell assets denominated in dollars. Starting with the most liquid: stocks, bonds, and treasuries. These are easy to trade—IBM stock is easier to sell than a Taiwanese factory in Wisconsin—so they go first.
About 40% of American stocks are owned by foreigners and about one-third of corporate bonds. If foreigners start fleeing, both plunge. This could cut your 401k almost in half, and it could drive up borrowing costs for companies to impossible levels.
Leading to mass bankruptcies on top of the wave of bankruptcies the Fed’s already engineering to try and stop the inflation it started.
It doesn’t stop there: one-third of US treasuries are owned by foreigners—over $8 trillion in bonds. If foreigners start dumping those, it will either send US government debt service soaring by potentially hundreds of billions of dollars a year. Or, much more likely, it forces the Fed to step in and buy up all that foreign demand, flooding yet more trillions into the economy.
This would flip inflation overnight marching back towards double-digits.
There are ways to stop this. But given the Washington clown show to raise the debt ceiling yet again, paired with their obsession with sanctions that scare foreign countries off the dollar, Washington isn’t remotely close to the serious thinking it will take to right this ship.
Losing reserve currency status would savage the American economy, and it would savage the American people. No country needs reserve currency status—after all, it doesn’t benefit the people. But, like climbing a cliffside with no gear, once you go halfway, you better not let go.
[A version of this article first appeared on Peter St. Onge’s substack.]
About the author: Peter St. Onge is a Mises Institute Associated Scholar and an Economic Research Fellow at the Heritage Foundation. For more content from Dr. St. Onge, subscribe to his newsletter where he writes about Austrian economics and cryptocurrency.
Source: This article was published by the MISES Institute
18 thoughts on “What If The Dollar Falls? – Analysis”
I’m surprised St, Onge appears to be ignorant of the inflation during the Nixon/Vietnam War inflation time when the dollar was pull off the fixed price gold standard, and caused the establishment of the petrodollar. While certainly most all of US increase in wealth goes to the wealthy, Americans in general do benefit by a small amount, especially post WWII, before the greater influence of Greenspan/Mises thought under Reagan. But the biggest threat now is if the House Republicans default/renege on US debt. This will cause a immediate fall in the petrodollar, reserve dollar, Eurodollar, FOREX, etc., Even China will be greatly concerned if the value of of its investments fall precipitously. The economic collapse of the early 21st century will be will be viewed with envy.
God bless America
The rest of the world is worse off than we are. They did the same.
Bring in millions of immigrants to make the US labor force more competitive.
We are the most capitalistic country in the world, for good or bad. But we can make it work better than anywhere else in the world.
Tax the rich and corporations to delete the budget deficit. Clinton did it.
Bring back justice and increase equality. That’s what makes a country great.
Freedom for all.
Healthcare for all.
Education for all.
That’s the dream and the solution to all our problems.
Be careful what you wish for is the old saying. The mighty dollar has and will always be mighty because it represents capitalism and wealth . You think China , Russia , Saudi Arabia and Iran have that status. NOPE
How this affect Australian economy?
The Vietnam war was Lyndon Johnson’s baby along with the Great society spending spree that forced the incoming Nixon to take us off the gold standard. The biden’s and the sentence reluctance to stop the massive spending spree, they are the ones threatening the debt limit. of course this will be settled as it always is. national debt will eventually bury us.
or maybe start another war in a country to keep your Reserve currency. Gone are the days when USA had an upper hand.
Silver , Silver , Silver for Anyone in the Middle Class range . It will replace the Dollar at the Street level of buying , exchanges , and Investments . The only One that would be against this is Our Own Inept Government, and the Democratic Party that has turned the Vote and Taxation into Organized Crime .
the fake paper dollar to which all western currencies are linked is on its last legs. and the war in ukraine which once gets won by russia will mean the end of this economic apartheid practiced by the western world led by a corrupt America. now all paper money will have to be backed by gold which will have to be earned not just printed and used to exploit. threaten and sanction the world. the wholesale loot and destruction of Iraq and libya were prime examples of these crimes. but russia is not iraq
A completely misinformed article on the dollar and everything else.
Great article, thankyou.
comment; While everyone is sitting around waiting for the dollar bomb to explode, WHAT ARE POLITITIONS DOING TO HELP COMBAT WHAT COULD HAPPEN TO THE USD.
this author doesnt have information about the global economics at all.
I’m going to assume you did no research on the author nor the Mises institute.
This article brought to you by…??? Sorry, people, the US Dollar will continue to be the eminent currency for all Western world countries. Don’t let the goonies fool you into thinking China can push the USD off it’s throne.
Nixon giving preferred trading status to China was the biggest F.U. in American history…..and still has it.
actually it was Bill Clinton who gave China most favorite nations status and developing nation status One of the dumbest moves ever. in addition he allowed China as did the rest of our presidents to manipulate their currency which is destroyed the manufacture base of America. funny how few politicians understand this or don’t care.
The analogy of rivers flowing into and out of a reservoir is very nice. The author’s Mises prejudices do shine through in places, like “China has a creeping stranglehold thanks to our idiotic over-regulation.” (It’s amusing to suppose that multinational companies out-sourced production from the free-market US economy to the socialist Chinese one in order to escape regulations.)
Still, all in all, quite a useful analysis.
that is true .the dollar is dead and buried