Three conditions must be in place before the dollar could collapse. First, there must be an underlying weakness. That situation exists in 2017. The U.S. currency is fundamentally weak despite its 25 percent increase since 2014. The dollar declined 54.7 percent against the euro between 2002 and 2012. Why? The U.S. debt almost tripled during that period, from $6 trillion to $15 trillion. The debt is even worse now, at $20 trillion. The debt-to-GDP ratio is now more than 100 percent. That increases the chance the United States will let the dollar's value slide. That's because it would be easier to repay its debt with cheaper money.
Second, there must be a viable currency alternative for everyone to buy. The dollar's strength is based on its use as the world's reserve currency.
The dollar became the reserve currency in 1973 when President Nixon abandoned the gold standard. As a global currency, the dollar is used for 43 percent of all cross-border transactions. That means central banks must hold the dollar in their reserves to pay for these transactions. As a result, 61 percent of these foreign currency reserves are in dollars.
The next most popular currency after the dollar is the euro. But it comprises less than 30 percent of central bank reserves. The eurozone debt crisis weakened the euro as a viable global currency.
China and others argue that a new currency should be created and used as the global currency. China's central banker Zhou Xiaochuan goes one step further. He claims that the yuan should replace the dollar to maintain China's economic growth. China is right to be alarmed at the dollar's drop in value. That's because it is the largest foreign holder of U.S. Treasurys, so it just saw its investment deteriorate.
Could bitcoin replace the dollar as the new world currency? It has many benefits. It's not controlled by any one country's central bank. It is created, managed, and spent online. It can also be used at brick-and-mortar stores that accept it. Its supply is finite. That appeals to those who would rather have a currency that's backed by something concrete, such as gold.
But there are big obstacles. First, its value is highly volatile. That's because there is no central bank to manage it. Second, it has become the coin of choice for illegal activities that lurk in the deep web.
That makes it vulnerable to tampering by unknown forces.
...a third condition. That's a huge economic triggering event that destroys confidence in the dollar.
Altogether, foreign countries own more than $5 trillion in U.S. debt. If China, Japan or other major holders started dumping these holdings of Treasury notes on the secondary market, this could cause a panic leading to collapse. China owns $1 trillion in U.S. Treasurys. That's because China pegs the yuan to the dollar. This keeps the prices of its exports to the United States relatively cheap. Japan also owns more than $1 trillion in Treasurys. It also wants to keep the yen low to stimulate exports to the United States. Japan is trying to move out of a 15-year deflationary cycle. The 2011 earthquake and nuclear disaster didn't help.
Would China and Japan ever dump their dollars? Only if they saw their holdings declining in value too fast and they had another export market to replace the United States. The economies of Japan and China are dependent on U.S. consumers. They know that if they sell their dollars, that would further depress the value of the dollar. That means their products, still priced in yuan and yen, will cost relatively more in the United States. Their economies would suffer. Right now, it's still in their best interest to hold onto their dollar reserves. China and Japan are aware of their vulnerability.
Our real conflict with Iran occurred because we overthrew their democratically elected leader. The oil company, now known as British Petroleum, lost its stronghold on Iranian oil. The British and the Americans would not have that. They inserted a dictator, the Shah of Iran, until the Iranian people rose up and innocent Americans were caught in between. Americans must know the history before we blindly decide that war with Iran is morally right. The Iranians have more to fear from us than we from them.
One should note that America is playing the same game in Venezuela. Venezuela is sitting on top of one of the largest reserves of oil, if not the largest in the world. Yet most in the country are poor. The only folks who got rich off of the oil was the Venezuelan plutocracy and foreign companies. They willed Hugo Chavez into existence and now they're willing Nicolas Maduro to effect some sort of Bolivarian revolution in an attempt to bring some sort of redistribution to what was stolen. America does not approve.
In response to sanctions from Washington, Venezuela has started reporting its oil prices in Chinese yuan, going against the international trend of listing prices in US dollars.On Friday, the weekly Oil Ministry bulletin published its prices for September in yuan, rather than the US dollar. The price-per-barrel posted on Friday was 306.26 yuan, or $46.76 on the more commonly-used exchange rate, up from last week’s price of 300.91 yuan, or $46.15.
“This format is the result of the announcement made on September 7th by the President [Nicolas Maduro]... that Venezuela will implement new strategies to free the country from the tyranny of the dollar,” the Venezuelan Oil Ministry said in a statement.
The decision to move to Chinese currency was made last week as a way to get around the sanctions imposed on Venezuela by the US government in August, which froze some Venezuelan assets and prohibited American citizens from doing business with the country.
This has hurt Venezuela’s oil exports at a time when the country is facing a severe economic crisis. At the time, the White House said the sanctions were “carefully calibrated to deny the Maduro dictatorship a critical source of financing”.
“The market is dominated by transactions with the US dollar, and we must develop other ways to conduct international transactions,” Finance Minister Ramon Lobo told VTV earlier.
Venezuela’s decision follows plans announced by China to start a crude oil futures contract priced in yuan and convertible into gold, which could lead to the emergence of a new Asia-based crude oil benchmark.
As China is the world’s biggest crude buyer, the new contract may allow exporters to bypass American sanctions by trading oil in yuan, something that has interested countries such as Russia and Iran.
“In 2012, Iran began to accept yuan for its oil and gas payments, followed by Russia in 2015,” political writer Dan Glazebrook wrote in a column for RT in June.
“If this takes off, this could literally spell the beginning of the end of US global power. The dollar is the world's leading reserve currency, in the main, only because oil is currently traded in dollars. Countries seeking foreign exchange reserves as insurance against crises within their own currencies tend to look to the dollar precisely because it is effectively ‘convertible’ into oil, the world's number one commodity.”