Finance
Can the U.S. Dollar Collapse? You Asked, Ron Paul Answered
Image CC BY-SA 2.0 via Gage Skidmore
Birch Gold Group customer question: “Can the U.S. dollar collapse?”
Yes, theoretically, the U.S. dollar can collapse. The dollar, like every other major currency around the world, is not backed by any tangible asset such as gold or silver.1 Instead, it is backed solely by the "full faith and credit" of the United States government. This means its value relies on the belief and confidence that people have in the U.S. government's ability to manage its finances responsibly and meet its obligations.
For more context, let me answer a couple of other questions.
What is a strong dollar?
When people talk about a “strong dollar,” they’re usually talking about how many pieces of other paper money a dollar can buy.
Five years ago, one dollar could buy 107 Japanese yen. Today, one dollar buys 156 yen. That means the dollar is stronger than the yen!
Now, if you’re a foreign currency trader or you’re shopping for real estate in Tokyo, this probably matters to you. For the vast majority of Americans, though, it’s totally irrelevant. (I wrote a previous column explaining what a “strong dollar” really means.)
The primary measurement of the dollar’s strength is the “dollar index” (DXY). This measures the relative purchasing power of the dollar compared to a basket of other currencies:
- Euro: 57.6% weight
- Japanese yen: 13.6% weight
- Pound sterling: 11.9% weight
- Canadian dollar: 9.1% weight
- Swedish krona: 4.2% weight
- Swiss franc: 3.6% weight
This index was developed in 1973 and only updated once since (in 1999 when five European currencies were replaced by the euro). That’s why it’s so out of sync with America’s current trading partners. For example, I have no idea why Sweden and Switzerland are on that list.
The most important thing to understand is that dollar strength or weakness is relative to a handful of other currencies, which is simply meaningless to most Americans.
Is the dollar falling?
There are two ways of answering this question.
First, the dollar index I just mentioned fluctuates constantly. On any given day, it might be rising or falling. I don’t pay much attention because I don’t do my shopping in pounds sterling or krona.
Second, and much more importantly, is the dollar falling in purchasing power here in the U.S.? Yes it is! We call that inflation. You can also call it “dollar devaluation” or “currency debasement,” but it’s essentially the same thing.
According to official CPI measures from the Bureau of Labor Statistics (which are nonsense), we’ve seen an overall price increase of 20% since January 2021.2 Stated another way: We’ve seen 20% of our purchasing power destroyed in little more than three years.
Is the dollar falling relative to other currencies? Who cares?
Is your dollar falling in terms of purchasing power? Yes.
What’s the difference between “falling” and “collapsing” though?
Can the U.S. dollar collapse?
Yes. First, its purchasing power (which is what matters to us most) already has:
- -96.9% since 1913
- -87% since the end of the Bretton-Woods gold standard in 1971
- -20% since January 2021
You might argue these aren’t “collapses” though, simply declines. I think the difference only becomes apparent in hindsight. After inflation has destroyed the dollar’s remaining purchasing power.
Historically, we have seen numerous examples of currencies collapsing when faith in the issuing nation’s credibility and responsibility fades.3 From the German mark during the Weimar Republic to more recent examples like the Venezuelan bolivar or the Argentine peso, hundreds of currencies have failed over the past couple of centuries.
Every time their respective governments engaged in reckless money-printing, excessive debt accumulation and irresponsible spending.
Currently, what prevents dollar collapse is its position as global reserve currency. That means there’s a lot of dollar demand for use in international trade. This demand is critical, because the dollar’s relative value is based solely on supply and demand.
However, this doesn’t guarantee dollar dominance. Every time the Treasury Department issues new debt, every time the federal government runs another deficit, global confidence in the dollar’s stability declines.
This year, the federal government will spend more on debt service payments than on defense!
That’s a crucial turning point. To understand why, you have to understand this little joke:
Q: What is a currency?
A: A piece of paper with an army behind it.
To sum up:
- The dollar has already collapsed in terms of purchasing power.
- From a global perspective, dollar strength or weakness is based on other (inflated) currencies – which are mostly meaningless to you and me.
Is it possible to reverse the dollar’s collapse?
No. A massive reduction in government debt and a Federal Reserve focused on reducing the money supply could slow, even stop, the ongoing loss of purchasing power. That doesn’t replace what’s already lost.
This is the primary reason it’s a mistake to think of currency as a store of value. That’s why every stable form of money in human history has been based on gold or silver. Don’t expect any government to willingly return to a gold standard. At least not until they’ve ridden the collapse all the way to the bottom.
They won’t return us to the gold standard – so each of us should consider whether we should put ourselves on our own, personal gold standards.
BGG - About the Author 
About Ron Paul
Ron Paul is a medical doctor, a retired Captain of the U.S. Air Force, an author who’s published 21 books and former twelve-term U.S. Congressman representing the state of Texas. He’s emerged as one of the leading voices challenging government’s addiction to deficit spending and the Federal Reserve’s wealth-destructive monetary policies. He works with Birch Gold Group to educate Americans about the threats to their financial futures, and how to protect themselves and their families. Outside of Birch Gold, you can find him on Facebook and X.
BGG - About the Reviewer About the reviewer Peter Reagan
Peter Reagan has covered precious metals and the economy for Birch Gold Group for over 15 years. His articles have been featured in several leading publications, including Newsmax and Zerohedge. At Birch Gold Group, Peter leverages his deep market insights to help educate website visitors and customers on why they should consider diversifying their savings into gold and other precious metals, and how that process works. Due to this commitment to education, his content has become a trusted source of information throughout the industry.
Sources
- “Fiat Money: What It Is, How It Works.” https://www.investopedia.com/terms/f/fiatmoney.asp
- “Consumer Price Index.” U.S. Bureau of Labor Statistics. https://www.bls.gov/cpi/
- “Hyperinflation: What Drives It and How It Can Be Prevented.” International Monetary Fund. https://www.imf.org/en/Blogs/Articles/2021/01/25/hyperinflation-what-drives-it-and-how-it-can-be-prevented
BGG - CTA Option 2 