The U.S. dollar is currently under immense pressure for three reasons. Here they are.
1. Central Banks Ditching the U.S. Dollar
Back in 1970, when the gold standard was thrown out the window, central banks around the world bought U.S. dollars as their reserve currency. They believed in the dollar, and they held it in their foreign exchange reserves.
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Now the U.S. dollar makes up much less of a portion of the reserve currencies of central banks than it did in the 1970s. This tells us that trust in the Greenback is diminishing.
To give you further perspective, in the first quarter of 2001, the U.S. dollar made up 71% of the allocated reserves. Fast forward to the third quarter of 2016, and it was 63%. (Source: “Currency Composition of Official Foreign Exchange Reserves (COFER),” International Monetary Fund, last accessed March 21, 2017.)
2. Rise of New Currencies
Have you paid attention to the Chinese yuan lately?
In 2016, it was recognized as one of the currencies in the special drawing rights (SDRs) by the International Monetary Fund (IMF), as it was the sixth most used currency for trade around the world. (Source: “RMB internationalisation stalls in 2016,” SWIFT, January 26, 2017.)
But it’s not just the increasing popularity of the Chinese yuan that could hurt the value of the Greenback. With the emergence of currencies like Bitcoin, the role they will play is a big unknown.
3. Reckless Government Spending, Skyrocketing National Debt
Throughout the history of mankind, any country with a government that spent without remorse and racked up a huge national debt eventually saw its currency collapse. Why would the fate of the U.S. dollar be any different?
The U.S. national debt now stands at around $20.0 trillion, the highest nominal national debt held by any country in the world. And sadly, it’s only expected to increase. The government has been spending more than it takes in for years now.
How Soon Could the Dollar Collapse?
Let me make it very clear: I don’t expect the dollar’s collapse to happen quickly. I believe it will happen in steps. First, the Greenback will deteriorate slowly against other currencies and, when it fails to regain its value, we could see much a faster decline. A mass exodus could happen in which central banks and other institutions ditch the dollar quickly and run to buy other assets like gold (believe me; it will happen).
A country with a collapsing currency offsets that collapse by raising interest rates. The theory is that higher interest rates will keep foreigners interested in the currency. On the flip side, higher interest rates are poison to the stock market, the real estate market, and the economy in general.
So when looking at your investment portfolio long-term, you should really build in some form of a hedge against a declining U.S. dollar. Precious metals, such as silver and gold, would be ideal hedges against paper money.
