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If the dollar collapses, what happens to foreign currencies?

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Captain Cucumber

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I have heard meany people say that if the USD collapses, all other fiat currencies will collapse with it. Why would this be? I understand that the USD is the world's reserve currency but I don't understand how this would cause other curriencies to collapse.

I would recommend getting an intoductory economics book to clarify the issues.

But to summarise:

All currencies cannot collapse at the same time since currencies operate in pairs. Ie if USD appreciates against GBP, then this means GBP has depreciated against USD. But all currencies could collapse against commodities,ie real wealth such as gold, bread, textiles etc. This would simply mean that gold, bread, etc would sky rocket in price (hyperinflation), but the relative prices of currencies would remain the same. If one country experiences hyperinflation it does not necessarily mean other countries will.

The dollar's status as reserve currency wouldn't affect other countries, but it would delay hyperinflation in the USA in general, since central banks around the world buy up excess dollars. But the dollar's status as reserve currency is being slowly diluted as central banks start to buy up euros - http://en.wikipedia.org/wiki/Reserve_currency .

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I have heard meany people say that if the USD collapses, all other fiat currencies will collapse with it. Why would this be? I understand that the USD is the world's reserve currency but I don't understand how this would cause other curriencies to collapse.

You need to differentiate between a bout of inflation and a true collapse of the dollar. It is likely that the massive debt being piled up by the U.S. will necessitate a monetization (that is, we will print dollars to pay debts), which will significantly reduce the goods-value of a dollar. If and when that happens, it is very likely that other nations with similar debt ratios will see a devaluation of their currency, but others with a more serviceable debt structure may get through unscathed.

However, if the dollar truly collapses, that is, becomes untenable as a means of exchange, it will be because of a massive paradigm shift that invalidates the concept of a currency backed solely by "full faith and credit." If enough people (that is, large states) demand an asset-backed currency, based on gold, symmetals or some other basket of goods, then the unbacked dollar will collapse, and, being the strongest of all unbacked currencies, logically lead to the collapse of fiat currencies in general.

In fact, if a single large economy, China, for instance, were to introduce an asset-backed currency, we would probably see a rush from dollars to that currency, and a collapse of fiats. The migration from gold to fiat was globally coordinated, and had to be, as any one major player holding out would have found its currency becoming a de facto standard. The U.S. and its economic allies maintained the gold standard lie until it was clear that no leading currencies were effectively backed by gold.

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  • 5 months later...

I agree with Agrippa1, it is not a collapse of the US dollar that would cause a flight from all major currencies, but a country choosing to back its currency with a non-inflatable commodity or allowing its citizens to use competing currencies such as precious metals. It is possible that the US dollar could tank at the same time that all other currencies tank, but I would say that's highly unlikely because every single central bank in the world will not choose to inflate at the same time. If you're talking about the major currencies--the Yen, the Euro, and the dollar, then that's different because they're all actively devaluing their currencies right now. But the currencies of smaller countries are doing fine right now like the Australian dollar, the Swiss Franc, and the New Zealand dollar. I think they may even be hitting all time highs against the US dollar.

I think that if the US continues on its present course of deficit spending then foreign countries will stop buying US T-bills. At that point the US will be forced to introduce austerity measures or inflate. I think the more likely option based on the attitudes of today will be to inflate. If the US starts to inflate to pay the debt at a rate of a trillion or two per year, then the dollar will lose its status as the reserve currency pretty fast unless Europe has major problems. For the American consumer it will mean rapidly rising prices regardless of what happens in Europe.

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