Will the dollar survive the economic crisis?
The recent economic crisis led governments, especially the US government, to go deeper into debt and use trillions of dollars to inject them into the economy. What will be the effect of this to our currencies and to the US Dollar? Will it still be the reserve currency in a few years? This essay wants to warn about the possibility of inflation and a bigger crisis as a result of governments’ reaction to the crash of 2008.
Governments around the world want to assure us that they avoided catastrophe by spending trillions on programs to stimulate the economy. But rather than spending money they already had Western governments only increased debt levels. One of the main reasons for our economic downturn is that we did not save and produce enough. Especially the United States financed its growth by consumption and increasing levels of debt. This growth was the result of a bubble which has already begun to implode. However, rather than addressing the fundamental problems the new administration in the US, as well as the old one, and most European countries try to inflate it once again by making it easier to get into debt and by printing money. With the exception of China and a few other countries they also focus on stimulating consumption instead of production. This will lead to even bigger problems in the next months or years.
While China may have an interest in financing US debt at the moment it is not possible that this continues without end. Once they stop buying the US Dollar massive inflation in America is guaranteed and the US Dollar will lose its status as the world’s reserve currency. The Dollar would decline and the Yuan would rise. Purchasing power would transfer from the West to the Asian producers. Hong Kong and Singapore would replace New York and London as the major financial cities of the world.
China has been pursuing a policy of buying gold since the early 2000’s. Gold is perceived to be a security against inflation and it is the reason the US Dollar became reserve currency in the first place. Up until 1971 the US Dollar was redeemable in gold. That meant it could be exchanged with gold and thus the power of the government to print new money to finance debt was limited. Richard Nixon, however, decided to end this and to make the dollar a worthless paper, resulting in a nation that financed its growth by credit. As it becomes increasingly clear that it is impossible to pay back this debt we will see the next crisis coming.
As has been demonstrated, the US Dollar faces a grave challenge and is likely to cease being the world’s reserve currency. The reasons are the incredible amount of debt accumulated by the US government and the Dollar not being backed by any value. If this continues to take its course the next major economic crisis will be a currency crisis and might alter the balance of powers in the world.
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