First and foremost, I'm a lay person. Well, at least when it comes to stocks I'm a lay person. I really don't care much for the way stocks are used, and only invest in the stock market when everyone's running scared. Personally, I look at the big picture and don't get caught up in the minutiae. So with that in mind, I'll give you my take on why doomsday predictors are wrong. The world won't end if the dollar goes to pieces.
Many of us have seen and heard alarms regarding government overspending, national debt, and a host of other problems that can eventually ruin the dollar. We see voters getting bought off with government programs, students with declining math scores, employees that have more brand loyalty as consumers than company loyalty as employees, and the list goes on.
It seems like whenever we hear news about the United States, it's always bad. The deficit's growing. Entitlements are killing the lifeblood of America. Rising taxes are replacing efficient investment with government spending. Bi-partisan politics keep things from improving. And while I happen to think all of these things are true, I'm not scared- not any more.
I like to do thought experiments, so that's what I'll do here. I once heard a wise man say that most problems have simple solutions, and it's people that complicate things when their own interests are jeopardized.
So let's do a simple thought experiment. What if we forgot about the stock market, bonds, derivatives, this quarter's performance, hedge funds and all other things associated with a "sophisticated" economy. In my experience, the more sophisticated a financial mechanism is, the less sense it makes. I end up spending so much energy and time trying to understand it that I'm tired out by the time I should be weighing if I should put my money in it or not.
So let's start from the premise that all this sophistication has gone out the window. If the dollar goes to zero, what that really means is that we'll be forced to measure our assets by their true value. If we ask ourselves the question, "What can I achieve with the tools I have," we'll be able to arrive at the true value of our assets. Can I live in my asset? Can I build with my asset? Can I farm with my asset? Where are there opportunities for added value with my asset? As you can see paper assets answer no in most cases to these questions. All the confusion created by "sophisticated" mechanisms, speculation, currency wars, creative accounting and fiscal strategy will cease to distort the true value of any economy. And quite soon we'll realize that the United States, more so than any other country in the world, is by far the country with the most true value.
Both hard and intangible assets like factories, production capacity, natural resources, nationwide informational connectivity (wireless and internet), nationwide ease of travel (roads and flight), infrastructure, machinery, military technology, weight in the global economy, education and quality of life are so densely found in the United States that the US's true value is completely unmatched by any other country.
The only possible honorary mention of a distant 2nd place can go to China since they've edged out the United States since 2010 for top global manufacturer, but China has little more to offer. Let's take a quick look.
China's taken great strides and continues to do so in many areas of life, but, at best, China is decades away from American-level infrastructure. It's 6.4 years of average schooling per adult is 3rd world. Until its political system changes, it can't be taken seriously by foreign investors and safe-haven seekers. It's a couple of revolutions away from having an empowered people and a government that allows its people to feel empowered. Some might say American empowerment is an illusion, but it's a powerful illusion that can turn many Americans into one person mountain-movers.
As for the European Union, the EU is in shambles and will continue to be in shambles until its member countries resume their own respective currencies.
So to continue with our thought experiment, we've established that the United States is by far the most valuable country in the world. If you're still not convinced, think of it this way. There are a lot more smart and capable Chinese wanting to become American than the other way around.
It is because of this intrinsic value that the US has the distinction of representing the reserve currency. Oil is traded in dollars thanks to a strong strategic program of economic and military leverage. Also, the US is kept relatively safe from invaders by having benign neighbors and two huge bodies of water affording it geopolitical advantages. There is no better option anywhere in the world, even in the midst of American financial turmoil to allocate large sums of money because of true value factors such as these.
But once again, let's return to the idea of currency. What happens if the dollar goes to zero. The least affected country in the world would be the United States. In reality, the United States is not the reserve currency of the world because of its intrinsic value, it is the reserve economy of the world because of its intrinsic value. And only then is it the reserve currency of the world because it is the reserve economy. So if you lose the currency, the value stays. And after the short-lived turmoil and small pockets of riots here and there of a fearful few, good things might even happen.
For instance, ending trillions of dollars in entitlements by paying them off with monopoly money. Middle men and predators of the system that don't contribute to the real value of the economy get left high and dry. It saddens me to admit that the current system is rigged against private equity, and private equity is the father of personally attaining meaningful assets.
As for a return to normalcy and the status quo, which is ultimately the testament to the world not ending if the dollar goes to pieces, those with meaningful assets continue to be wealthy. Consumers who choose to spend and not save, continue to be poor. Meanwhile, behind the scenes, history shows us a high likelihood that a smooth transition would happen to a new "currency" or standard without 99% of the American population knowing about it until the disclosure. We'd be eventually eased into the new "currency" or standard by affable and sympathetic public speakers that would be working and negotiating behind the scenes just as it's happened in every government bailout that the government has entertained in the past 60 years. Being able to perpetually bailout or kill a currency is one of the biggest advantages (perhaps playing chicken) to being the reserve economy and hence reserve currency of the world.
All you'd have to do is print more money to bail people out. So the two moves that the reserve economy can do for its reserve currency is to keep printing money- which it has been doing- or let the dollar die. Either way value is value and nothing can change that. Currency cannot create value anymore than calling a rose by any other name can change its smell.
On a more personal note, currencies allow for mirage-like behavior by ultimately blurring the true value as to what's really there. Market fluctuations can also contribute to this but think about how having a safety deposit box with gold coins as opposed to a piece of paper that says that you own part of a company that owns gold. Both are subject to market fluctuations, but you know what you have in your safety deposit box while the paper option is uncertain. In this case both hedge inflation, but other factors can interfere that might not occur to you until it's too late. So the coins win-out against paper. As a country, though, the US will be fine. Feel bad for the underdeveloped countries that instead of developing assets with their own currency at the appropriate times, ended up buying reserved currency and/or get pneumonia when the US sneezed.