Collapse of Dollar and Impact on Sustainable Development Goals(SDGs)

With whatever we hear and see in the news, it becomes important for us to understand Why Is Collapse of Dollar is so imminent. Is it really the case?

Before we do that it is important that US Dollar dominance is understood well by our readers.

Yet, the dollar’s dominance as the world’s reserve currency has been challenged in recent years. In this essay, we will look at the causes behind the dollar’s collapse and the implications for the global economy.

Let’s discuss this.

Collapse of Dollar: Reasons and Consequences

Since the end of World War II, the US dollar has been the main worldwide currency. It is the most extensively traded currency in the foreign exchange market and has been utilized as the principal reserve currency by central banks globally. Undoubtedly, it is essential to any country’s treasury.

Nowadays, most experts believe that a declining US dollar cannot lose its position as the world’s main currency since there is “no alternative” on the horizon. Yeah, but don’t tell that to the numerous countries scrambling to find an alternative, and further American complacency would just exacerbate the dollar’s demise. Possibly the most serious consequence would be the collapse of the U.S. dollar and its replacement as global trade’s “unit of account.”

Geo-Political Context of Risk of Collapse of Dollar

The major factor contributing to the dollar’s decline is the changing geopolitical landscape. The rise of China as an economic and military power has challenged America’s position as the world’s sole superpower.

Additionally, the increasing tensions between the US and its traditional allies have weakened confidence in the dollar’s long-term stability.

In addition, BRICS (Brazil, Russia, India, China and South Africa) have opened trade channels in their local currency.

And why are emerging nations rebelling now, when global trade has been based on the dollar since the end of World War II? Because the US and its allies have increasingly turned to financial sanctions as a weapon.

Too much trusting in the invincible dollar, the US regarded sanctions as a low-cost alternative to sending soldiers outside US to fight. But, it is paying the price in terms of lost currency allegiances. Countries striking accords to trade without the currency increasingly include longtime adversaries.

US allies like the Philippines, Thailand, and India, although being among the least vocal of the main anti-dollar rebels, have been discussing with the UAE the possibility of doing non-oil commerce in rupees.

Why Gold Prices Are On Steroids?

Gold is a perfect example right now, with a 20% increase in six months. The typical suspects – large and small investors seeking a hedge against inflation and low real interest rates – are not driving the surge in demand.

Instead, the primary buyers are central banks, who are drastically cutting their dollar holdings and looking for a safe haven. Central banks are purchasing more tonnes of gold than at any other time since data collection started in 1950, accounting for a record 33% of monthly worldwide demand for gold.

Now, they account for a record 33% of monthly global gold demand.

This purchasing frenzy has pushed gold prices near record highs, more than 50% higher than what models based on real interest rates would imply. Something new is clearly pushing gold prices.

When it comes to central bank purchasing, nine of the top ten are from emerging countries, including Russia, China, and India.

Not by chance, these three countries are in negotiations with Brazil and South Africa about developing a new currency to compete with the dollar. Their immediate objective is to trade directly with one another in their own currencies.

“Every night, I wonder why all nations have to base their commerce on the dollar,” Brazilian President Luiz Inácio Lula da Silva stated recently during a visit to China, adding that a different currency would help “balance world geopolitics.”

Thus the oldest and most traditional of assets, gold, is now a vehicle of central bank revolt against the dollar. Often in the past, both the dollar and gold have been seen as havens, but now gold is seen as much safer. During the short banking crisis in March, gold kept rising while the dollar drifted down. The difference in the movement of the two has never been so large.

Economic Factors Affecting risk of Collapse of Dollar

Economic factors play a significant role in the declining value of the US dollar. Here are some of the key ways in which economic factors are contributing to the collapse of dollar:

The Slowdown in Economic Growth:

The US economy has experienced a slowdown in growth in recent years.

This has been attributed to a range of factors, including a

The decline in productivity,
An aging population, and
Increasing levels of debt.

A slow-growing economy makes the dollar less attractive to investors, which can lead to a decline in demand for the currency.

Rising Debt Levels:

The US has one of the highest levels of national debt in the world, with debt levels currently exceeding $28 trillion.

High levels of debt can lead to concerns about the government’s ability to repay its creditors, which can lead to a collapse of dollar.

Persistent Trade Deficits:

The US has run persistent trade deficits for many years, meaning that it imports more goods and services than it exports.

This has led to a significant accumulation of foreign debt, which can make the dollar less attractive to investors.

Low-Interest Rates:

The US Federal Reserve has kept interest rates at historically low levels for many years.

This has made it less attractive for investors to hold US dollars, as the returns on their investments are relatively low compared to other currencies.

Political Uncertainty:

Political uncertainty can also have a negative impact on the value of the dollar.

The US has experienced significant political turbulence in recent years, which has led to concerns about the stability of the country’s institutions and policies.

This can make the dollar less attractive to investors, who may seek more stable currencies instead.

Sanctions On Developing Nations

Surprisingly, the United States, the European Union, Japan, and the United Kingdom now penalize 30% of all nations, up from 10% in the early 1990s. Until recently, the majority of targets were tiny.

The major industrialized countries then started a full-fledged sanctions campaign against Russia for its invasion of Ukraine, cutting Russian banks out of the dollar-based global payment system. It was suddenly evident that any growing country might be a target.

At what rate Dollar is Declining

The dollar’s reputation as the currency foreign central banks want to have in reserve is a vital barometer of its strength, and it has been dropping quicker than many people know.

Particularly since the imposition of sanctions on Russia.

According to one measure, the dollar’s proportion in central bank reserves has fallen to 47% from 73% two decades ago, with roughly a third of the drop occurring since the beginning of 2022.

Despite some questioning the dollar’s dominance in the US economy, significant demand for the currency tends to cut the cost of borrowing overseas, a luxury America desperately needs today.

It presently has the second-greatest fiscal and current account deficits after the UK, as well as the second-highest foreign liabilities (as reflected in its net international investment position) after Portugal among the top 20 developed economies.

Rise Of Digital Currencies

At the same time, the number of central banks considering launching their own digital currency has risen to more than 110 since 2020, accounting for 95% of global GDP.

Several countries and people are experimenting with digital currencies for use in bilateral commerce, posing yet another challenge to the dollar.

Narrative On Collapse Of Dollar

The risk for America is that its arrogance develops, fueled by the “no alternative” narrative.

That narrative is based on worldwide faith in American institutions and the rule of law, which is precisely what weaponizing the dollar has undermined.

It is also based on faith in the country’s capacity to pay its obligations, which is eroding as the country’s reliance on foreign finance grows.

Consequences of the Collapse Of Dollar

The collapse of dollar could have significant consequences for the global economy.

A weakened dollar could lead to higher inflation in the US, as imports become more expensive.

Additionally, a collapse of dollar’s value could lead to a decrease in foreign investment in the US economy, further exacerbating the economic challenges faced by the country.

A shift away from the dollar as the primary reserve currency could also lead to increased volatility in the foreign exchange markets.

Impact on Sustainability Development Goals (SDGs)

The risk of the collapse of the dollar(USD) due to USD dominance decline could potentially pose a threat to the achievement of the Sustainable Development Goals (SDGs). Here are some of the ways in which the declining dollar could affect the SDGs:

Reduced Investment

The US dollar has traditionally been the currency of choice for foreign investors.

A collapse of dollar’s value could lead to a decrease in foreign investment in developing countries, which could hamper their ability to achieve the SDGs.

Investment is critical for economic growth, job creation, and poverty reduction, all of which are essential for achieving the SDGs.

Increased Volatility

A shift away from the US dollar as the primary reserve currency could lead to increased volatility in the global economy.

This could lead to economic instability, which could hinder the achievement of the SDGs.

Stable economic growth is essential for achieving the SDGs, as it provides the resources needed to invest in healthcare, education, and other critical areas.

Limited Access to Financing

Many developing countries rely on access to international financing to fund their development projects.

A collapse of dollar could make it more difficult for these countries to access financing, as lenders may be less willing to lend in a depreciating currency.

This could limit their ability to achieve the SDGs, as they may not have the resources needed to fund critical projects.

Increased Debt:

A collapse of dollar could lead to an increase in the debt burden of developing countries.

Many developing countries have borrowed in US dollars, and a collapse of dollar’s value could make it more difficult for them to service their debts.

This could limit their ability to invest in critical areas such as healthcare and education, which could hinder the achievement of the SDGs.

Conclusion

The dollar’s final line of defense is the state of China, which is the only economy large and centralized enough to threaten US currency supremacy but is also heavily indebted and institutionally broken.

When a colossus begins to rely on the weaknesses of competitors, it’s time to take a long, hard look in the mirror. When confronted with a “barbaric relic” like gold and new challengers like digital money, it should seek methods to increase trust in its finances rather than taking its financial powerhouse status for granted

Checkout the book The Modern Survival Manual: Surviving the Economic Collapse

FAQs : USD Dominance Decline and risk of Collapse of Dollar

What is USD dominance decline or risk of collapse of Dollar mean?

USD dominance decline or risk of collapse of dollar refers to a scenario where the US dollar loses its status as the dominant global reserve currency, meaning that it is no longer the currency that countries hold in large amounts to use for international trade and finance transactions.

What could cause the collapse of the dollar (USD)?

Several factors can contribute to USD dominance decline which can result in to collapse of dollar, including the rise of competing currencies such as the euro and the Chinese yuan, shifts in global economic power and trade patterns, and changes in monetary policies and regulations.

What are the potential consequences of USD dominance decline?

The consequences of USD dominance decline are complex and depend on many factors, but they could include the collapse of dollar, higher borrowing costs for the US government, and changes in global trade and investment patterns.

How likely is USD dominance decline?

It is difficult to predict the likelihood of USD dominance decline with certainty, but some experts believe that the long-term trend is toward a more multipolar global monetary system, in which no single currency dominates.

What steps can the US take to mitigate the USD dominance decline and arrest the collapse of dollar?

Some analysts suggest that the US could take steps such as promoting the greater international use of the US dollar through trade agreements and financial regulations, reducing its trade and budget deficits, and improving its economic competitiveness through investments in infrastructure and innovation.

What are SDGs?

SDGs, or Sustainable Development Goals, are a set of 17 goals established by the United Nations to achieve a sustainable and equitable future for all. These goals cover a wide range of issues, including poverty, hunger, health, education, gender equality, clean water and sanitation, renewable energy, and sustainable economic growth.

How are SDGs related to USD dominance decline and affected by the collapse of dollar?

USD dominance decline can potentially impact the ability of countries to achieve their SDGs, as many of the SDGs require significant financial resources that are often obtained through international trade and investment. A decline in the use of the US dollar for these transactions could affect the availability and cost of financing, which could in turn affect progress toward the SDGs.

Can SDGs be achieved without a dominant global reserve currency?

Yes, SDGs can be achieved without a dominant global reserve currency, as long as there are other means of financing and facilitating international trade and investment. This could include the use of multiple currencies, the development of new financial instruments and institutions, and increased investment in domestic resources and infrastructure.

How can the international community support SDGs in the context of USD dominance decline?

The international community can support SDGs by promoting greater financial inclusion and transparency, investing in sustainable infrastructure and technologies, and supporting innovative financing mechanisms such as impact investing and green bonds. Additionally, international cooperation and dialogue are important for addressing global economic imbalances and promoting sustainable and equitable economic growth.

What are some potential opportunities for SDGs in the context of USD dominance decline followed by collapse of dollar?

The decline of USD dominance could create opportunities for increased collaboration and innovation in international finance and trade, as well as increased investment in sustainable infrastructure and technologies. Additionally, a more multipolar global monetary system could potentially lead to greater financial inclusion and reduce economic inequalities.