Economy
The concept of the US dollar failing seems so far-fetched that it almost seems outside the realm of possibility. For nearly 80 years the dollar has been the world’s reserve currency, and it remains one of the most widely used currency for international transactions and the most used currency for foreign exchange reserves.
Yet throughout history currencies have come and gone. The British pound, for instance, once served as the world’s reserve currency until the dollar eclipsed it. And it’s not outside the realm of possibility for the dollar to suffer the same fate.
How that would happen, on what timeline, and what would replace the dollar are all matters of debate however. Other fiat currencies don’t seem to have the same demand as the dollar, nor do they seem to be making particular inroads into the dollar’s dominance.
Precious metals once backed major world currencies, with those currency units being defined as units of gold and silver. And there are always rumors that the dollar’s replacement could end up being a gold-backed currency.
In an era in which governments gain so much from unbacked fiat currencies, it seems bizarre to imagine that governments would willingly place themselves once again under the confining strictures of a gold-backed currency.
But given the high inflation of the past few years, maybe that’s not so unimaginable after all. And if the dollar ends up failing and being replaced by a gold-backed currency, what could that mean for precious metals?
To say that the dollar has seen better days isn’t really in doubt. Thanks to persistent inflation over the past 100+ years, what took $1 to purchase in 1913 now takes more than $31. That’s a 97% loss of purchasing power.
But the dollar’s loss of purchasing power won’t be stopped anytime soon. With ever more inflation, each year sees the dollar’s purchasing power continue to erode. Here are three major problems weighing on the dollar.
The US government has never been good about controlling its spending. But in recent years that problem seems to have gotten much worse.
The growth of the national debt has accelerated since 2008, and is starting to reach the point at which it is creating significant problems for the government. From $10.6 trillion at the beginning of 2009, the national debt has grown to over $33.6 trillion today, an annualized growth rate of about 8% per year.
Projections for the future aren’t that great either. The government already missed its Fiscal Year 2023 goals, with the deficit rising from an expected $1.4 trillion to what will likely be $2 trillion. And future fiscal years are already projected to see deficits of up to $2 trillion, which could very well increase.
No one in Washington seems to have any understanding of the situation the government is in. Total interest expense on the national debt was $883 billion in FY 23, an enormous sum that eclipses the amount of authorized spending on national defense.
As deficit spending increases, as the national debt climbs, and as interest rates rise, that sum will only grow. Before long, the government will have to make hard decisions on how to spend its money.
As interest service costs rise, the federal government will have to choose which government programs it cuts in order to pay the interest on the national debt. Paying that interest is an absolute must, as failing to pay it means that the government has defaulted on its obligations, which would lead to even more expensive debt costs.
But if the government decides that it wants to both service its debt and NOT make any cuts to spending, there’s only one way to do that: issuing ever more debt and running higher budget deficits. As that debt gets monetized after issuance, it will likely result in higher inflation and further reduction of the dollar’s purchasing power.
One of the major budgetary issues facing the government that has been flying under the radar is the fate of Social Security. As of right now, the Social Security trust fund is expected to run out in 2033. At that time Social Security tax income will only be able to cover 77% of expected benefit payments.
The fixes required to ensure the long-term fiscal sustainability of Social Security require either a 28% increase in Social Security taxes or a 25% immediate cut in benefits. Neither of those is politically palatable, and no one in Washington is focused on the issue.
Between war funding, debt limit crises, and threats of government shutdown, Washington’s attention is elsewhere. The longer Congress ignores the problem, the more difficult it becomes to solve and the more painful the solution becomes.
If Congress were to try to fix the shortfall with additional funding that didn’t come from tax revenues, that would mean coming up with hundreds of billions of dollars that it doesn’t have, meaning yet more debt and more interest payments.
For years the American public was lulled into a false sense of security through low inflation rates. The Federal Reserve targeted an inflation rate of 2% per year, which it was able to maintain for a long time.
But the trillions of dollars of federal spending that occurred in 2020 required massive debt issuance at a time when stock markets were crashing and bond markets were freezing. The Fed stepped into the breach and monetized much of that debt, eventually more than doubling the size of its balance sheet and boosting the money supply by over 30%.
This money wasn’t neutralized in any way, unlike the post-2008 quantitative easing, and so we eventually saw inflation starting to rise. It peaked at 9%, then dropped to as low as 3%, and is now back up to 3.7%.
Where inflation will go from here is anyone’s guess. While the Fed is committed right now to shrinking its balance sheet and lowering the money supply, what happens when the economy falls into recession? Will the Fed return to quantitative easing, risking a return of rising inflation?
The higher inflation rises, the more the dollar’s purchasing power erodes, and the higher the likelihood the dollar is to fail. But how long might that take, and what would it look like?
The dollar today is one of the most demanded currencies in international trade. It makes up 88% of foreign exchange transactions and 59% of foreign exchange reserves.
While that latter figure is declining, it’s not doing so at an alarming rate. Right now it looks like an eventual dollar failure will likely be slow and steady, and not the result of a one-time crash.
If foreign governments, businesses, and individuals pivot from using the dollar to using other currencies or forms of money, demand for the dollar will fall. And that could exacerbate the problems we’re already facing with the dollar.
Without a large international market for dollars, the US government can’t continue to create trillions of dollars of debt to fund its reckless spending. If the government tried to keep on doing business as usual, it could very well end up in an inflationary spiral that could lead to the dollar’s ultimate demise.
The question most people have, however, is what would replace the dollar?
The euro, yuan, pound, yen, and other currencies aren’t really any better. But in some quarters there is speculation that gold or some form of gold-backed currency could replace the dollar.
Whether that would take the form of a new gold-backed currency intended for international trade, gold backing for an existing currency, or some other scheme remains to be seen. But the fact that gold is even in the discussions is a sign that some governments are wary of the problems with unbacked fiat currency.
If the dollar fails, and if it ends up being replaced with some form of gold-backed currency, there’s a good chance that gold and precious metals prices could rise. After all, if gold becomes money again, demand for gold could increase significantly.
Owners of gold and silver could find that the value of their precious metals holdings might rise quite a bit if a gold-backed currency supplants the dollar. And many people are already positioning themselves to take advantage of that potential.
Central banks around the world have been adding gold to their balance sheets at a rate that hasn’t been seen in decades. By some estimates global government gold holdings are at their highest levels ever. But central banks aren’t the only ones buying.
Gold demand from investors around the world has been strong for the past several years. While demand for exchange-traded products like ETFs has jumped around a bit, demand for physical gold coins and bars has remained strong.
There are numerous ways to benefit from owning physical gold too. Since the late 1990s, Americans have been able to buy gold and other precious metals through a precious metals IRA. These IRAs offer the same tax benefits as other IRA accounts, but they’re able to own physical gold and silver coins and bars.
Precious metals IRAs can be funded through tax-free rollovers from existing tax-advantaged retirement accounts such as a 401(k), 403(b), TSP, IRA, or similar account. That allows you to safeguard your savings with precious metals.
For those who don’t want to touch their retirement accounts, there’s always the option of a direct cash purchase of precious metals. Whichever way you choose to buy gold, Goldco has options available to you.
With over $2 billion in precious metals placements, Goldco has helped thousands of customers buy gold. Our more than 5,000 5-star reviews are a testament to our commitment to quality products and exceptional customer service.
If you’re worried about the potential failure of the dollar, or of a coming recession, or are worried about the impact inflation will have on your savings, maybe gold is what you need. Call Goldco today to learn more about you can benefit from owning gold.
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