https://youtu.be/N8IyDSrMY3w
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When the crash occurs, these parties will demand assets denominated in anything other than dollars. The collapse of the dollar means that everyone is trying to sell their dollar-denominated assets, and no one wants to buy them. This will drive the value of the dollar down to near zero. It makes hyperinflation look like a day in the park.
Two Conditions That Could Lead to the Dollar Collapse
Two conditions must be in place before the dollar could collapse.
First, there must be an underlying weakness. As of 2017, the U.S.
currency was fundamentally weak despite its 25 percent increase since
2014. The dollar declined 54.7 percent against the euro between 2002 and 2012. Why? The U.S. debt almost tripled during that period, from $6 trillion to $15 trillion. The debt is even worse now, at $21 trillion, making the debt-to-GDP ratio
more than 100 percent. That increases the chance the United States will
let the dollar's value slide as it would be easier to repay its debt
with cheaper money.
Second, there must be a viable currency alternative for everyone to buy. The dollar's strength is based on its use as the world's reserve currency. The dollar became the reserve currency in 1973 when President Nixon abandoned the gold standard. As a global currency, the dollar is used for 43 percent of all cross-border transactions. That means central banks must hold the dollar in their reserves to pay for these transactions. As a result, 61 percent of these foreign currency reserves are in dollars.
Note: The next most popular currency after the dollar is the euro. But it comprises less than 30 percent of central bank reserves. The eurozone debt crisis weakened the euro as a viable global currency.
Second, there must be a viable currency alternative for everyone to buy. The dollar's strength is based on its use as the world's reserve currency. The dollar became the reserve currency in 1973 when President Nixon abandoned the gold standard. As a global currency, the dollar is used for 43 percent of all cross-border transactions. That means central banks must hold the dollar in their reserves to pay for these transactions. As a result, 61 percent of these foreign currency reserves are in dollars.
Note: The next most popular currency after the dollar is the euro. But it comprises less than 30 percent of central bank reserves. The eurozone debt crisis weakened the euro as a viable global currency.
China and
others argue that a new currency should be created and used as the
global currency. China's central banker Zhou Xiaochuan goes one step
further. He claims that the yuan should replace the dollar to maintain China's economic growth.
China is right to be alarmed at the dollar's drop in value. That's
because it is the largest foreign holder of U.S. Treasury, so it just
saw its investment deteriorate. The dollar's weakness makes it more
difficult for China to control the yuan's value compared to the dollar.
Could bitcoin replace the dollar as the new world currency? It has many benefits. It's not controlled by any one country's central bank.
It is created, managed, and spent online. It can also be used at
brick-and-mortar stores that accept it. Its supply is finite. That
appeals to those who would rather have a currency that's backed by
something concrete, such as gold.
But there are big obstacles. First, its value is highly volatile. That's because there is no central bank to manage it. Second, it has become the coin of choice for illegal activities that lurk in the deep web. That makes it vulnerable to tampering by unknown forces.
Economic Event to Trigger the Collapse
These two situations make a collapse possible. But, it won’t occur
without a third condition. That's a huge economic triggering event that
destroys confidence in the dollar.
Altogether, foreign countries own more than $5 trillion in U.S. debt. If China, Japan or
other major holders started dumping these holdings of Treasury notes on
the secondary market, this could cause a panic leading to
collapse. China owns $1 trillion in U.S. Treasury. That's because China pegs the yuan to
the dollar. This keeps the prices of its exports to the United
States relatively cheap. Japan also owns more than $1 trillion in
Treasurys. It also wants to keep the yen low to stimulate exports to the United States.
Japan is trying to move out of a 15-year deflationary cycle. The 2011 earthquake and nuclear disaster didn't help.
Would China and Japan ever dump their dollars? Only if they saw their holdings declining in value too fast and they had another export
market to replace the United States. The economies of Japan and China
are dependent on U.S. consumers. They know that if they sell their
dollars, that would further depress the value of the dollar. That means
their products, still priced in yuan and yen, will cost relatively more
in the United States. Their economies would suffer. Right now, it's
still in their best interest to hold onto their dollar reserves.
Note: China and Japan are aware of their vulnerability. They are selling more to other Asian countries that are gradually becoming wealthier. But the United States is still the best market (not now) in the world.
Note: China and Japan are aware of their vulnerability. They are selling more to other Asian countries that are gradually becoming wealthier. But the United States is still the best market (not now) in the world.
When Will the Dollar Collapse?
It's unlikely that it will collapse at all. That's because any of the
countries who have the power to make that happen (China, Japan, and
other foreign dollar holders) don't want it to occur. It's not in their
best interest. Why bankrupt your best customer? Instead, the dollar will
resume its gradual decline as these countries find other markets.
Effects of the Dollar Collapse
A sudden dollar collapse would create global economic turmoil.
Investors would rush to other currencies, such as the euro, or other
assets, such as gold and commodities. Demand for Treasurys would plummet, and interest rates would rise. U.S. import prices would skyrocket, causing inflation.
U.S. exports would be dirt cheap, given the economy a brief boost. In the long run, inflation, high interest rates, and volatility would strangle possible business growth. Unemployment would worsen, sending the United States back into recession or even a depression.
How to Protect Yourself
Protect yourself from a dollar collapse by first defending yourself from a gradual dollar decline.
Important: Keep your assets well-diversified by holding foreign mutual funds, gold, and other commodities.
A dollar collapse would create global economic turmoil. To respond to this kind of uncertainty, you must be mobile. Keep your assets liquid, so you can shift them as needed. Make sure your job skills are transferable. Update your passport, in case things get so bad for so long that you need to move quickly to another country. These are just a few ways to protect yourself and survive a dollar collapse.
Important: Keep your assets well-diversified by holding foreign mutual funds, gold, and other commodities.
A dollar collapse would create global economic turmoil. To respond to this kind of uncertainty, you must be mobile. Keep your assets liquid, so you can shift them as needed. Make sure your job skills are transferable. Update your passport, in case things get so bad for so long that you need to move quickly to another country. These are just a few ways to protect yourself and survive a dollar collapse.
US Trade Deficit With China and Why It's So High
The Real Reason American Jobs Are Going to China
The U.S. trade deficit with China
was $375 billion in 2017. The trade deficit exists because U.S. exports
to China were only $130 billion while imports from China were $506
billion.
The United States imported
from China $77 billion in computers and accessories, $70 billion in
cell phones, and $54 billion in apparel and footwear. A lot of these
imports are from U.S. manufacturers that send raw materials to China for
low-cost assembly. Once shipped back to the United States, they are
considered imports.
In 2017, China imported from America $16 billion in commercial aircraft, $12 billion in soybeans, and $10 billion in autos. In 2018, China canceled its soybean imports after President Trump started a trade war. He imposed tariffs on Chinese steel exports and other goods.
In 2017, China imported from America $16 billion in commercial aircraft, $12 billion in soybeans, and $10 billion in autos. In 2018, China canceled its soybean imports after President Trump started a trade war. He imposed tariffs on Chinese steel exports and other goods.
Current Trade Deficit
As of July 2018, the United States exported a total of $74.3 billion
in goods to China. It imported $296.8 billion, according to the U.S. Census Bureau. As a result, the total trade deficit with China is $222.6 billion. A monthly breakdown is in the chart.
Monthly U.S. Trade Deficit With China From January to July 2018
NOTE: All figures are in millions of US$
US$211.1
Jul 18
US$202
Jan 18
US$205
Feb 18
US$210
Mar 18
US$210
Apr 18
US$214
May 18
US$213
Jun 18
US$211
Jul 18
Causes
China can produce many consumer goods at lower costs than other
countries can. Americans, of course, want these goods for the lowest
prices. How does China keep prices so low? Most economists agree that
China's competitive pricing is a result of two factors:
- A lower standard of living, which allows companies in China to pay lower wages to workers.
- An exchange rate that is partially fixed to the dollar.
If the United States implemented trade protectionism, U.S. consumers
would have to pay high prices for their "Made in America" goods. It’s
unlikely that the trade deficit will change. Most people would rather
pay as little as possible for computers, electronics, and clothing, even
if it means other Americans lose their jobs.
China is the world's largest economy.
It also has the world's biggest population. It must divide its
production between almost 1.4 billion residents. A common way to measure
standard of living is gross domestic product per capita. In
2017, China’s GDP per capita was $16,600. China's leaders are
desperately trying to get the economy to grow faster to raise the
country’s living standards. They remember Mao's Cultural Revolution all
too well. They know that the Chinese people won't accept a lower
standard of living forever.
China sets the value of its currency, the yuan, to equal the value of a basket of currencies that includes the dollar. In other words, China pegs its currency to the dollar using a modified fixed exchange rate. When the dollar loses value, China buys dollars through U.S. Treasurys to
support it. In 2016, China began relaxing its peg. It wants market
forces to have a greater impact on the yuan's value. As a result, the dollar to yuan conversion has been more volatile since then. China's influence on the dollar remains substantial.
Effect
China must buy so many U.S. Treasury notes that it is the largest
lender to the U.S. government. Japan is the second largest. As
of September 2018, the U.S. debt to China was $1.15 trillion. That's 18 percent of the total public debt owned by foreign countries.
Many are concerned that this gives China political leverage over
U.S. fiscal policy. They worry about what would happen if China started
selling its Treasury holdings. It would also be disastrous if China
merely cut back on its Treasury purchases.
Why are they so worried? By buying Treasurys, China helped keep
U.S. interest rates low. If China were to stop buying Treasurys, interest rates would rise.
That could throw the United States into a recession. But this wouldn’t
be in China's best interests, as U.S. shoppers would buy fewer
Chinese exports. In fact, China is buying almost as many Treasurys
as ever.
U.S. companies that can't compete with cheap Chinese goods must
either lower their costs or go out of business. Many businesses reduce
their costs by outsourcing jobs to
China or India. Outsourcing adds to U.S. unemployment. Other industries
have just dried up. U.S. manufacturing, as measured by the number of
jobs, declined 34 percent between 1998 and 2010. As these industries
declined, so has U.S. competitiveness in the global marketplace
.
.
What's Being Done
President Trump promised to lower the trade deficit with China.
On March 1, 2018, he announced he would impose a 25 percent tariff on
steel imports and a 10 percent tariff on aluminum. On July 6, Trump's
tariffs went into effect for $34 billion of Chinese imports. China
canceled all import contracts for soybeans.
Trump's tariffs have raised the costs of imported steel, most of
which is from China. Trump's move comes a month after he imposed tariffs
and quotas on imported solar panels and washing machines. China has
become a global leader in solar panel production. The tariffs depressed
the stock market when they were announced.
The Trump administration is developing further anti-China protectionist measures,
including more tariffs. It wants China to remove requirements that U.S.
companies transfer technology to Chinese firms. China requires
companies to do this to gain access to its market.
Trump also asked China to do more to raise its currency. He claims
that China artificially undervalues the yuan by 15 percent to 40
percent. That was true in 2000. But former Treasury Secretary Hank Paulson initiated the U.S.-China Strategic Economic Dialogue in 2006. He convinced the People's Bank of China to strengthen the yuan's value against the dollar.
It increased 2 to 3 percent annually between 2000 and 2013.
U.S. Treasury Secretary Jack Lew continued the dialogue during the Obama administration.
The Trump administration continued the talks until they stalled in July 2018.
The dollar strengthened 25
percent between 2013 and 2015. It took the Chinese yuan up with it.
China had to lower costs even more to compete with Southeast Asian
companies. The PBOC tried unpegging the yuan from the dollar in 2015.
The yuan immediately plummeted. That indicated that the yuan was
overvalued. If the yuan were undervalued, as Trump claims, it would have
risen instead.
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Source: The Balance
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