Looking at this graph it is really normal to start thinking about the issues that economists are discussing nowadays and about the possible signs that a dollar might collapse. Generally speaking, a dollar collapse means that that the value of the dollar falls so rapidly, that everybody who owns such a currency starts to sell it out, no matter of the cost. In other words, everybody owning assets denominated in dollars – US. Treasuries, currency will try to sell them and nobody will want to buy them, thus the dollar value will decrease to near zero.
According to an article called “Is the Collapse of the U.S. Dollar Imminent?” written by Kimbery Amadeo, there are must be several conditions in place in order to for the dollar to crash. She claims that some of these conditions are already present. First of all an underlying weakness should be present. The fact that the dollar has declined with 40% against the euro between 2002 and 2011 is a weakness. This is because the US debt has increased from 5.9 trillion to 14 trillion, which means that probably for the US government a weak dollar might mean that it will be cheaper to repay the huge debt.
The second condition, she states, is when a viable alternative to the dollar exists. Although since 1970s the dollar became the world’s reserve currency and 43% of the all cross-border transactions are using dollars and 61 % of the central banks’ foreign currency reserve are in dollars, the euro is also gaining power. Now only 30 % of the banks’ reserves are in euros, but many big countries such as China, demand a new global currency.
The third condition is an event that could trigger a dollar collapse. Given the fact that foreign countries own $2.4 trillion in U.S treasuries, if China or Japan, the major holders of start selling their dollars in the secondary market, this could cause an immediate collapse. China has pegged its currency the yuan to the dollar, and holds about $1 trillion in U.S. treasuries, so that the prices of the exports are relatively cheap. Japan is holding $800 billion in Treasuries in order to keep the yen low, so that they can export to the USA.
An article published in businessweek.com Shamim Adam and David Yong claims that the US dollar is near to crisis, as the formed advisor to China’s central bank Yu Yongding claims. He says that the devaluation of the US dollar is inevitable as their debt rises, being a huge one.
The deficit that the the USA will record for the fiscal year 2010, will be around 9.1% of the GDP, which is about $1.3 trillion and as predicted in the next decade it will have a cumulative of 6.27 trillions.
In respond to the predictions, China has reduced its holding by 10 % to 846.7 billion, as the US failed to provide safety or liquidy in managing China’s 2.45 trillion foreign exchange reserves. China is planning to reduce even more its holdings on US dollar in order to hedge the risk from high depreciation, converting its holding into assets. The US government is pressing China constantly to raise the value of the yuan, and it states that it is highly undervalued, claiming that it will increase the duties on Chinese imports if actions not taken.
Many claim, that the government is to blame, because of the constant printing on new treasury bills, which is how actually the government borrow money, but this drives to higher inflation and high depreciation of the dollar. Some people have doubts what will; happen if the dollar collapse and there are really serios issues that a collapse will cause. First, this will create a global economic crisis, the price of the foreing currencies and the gold would plummet as everybody will invest in them, demand for tresuries as well, which will cause the interest rates to rise as well, import prices wil raise as well causing the inflation to rise. In the short term, the economy will be boosted as U.S export would be very cheap, but business growth will slow down, because of the high inflation and the high interest rates. Unemployment will raise and the economy will fall into recession, creating a depression. Obviously, the effects on the economy will be very serious, but as many others claims, these are only predictions which might not be realistic and might not happen.
WORKS CITED
ADAM, Shana. "U.S. Dollar Is ‘One Step Nearer’ to Crisis, Yu Says." Business Week (28 Sept. 2010): n. pag. Web. 19 May 2011. <http://www.businessweek.com/news/2010-09-28/u-s-dollar-is-one-step-nearer-to-crisis-yu-says.html>.
Amadeo , Kimberley. "Is the Collapse of the U.S. Dollar Imminent?." About Economy n. pag. Web. 19 May 2011. <http://useconomy.about.com/od/criticalssues/p/dollar_collapse.htm>.
