If the dollar truly collapses, it will buy less than it did before a collapse. If a dollar is worth two pounds of potatoes today, a collapse would mean that has less buying power and may just buy one french fry. However, because of the unique role of the dollar in the world's economy, the impacts of a dollar collapse could be less direct and more complicated to understand.
Money Supply vs Inflation
One could argue that the dollar has already lost a great deal of value. In February 2008, there were approximately $7.6 trillion in circulation, based on M2 money supply data from the Federal Reserve. By February 2013, M2 had grown to $10.4 trillion -- a 37 percent increase. Applying the principles of supply and demand, since the amount of money available has grown significantly, its value should go down. However, the inflation rate from 2008 to 2013 was only 8.2 percent. While the dollar's value went down, it didn't go down anywhere near as much as the increase in money supply might indicate.
If the dollar starts to collapse, you'll see it in increases in the prices of imported goods. As the dollar becomes less valuable, it will buy fewer Japanese Yen, Chinese Yuan or British Pounds, making products from those countries more expensive. However, since many foreign companies have US-based operations that do business in US dollars, the impact of a weaker dollar will be blunted. For example, when Toyota uses American employees, paid in US dollars, to put an American-built engine into a Camry in Kentucky, there aren't a lot of Yen changing hands.
If the dollar collapses, commodities will go up in price. One prime example of this is gold, which investors buy precisely when they're worried about the value of money. Even if you aren't an investor, items that use gold, like jewelry, will become more expensive if the dollar collapses. Other commodities, like oil or products made with corn, will also go up in price.
One of the factor underpinning the dollar's relative strength is that, even if it isn't the best currency out there, it's the least-bad. As of the date of publication, most other major currencies, like the Euro or the Yen, have other major problems that also weaken them. If the dollar crashes, every country that sells oil, which is priced in dollars, will lose the value of their holdings. Countries like China that hold large quantities of US-dollar denominated debt will lose their investment as well. This is the upside of having foreigners owning large pieces of America -- their fates become deeply intertwined with ours, protecting the money in your wallet.
- US Inflation Calculator: Home Page
- Reuters: Weak Dollar, Higher Commodity Prices Boost US Crude
- The Economist: The Mighty Dollar?
- U.S. Department of Treasury. "FATCA was Enacted in 2010 by Congress to Target Non-Compliance by U.S. Taxpayers Using Foreign Accounts." Accessed Sept. 21, 2020.
- Congressional Research Service. "The Depreciating Dollar: Economic Effects and Policy Response," Pages 1, 3. Accessed Sept. 21, 2020.
- International Monetary Fund. "Table 1: World Currency Composition of Official Foreign Exchange Reserves," Select Calendar "2008Q1 and 2020Q1." Accessed Sept. 21, 2020.
- U.S. Department of the Treasury. "Major Foreign Holders of U.S. Securities." Accessed Sept. 21, 2020.
- Federal Reserve Bank of St. Louis. "Central Government Debt, Total (% of GDP) for Japan." Accessed Sept. 21, 2020.
Steve Lander has been a writer since 1996, with experience in the fields of financial services, real estate and technology. His work has appeared in trade publications such as the "Minnesota Real Estate Journal" and "Minnesota Multi-Housing Association Advocate." Lander holds a Bachelor of Arts in political science from Columbia University.