Many experts believe there will come a tipping point that causing the dollar to collapse and lead to global economic turmoil. In this scenario, investors would rush to other currencies to escape further losses. Global trade would seize up because the majority of international contracts demand a dollar payment. Other assets would skyrocket, especially the euro, the yuan, and gold. Interest rates in the U.S. would rise as demand for Treasurys fell.
What They Say About the Collapse of the Dollar
The authors of The Coming Collapse of the Dollar and How to Profit from It, for example, predict a dollar collapse that is not well substantiated and plays on fear. Two authors with great economic credentials wrote this very popular book. Their research into the causes of the current weakness of the U.S. economy is very thorough and easy-to-understand. In fact, everyone should read the chapters in Parts One and Two.
The authors' assertion that the U.S. dollar will collapse because all governments' currencies collapse is based on only four examples: Ancient Rome, Revolutionary-era France, Weimar Germany and Argentina. None of those examples are similar to the modern-day U.S. economy.
The authors have not made a well-researched argument to support their conclusion that these conditions will lead to the inevitable collapse of the world's reserve currency.
They state that the dollar is not sustainable as the world currency because it is no longer on the gold standard.
The Declining Value of the U.S. Dollar
It is true that, over the long term, the dollar's value is declining. The dollar has declined 40 percent since 2002, and could decline further still for the following five reasons:
A $19 trillion U.S. federal debt.
Excess liquidity causing inflation or, as is occurring now, asset bubbles.
The unsustainable personal debt of U.S. citizens.
A massive trade deficit.
The strength of emerging market countries, like China. They are becoming less dependent on holding U.S. dollars to keep the value of their currencies low.
All of these forces drive down the value of the dollar, but only in the long term.
How to Hedge to Protect Yourself
Some of the ways to protect yourself from a potential dollar collapse are also good ways to protect your assets from the far more likely dollar decline. First, keep your investments diversified away from the dollar by making sure you hold foreign mutual stock and bond funds and some gold. For more, see Why Invest in Gold.
The authors of The Coming Collapse of the Dollar suggest, like many others, that you hoard gold and other hard assets. Their recommendation to buy gold, precious metals and shares in gold mining companies is narrow and flies in the face of modern portfolio theory. The authors also concede that one of them, James Turk, could profit from a gold boom since he publishes the Freemarket Gold and Money Report.
They also recommend short-selling stocks of companies that a falling dollar will hurt.
This is also called timing the market and is not recommended for the average investor.
If the dollar were to absolutely collapse, as they predict, it would wreak devastation upon the world's economy in ways that are unimaginable. Owning gold might be the best way to go, or it might not. That's why a well-diversified portfolio, a constant attention to key economic indicators, is a better way to protect your personal finances than putting all your eggs in one basket. Even if it is made of gold.
How should you protect yourself from the global economic turmoil? This high level of uncertainty could occur from any sudden shift in the world economy. The best defense is to be mobile. That means keeping your assets liquid, so you can shift them quickly. Don't tie a lot of money up in real estate, which could tie you down.
It's also difficult to sell when the real estate market goes south. You could even lose money if you can't get renters.
Invest in yourself and in your knowledge. Stay on top of the global economy. Understand investing. And it's never a bad idea to keep your passport updated, just in case! For more practical ideas, see Five Steps That Protect You From an Economic Crisis.
