Prepping Economics Part 1 : Why the Dollar Will Fail – International Issues

Many preppers perceive that after TEOTWAWKI (ie a Level 2 or 3 situation) the present US currency will become of little value.  Their view of the future possibly revolves around using precious metals for currency and/or a currency-less situation that involves bartering.

This six part series moves sequentially through the reasons why our current US dollar will cease to be of value if society should collapse, and then looks at the value and effectiveness of bartering as a replacement, the role of precious metals in the creation of a new currency, and finally comes up with some predictions for a future currency and how you can best prepare for this.

We suggest you read these articles in sequence, starting of course with this article first.  But they are each independent of the other, so help yourself in whatever form you like.  Please also see other articles in our general series on Economic Issues After TEOTWAWKI.

The Current International Vulnerability Of Our Fiat Currency

We agree it is likely our present ‘fiat’ currency will cease to be of value after a collapse in our society.  But there’s another factor to consider as well – a collapse in our society might be precipitated by a collapse in our currency, rather than happening the other way around.  And a currency collapse could occur either as a result of internal problems within our society and its economy, or as a result of outside forces from other nations and our external creditors.

Our fiat currency’s only value at present is the US government saying ‘This dollar bill is worth a dollar because we say it is’ – a statement that survives due to it being supported by a near unanimity of opinion among US citizens domestically, and by those other people/organizations/governments around the world that accept US currency, and who agree the value is indeed as it is claimed to be.

If the credibility of the US government guarantee/edict weakens, so too does the strength of our currency.  At present the government does as much as it can to gently encourage us – some might say to brutally force us – to conduct our financial transactions in dollars.  Of course, the more we do that, the more visible our trading becomes, and the easier it is for the government to effectively assess our economic activity and tax us, so the government benefits both by keeping the dollar as the prime basis of our economy, thereby implying its reliable value, and also by keeping our trading easily measured and therefore easily regulated and taxed.

There’s nothing new about fiat currencies.  Most countries have a fiat based currency, because it gives the government issuing the currency a huge amount of economic flexibility – quite literally, the ability to print money.

The value of any country’s fiat currency therefore goes up and down as a result of many things, every day, including how people perceive the strength and prudence of the country’s government and its economy.  The country’s balance of payments is another factor, as is the interest rates payable on investments in that country, and the relationship between the country’s economic activity and the amount of fiat currency in circulation.

These various factors point to the problems with the unified Euro currency – different governments, different economies, different strengths, different interest rates, but one shared currency.  These forces, all pulling in different uncoordinated directions for each of the different countries in the Eurozone, threaten to tear the Euro apart.

A common currency must be supported by a common set of economic conditions and policies.  That is why the Eurozone is seeking ever greater power over its member nations, so as to buttress the varying strengths and weaknesses of individual national governments with an overarching claim/promise of Euro value made by a central government, and with a consistent economic underpinning of the currency.

So, the first point is simply this.  If there is a collapse in our government, our economy, and our society in general, then it is very likely that there’ll be a collapse in the dollar, too, because it is a fiat currency with no real underlying value.  We are probably all agreed on this.

But this collapse in value will be in two different parts – internationally and domestically.  We’ll consider the domestic issues in the next part of this series, and now concentrate on the international issues.

International Impacts of Dollar Problems and Devaluation

Domestically it is probable that our currency will retain its integrity unless some society-destroying crisis comes along or the government acts extraordinarily foolishly.  Mild inflation or deflation may impact on its value, but other than that, the currency should remain reasonably linked to economic activity and real values.

But internationally, our currency’s integrity relies not just on us, but also on the actions of other nations which we have little control over.  As other countries become increasingly larger and more economically powerful, and as international groupings of countries have more control over the global economy, our ability to dictate (and, more recently, to even influence) the world’s economy is weakening.  Rather than setting the economic ‘rules’ for the world, increasingly we are having to follow those created by others.

For example, if ‘investor nations’ such as China stop buying our debt on the basis of, as at present ‘We’ll excuse you 6.15 yuan of debt that you owe us for every dollar you give us’ and instead say ‘We don’t think your currency is worth as much, so we now want two dollars from you for every 6.15 yuan you owe us’, that would see our currency’s value halved – it would be devalued.

Similarly, if other countries said to each other ‘We’re not so comfortable doing our trade between ourselves in dollars any more.  Let’s instead start trading in a different currency’ then all the stockpiles of US currency being used by other countries and individuals for trading would be released and returned back to us to be changed into whatever other currencies they preferred.  Any time there’s a flood of any product into any market, its value drops, and the same is as true of currency as it is of food and other goods/services.  This is not just a hypothetical speculation – read this article about the sleeping giant that is starting to wake – the Chinese Yuan/RMB and its potential to become a major global currency.

It is believed that there is a great deal more US cash used in the rest of the world by other countries as part of their economies than there is actually in the US itself (perhaps 70% – 80% of all currency is held in other countries – here’s a somewhat dated but interesting article).  If all those other countries started returning their dollars back to us and said ‘Here’s your money back, we don’t want it any more, please give us euros instead’ our currency would again rapidly and massively devalue.

People often assume that a government can control the value of its currency compared to other currencies in the world, but that is not entirely true.

A currency’s exchange rate is something that can be determined to a greater or lesser extent by how other countries act and respond.  A simple analogy – say you are selling apples.  You can set the price at 10c each or $10 each, but the only thing that really matters is not the price you put on the apples, but how many you actually sell.  It is the same with currencies – a government can say its currency is worth whatever they wish to say, but if the government’s valuation is out of line with the real value of the currency, you’ll get a ‘black market’ with unofficial currency trading at the real rate and little or no activity at the official rate.

Is Devaluation Good or Bad?

What happens to us if our currency is devalued?  The most immediately obvious would be imported goods going up in price – there’d be no more cheap Chinese imports.  But is that a bad thing or a good thing?

It would be a shame to go to Wal-Mart and see the price of everything had doubled, for sure.  But if the price of imported goods skyrockets, maybe that helps us to then start to rebuild some local manufacturing.  In addition, our own exports become more competitive on world markets, because with the dollar now worth less, our goods, still bringing the same dollar price to the US sellers, cost other people in other countries less in their own currencies.

Think of the US automobile industry.  If our currency was devalued, that would mean that foreign cars become more expensive in the US, and more people would start buying American cars again.  Meantime, in other countries, foreign cars would remain the same price, but US cars would drop in price.  People in other countries would start buying US cars, too.  (To the pedants out there, yes, we know this is and much else in this series a simplification – ‘foreign’ cars often have significant US content, and ‘domestic’ cars have huge amounts of foreign content, but we’re talking concepts here rather than exact specifics, and the essential concepts remain accurate.)

Not only would this put more people back into work in Detroit, but it would mean that our balance of trade would improve – our imports would drop and our exports would grow.  We would have more money coming in to the country and less going out.  Money would become more plentiful, interest rates would drop, and so on.  One source of pressure on our currency would be reduced.

So from that perspective, devaluation would be good.  But remember – at the same time, everything we import would go up in price, and so we’d spend more of our weekly wages buying essential (imported) things – which these days is just about everything, including even basic food and produce.  That’s a bad thing.

This duality of costs and benefits is why the Chinese government in particular is happy to maintain an artificially high value of the US dollar.  The artificially weak Chinese yuan boosts their manufacturing economy.  They don’t care that their weak yuan makes imported goods more expensive, because their economy is primarily a domestic driven economy.  They don’t import much, so who cares if imported goods go up.  It is more beneficial to be selling their exports for more money, because they have a positive balance of trade.

Devaluation is one of those things that has good and bad features associated with it.  In a room full of economists, you’ll find some who strongly recommend it, and others who strongly hate it.  Economics is far from an exact science!

Devaluation might be bad, and might be good, but is unlikely to precipitate a sudden collapse in our economy and our society.  Yes, depending on the speed and extent of a devaluation, it certainly would impact on our economy, but it is unlikely to cause it to colossally collapse.

Other External Risks and Factors

There are other potential pressures on our currency too.  If foreign nations become reluctant to lend us money (which we need to finance the government’s ever-increasing annual deficits) we’d have to increase the interest rates we offered them to entice them to give us money, and that would increase business costs across the board, reducing domestic expenditures, shifting more of our GDP into interest payments to foreign countries, and hurting the economy.

It is entirely possible that foreign investors could get ‘spooked’ – investors are crowd loving and crowd following animals who like to do what everyone else is doing.  That’s why we see things like the dot-com boom, when everyone wanted to invest in internet businesses, and then the dot-com bomb when everyone realized that most of such investments were nonsensical.  The same surprisingly irrational and emotional factors can apply to the perception of entire nations, too.

It is also entirely possible that a large enough grouping of countries who hate us could group together to bring economic pressures to bear on us.  After all, that’s what we do as a matter of course against nations we don’t like – we impose ‘economic sanctions’ on them.

It was easy for us to impose economic sanctions when between us and a few of our strongly supportive allies, we controlled the largest part of the global economy.  But our share of the world economy is now very much smaller than it was, and we have fewer allies, who are in turn also getting smaller.

The demographics point to the new economic super-powers being, in the short-term, countries such as China, India, and lesserly Brazil and maybe Russia.  Those countries range from ambiguously neutral to actively hostile to our interests.

Add to that the growing Muslim activist movement in the Middle East, Asia and Africa, and the continued huge money flows going to OPEC nations (who are seldom friends of ours) and we are becoming increasingly vulnerable to orchestrated pressures by hostile nations to weaken our currency and therefore our economy.

This is not just idle speculation.  The Euro has already displaced the dollar in many countries as being the preferred international currency to trade in, and there are regular moves by OPEC to move oil costs away from being dollar denominated and to instead to use some other non-US currency measure.

Implications for Preppers

An economic collapse could occur for reasons outside our country’s control.  Other nations could act to diminish the value of our currency and to harm our ability to trade internationally.

What does that mean for us?  You should store your assets not in dollar denominated funds, but in the form of real assets.  Property and long-lived prepping supplies are two obvious choices.  Firearms and ammunition are another – both seem to be going steadily up in price, even before the current panic buying and leap in prices (but don’t buy at the top of the market pricing).

Gold and silver might also be a consideration.  If you invest in companies, try to choose companies who will have a viable business plan even if our currency shifts massively in value.

Article Series Continues….

This was the first part of our six part series on prepper economics.  Please do read on through the balance of the series :

Part 0 :  Introduction – Why Economics is Practical and Important to Preppers
Part 1 :  International Reasons Why the Dollar Will Fail
Part 2 :  Domestic Reasons Why the Dollar Will Fail
Part 3 :  Why Bartering Is Not A Useful Way of Trading
Part 4 :  The Unavoidable Need for Money
Part 5 :  A Probable Currency Evolution Post TEOTWAWKI
Part 6 :  How to Prepare for the Future Economy