Three scenarios for the collapse of the dollar: what will be the end of his era

Investors around the world have been accustomed to the US dollar as a “safe haven” and the most stable currency in the world since the days of the Bretton Woods monetary system, when the dollar was still backed by gold. The Bretton Woods system has been gone for a long time, and not a single currency in the world is backed by gold anymore, and confidence in the dollar remains. But already today it is time to think about what will happen after the dominance of the dollar, when the current monetary system reaches its logical end.

The current monetary system was formed in the late 70s of the XX century. After the world economic and energy crisis of 1973-1974, which shook the capitalist world, oil prices, and then many other commodities on the stock exchanges of different countries, began to be set in US dollars. Accordingly, international payments for the export and import of raw materials and other goods began to be carried out mainly in US dollars. This situation fueled confidence in the dollar as the most reliable currency in the world. The euro, having tried at the beginning of the 21st century to become an alternative to the dollar in international settlements, by 2022 turned out to be a colossus on feet of clay, and its position in the world began to noticeably stagger due to internal problems.

The absence of a worthy alternative to the dollar in international settlements has led to a distortion in the foreign exchange market, which is expressed in the fact that when the dollar rises in price, most of the world’s reserve currencies become cheaper, and vice versa. The world of currency and financial markets, accustomed to such an “order”, may not be ready for the fact that the credibility of the “American” will ever be lost forever.

Of course, this will not happen soon, but today it can be assumed that the collapse of the dollar will pose a threat, if not for the United States as a state, then for many American corporations, including transnational giants. But the United States is the largest trading partner of China, the countries of Latin America and the Asia-Pacific region, the G7 countries and many G20 countries. What will await the world economy with such a turn of the wheel of history?

Today, fears for the dollar and its future seem to be unnecessary. Federal Reserve Board member Christopher Waller recently said that the Fed’s next (November) meeting of the Fed’s Open Market Committee will have “serious discussions about the pace of monetary tightening.” Which indicates a very likely new increase in the US interest rate corridor. This means that the dollar will not fall, but will “raise its head” even higher, and at a higher interest rate, speculative capital from developing countries will again begin to flow into the United States. Of course, the euro and the Japanese yen, which are at multi-year lows in 2022, and such vulnerable currencies of developing countries as the Turkish lira, the Argentine peso, and the South African rand will suffer the most from the strengthening of the dollar, of course.

Yes, and the ruble in the short term after the announcement of the decision of the Fed may also fall in price. Although the dynamics of the “Russian” since the beginning of the year (strengthening against the dollar by 11% against the backdrop of a fall in other currencies) allows us again, as after the 2015 crisis, to call the ruble one of the most stable currencies in the world, even despite the short-term growth of the dollar above 120 rubles in March of the current year.

But back to our “greenback”. The US dollar this year shows significant stability against the backdrop of the outbreak of the global energy crisis and the beginning of the food crisis. Inflation in many countries, both developing and the most developed, including the United States, is at unusually high levels this year, which objectively does not contribute to the strengthening of national currencies. The United States, although itself also affected by rising inflation, and the energy crisis, and the economic recession, feel a little better than Europe, from which capital is not fleeing anywhere, but to the United States as a “safe haven”. So it turns out that there is no worthy alternative to the dollar today.

CNY? This is the only one of the currencies of developing countries, which is the world’s reserve. However, China, despite being the second largest economy in the world after the US, is still positioning itself in the group of developing countries and is not eager to join the G7. In addition, in 2022, the yuan has already lost 14% of its value against the dollar. Therefore, it is too early for him to fight on equal terms with the dollar – not the right weight category.

But there is reason to think about what might be happening in the so-called “post-dollar era.” I believe that events can develop in one of three ways.

The first is the regionalization of currencies. It is possible that in the future, for example, as a result of another global economic crisis or any changes in the political and geographical map of the world, the concept of a reserve currency will objectively change. In the future, the currencies of certain geographic regions will become reserves, or several supranational currencies will appear in the world – supranational currencies of European countries, countries of Eurasia and Asia, countries of North and South America. That is, for example, a new supranational currency “amero” may appear in North America. A similar project, which supposed, however, to replace the national currencies of the United States, Canada and Mexico with the “amero”, was already discussed at the beginning of the 21st century, but did not take on a real shape. But in the future, when the world realizes that it is no longer possible to rely on the reliability of the dollar, as before, the idea of ​​“amero” and similar supranational currencies may well return, and such projects, in my opinion, will turn out to be quite viable.

The second is the issuance of state or supranational digital currencies. Such currencies may in the near future, on the horizon of several years, become an alternative to the dollar and other world reserve currencies in international settlements. Already today in China, in parallel with the traditional (fiat) yuan, the digital yuan issued by the People’s Bank of China is circulating, in which about 40% of all non-cash settlements and payments were carried out in the first half of 2022. The state digital currency eNaira has already been launched in Nigeria, the digital won is being tested in South Korea, and the creation of supranational digital currencies is being considered in a number of Caribbean and Asia-Pacific countries. The Bank of Russia is starting the first stage of testing the digital ruble project this year.

In the future, digital currencies from different countries, in terms of ease of payments and settlements, as well as protection from sanctions, can be a serious alternative to the fiat US dollar and other current world reserve currencies, which in the future will become useless candy wrappers, interesting only to collectors.

The third option is the transition to non-state digital currencies. Sometime in the future, not only the US dollar and not only other world reserve currencies will be replaced by non-state digital financial assets. It is still very difficult to imagine what must happen for the collapse of not only the dollar, but the entire global system of fiat currencies. In this case, the world economy cannot do without a very serious crisis. Under such a scenario, there will be financial shocks comparable to the political and geographical changes of 1917-1918, when four empires collapsed on the Eurasian continent and many new states were formed, and the boundaries of the old ones changed noticeably. As a result of these turmoils, the dollar, and perhaps a significant part of fiat currencies, will simply disappear. Central banks will either become history or will perform formal regulatory functions of the banking sector in their countries.

That is, events will develop according to the same scenario, when the world will get out from under the rubble of the old dollar era, in the words of Alexander Solzhenitsyn, “in the most clumsy, ridiculous and destructive way.” It is possible that the world economy will have to go through this path of development in order to no longer become dependent on one reserve currency and, ultimately, on one country. From this point of view, such a scenario will be the most effective of the three listed. It is still difficult to say what price the world economy will have to pay for getting rid of the dollar forever, but we can assume that this price will turn out to be very high – the consequences of any revolutions always have to be paid by the common people, for whose sake these revolutions take place in words, and pay dearly.