STOP SAVING MONEY | The Dollar Crisis Just Got Worse

What's big guys? It's Graham here. So, apparently, a lot can change, and quickly. Because in April of 2020, CBC posted a video titled "Why is the US dollar so powerful?" only to post a follow-up two years later with a new headline, "Why the US dollar may be in danger?" This, of course, is mirrored by CNN, The Wall Street Journal, ABC, and even discussed by Investopedia, making you wonder: is the US dollar actually in danger? And if so, what could we do about it?

After all, on the surface, the U.S. national debt just recently surpassed 30 trillion dollars. The annual deficit continues growing larger and larger, and the popularity of the dollar has been on a slow decline for more than 20 years. So, let's talk about exactly what this means, how a declining dollar would not only affect you but also the entire economy, and whether or not this is even a big deal. Because I have fun taking headlines like this, breaking them down even further, and then getting the unbiased truth of what's going on.

Since honestly, they do have a point, and it is kind of concerning. But before we go into that, I have to warn you: the like button is also in danger of not being smashed for the YouTube algorithm! So if you wouldn't mind just giving it a gentle tap and subscribing if you haven't done that already, it would help me out tremendously. Hopefully, these videos will help make you more money. Thank you guys so much!

I know, with that said, let's begin. Alright, so it's a quick 90-second recap to bring all of you guys up to speed with what's going on. As of now, and for the last 80 years, the US dollar has been the most powerful currency in the world because it's known as what's called a reserve currency. This refers to a currency that's accepted throughout the entire world. Since 1945, the US dollar has taken that place because of its resiliency, lack of volatility, and safety.

When this system was first adopted, it was used as a way to keep the price of investments, commodities like gold and oil, and exchange rates stable. See, when you have dozens of countries all trading goods and services with each other, it helps to have one universal currency accepted everywhere with predictable value to conduct those transactions. Otherwise, you run the risk of getting paid in another currency that could be difficult to exchange. And by the time you're able to convert it back to your native currency, it may have just tanked in value.

So think of this like a global transfer of value through the US dollar that everyone has universally agreed to be safe. Or, for all my crypto fans out there, it's no different than using a stablecoin to move money from one token to another without the price of whatever token crashing into oblivion as soon as you buy it, except in this case, it's with the US dollar. Of course, the United States benefits from this as well because there's more global demand for its currency. More countries hold those dollars, and as a result of that excess demand, we have extra buying power.

But as CNBC reports, the value of the dollar could be in danger. So, we need to investigate and go down the rabbit hole to figure out why. First, they say that the growing deficit is the greatest threat to the US dollar. And if you look closely at the numbers I'm about to show you, you will be shocked. That's because the United States operates a bit like a business in the sense that it draws money from taxpayers and exports, and then spends that money on the systems that keep it growing.

Or, in more literal terms, the federal government collected four trillion dollars of revenue in 2021, and they spent 6.8 trillion dollars. Wait, what? Yeah, for the last 20 years, the US federal government has operated on a deficit, meaning they spend more money than they make. In fact, the last time that we had any surplus whatsoever was all the way back in 2001. So, what's going on? Well, yeah, it's no surprise that over time, the United States has spent way more money than it makes, and now the national debt has ballooned to over 30 trillion dollars.

Of course, this is not the first time the national debt has been called into the spotlight, having increased consistently since the late 1800s. But it's a sore spot for the US dollar. CNBC reports that a high government deficit results in excess money printing, which increases inflation and devalues the existing currency that we have in circulation. It would be no different than having one pie with four slices, only to have the government give people more slices by taking the existing pie and cutting it up even further.

The other concern brought up by The Economist Stephen Roach is that the US has an extremely low savings rate. So, in times of economic hardship, we have to borrow money from foreign nations who lend us their savings to get us through. Unless, of course, something happens and they evaluate: should we be giving them more money? So, realistically, is this something that could actually happen? Well, before we answer that, the second impact to a declining currency is a weakening dollar.

See, the dollar is not just valued at one dollar. Even though technically, a dollar is always going to be a dollar, this money is tracked through three different metrics. The first is the exchange rate to other currencies. The second is the demand for 10-year treasury notes. The third is what's known as the foreign currency reserves, which is a fancy way of saying how many of these dollars are held by other countries.

Now, right off the bat, when people think of a weakening dollar, it's no surprise that a dollar today is worth significantly less than it was back in the 1950s. So, we already have a currency that's worth less and less the more of it gets printed. But in this context, the weakening dollar is a lot more important because it not only affects you, but also global demand in terms of how much this could buy. But when it comes to the exchange rates to other countries, it is true that the value of the US dollar has been gradually weakening since 2020.

However, recently, the US dollar strengthened again as investors look for a safe haven during times of global uncertainty. As far as demand for treasury notes, this is essentially giving the US government a 10-year loan. For people who want a safe place to store their money, they'll buy these and then get a predictable return on their capital. But recently, though, the dollar has been actually going up alongside interest rates, meaning the higher the rates go, the more interest there is in higher yielding bonds, and that, in turn, helps boost up the dollar.

However, third, in terms of foreign currency reserves, this is where things start looking a little bit less optimistic. Because, as you can see, the US dollar has been steadily declining as other currencies are beginning to take its place. And as CNBC reports, we're now at the lowest level in 25 years. Now, of course, on the bright side, a weaker dollar could actually be beneficial for the US economy because our own exports cost less for other countries to purchase and that can help boost demand.

Although, on the flip side, imported goods would then cost more because their dollar buys less. Alongside that, inflation could look worse because it costs more money to buy the exact same things. Third, no reserve currency status has ever lasted for more than 80 to 120 years, leading to the fear that maybe the US dollar won't last indefinitely either. For example, France held the reserve currency from 1720 to 1815. However, over time, they continually ran into deficit and spent more money than they made. That led to a lowering of interest rates and then eventually reissuing even more currency to keep up with demand.

Even though initially it was a big boom to the economy, over time it devalued their money, and within 10 years, the world had lost faith in France's reserve currency, and they moved on to instead the British pound, which held the reserve currency from 1815 to 1920. During the time that France was economically declining, Britain was quickly becoming one of the world's largest economies. London was the center of international trade, and as a result, the entire world was already using their currency.

Although after World War One, the UK went through a time of economic depression, slowing growth, and deflation, eventually leading them to abandon the gold standard and the eventual U.S. reserve currency, which started officially in 1944 and is lasting until who knows when. Prior to then, the United States grew to the point of becoming the world's largest economy by 1920, during a time where other countries were abandoning the gold standard to pay for the cost of World War One. But by the time World War II occurred, the U.S. was in a position to supply weapons and goods to other countries, which were later repaid back with gold, giving them, of course, the leverage to become the world's reserve currency. From that point on, instead of buying gold, other countries would purchase U.S. treasuries as a safe store of value.

However, with the rising national debt, high inflation, and declining global reserves of U.S. dollars, is our money actually in danger? Or is this another fear-mongering headline with no chance of actually happening? Well then, as I mentioned earlier, now is the perfect time to bring up the national debt which as of right now stands at just over 30 trillion dollars. In terms of just how massive that number is, that's enough to pay off everyone's mortgage, plus have enough left over to pay off all outstanding student loan balances and auto loans, and give everyone in the United States a 25,000-dollar check.

So, is 30 trillion dollars anything to worry about? And could that collapse the dollar? Well, unlike a person who should only spend money that they have available in the checking account, a country works completely differently, and they often finance their operations to continue growing. It would be kind of like a person taking out a student loan, knowing that if they spend ten thousand dollars today, they can make fifty thousand dollars or more in the future. Except with the United States, they could keep borrowing and borrowing and borrowing sometimes for completely pointless random stuff.

So, is that a problem? And the answer is, well, kind of. When we look at our debt in relation to how much money we make, we're actually a lot lower than quite a few other countries. You could see here that sure, we might owe the most amount of money, but we also make quite a lot of money as well. And when you factor in the debt-to-income ratio, you could see where we are here. It's like someone taking out a three million dollar mortgage which, to some people, sounds crazy until you realize that person is worth 20 million dollars, and a three million dollar mortgage is the same amount that they make in a year.

So, the amount of debt that we're taking on relative to the amount that we own as a country is still relatively really small, even though the number itself is high. And really, because of that, for better or worse, there's no real reason to pay off the national debt early, if ever. However, where I see the biggest obstacle is if people stop investing in the United States, and we stop growing like we have been. Then the United States will be forced to pay a higher interest rate on their debt to entice more people to invest, and that in turn would almost certainly lead to trouble in the future.

That's why experts say that as of right now, even though the dollar's future looks uncertain, there's not a lot of risk. Because in order to lose its status as the reserve currency, there has to be another contender to take its place, of which there's nothing that's coming close. Now, obviously, the fact that 80 percent of all US dollars were printed in the last 22 months combined with 64 percent of Americans now living paycheck to paycheck, while China's economy is poised to outpace the US by 2030, isn't exactly confidence inspiring. But by and large, a lot needs to happen first if there is to be a new reserve currency.

Notwithstanding a massive black swan event that would undermine the United States' role in worldwide trade, it might not happen or it might not happen during a time that any of us could reasonably predict. To put your mind at ease even more, a Charles Schwab analyst looked at this even further, and they concluded that still, the US dollar is used in 40 percent of global trade and in almost 80 percent of all cross-border transactions. Today, the US dollar has held roughly the same value since 1987, proving it to be a good flight to safety during times of economic turmoil.

So, as much credit as they'd like to give for this, and I do think that it has some merit over the next 100 years, realistically in the short term I would not worry about the demise of the US dollar. Not to mention, if it did collapse or even lose a significant amount of value, it would also impact every other country that holds their reserves in US dollars as well. That's why I don't think there's a major issue to worry about. The US dollar is still the top option, and instead, I would focus on what you can control. Subscribe, feel free to add me on Instagram. Thank you guys so much for watching, and until next time!