The End Of The Dollar
Over the last six months, several clients have posed questions regarding “the end of the dollar.” Underlying this fear is concern over the U.S. implementing a digital currency as well as devaluation of the dollar.
Anytime something like this is considered, a variety of conspiracy theorists will suggest the worst-case scenario. However, as with most things, there are pros and cons to consider.
First, recognize that whether evaluating digital currency or paper currency, both can be US Dollars. The difference is simply the manner with which they are produced, transferred, tracked and held. Furthermore, whether digital or paper, a dollar is backed by the United States of America and the strongest economy on the planet.
All world governments want to switch to a digitally based currency for a few main reasons.
Paper currency is costly to produce.
Paper bills are more easily counterfeited. Counterfeiting reduces the purchasing power of legitimate currency and can lead to inflation.
Paper currency is easily destroyed by fire, flood, bugs, mold or use.
Paper currency also facilitates the ability to illegally avoid taxes. This is a huge issue. If a digital currency is created that uses block-chain technology, it will be easier for governments to track the flow of money. Although this will probably compromise some privacies, it will also make it much harder for tax cheats to hide.
What appears to make people uncomfortable is the notion that the USA will have some sort of unproven “bitcoin” type of dollar. This is often referred to as a Central Bank Digital Currency, or CBDC. Again, even if we have a CBDC, it does not mean it has any different purchasing power than a green dollar bill.
That said, digital currency is not really new. The federal government has been issuing savings bonds in digital form since 2002. Despite being issued and tracked digitally, they are all in US Dollars.
The United States is not alone. Federal governments around the world are all moving in this direction.
Additionally, consider the delivery of social welfare. Benefits such as unemployment, Medicare, Social Security and Disability are tracked digitally. The government doesn’t send anyone green dollar bills. However, that doesn’t mean the benefits aren’t convertible into green dollar bills. However, digital delivery should increase efficiencies for the government and lower costs for users.
Often, people will express concern that the US Dollar will lose its reserve currency status. This might happen, but most likely not in my lifetime. Since the end of World War II, the US Dollar has been the world’s preferred and most dominant reserve currency.
The US represents about 25% of world Gross Domestic Product. However, on a daily basis about 60% of world GDP is settled up in US Dollars. This is a reflection of how stable and preferred the US Dollar is relative to other currencies.
Despite the relative stability of the US Dollar, it is not without flaws. Over the last century, the US Dollar has lost about 97% of its purchasing power. This is a deceptive concept as you must recognize the US is not the only country that runs deficits or prints currency. Furthermore, despite the devaluation of the dollar as currency, you can still take it to McDonald’s and buy a happy meal.
People will then ask, “How do you insulate against devaluation of the dollar?” The approach remains the same.
Consider Coca-Cola. Coke sells into hundreds of countries every day. Obviously, this entails trading soda water for a variety of currencies. As long as Coke products are in demand, it will command payment in whatever currency holds value at that time. That may mean payment in dollars, pounds, yen, crypto currency….or sea shells.
Given this, owning multi-nationals is an effective way to hedge and diversify currency risk.
Expanding upon this, owning growing businesses remains the best way to maintain purchasing power. This is especially true when investors worldwide must face all sorts of central banks printing money on a daily basis. This fact has nothing to do with a digital versus paper currency concerns, except that it is much easier to print digitally than in paper.
Although there are many things to worry about each day, the demise of the dollar is not one of them.