Earlier this month, it was announced that the BRICS nations, consisting of Brazil, Russia, India, China, and South Africa, are working on a unified currency and plan to present their idea at the next BRICS Summit in South Africa. Their long-term objective is to replace the U.S. Dollar as the global currency standard. This development has raised concerns about the potential collapse of the U.S. Dollar and its loss of value.
A currency collapse refers to a situation where a country’s money loses its value and becomes worthless in the eyes of other nations. Currencies are essentially IOUs backed by the issuing country’s government. When the government or the reliability of the IOU becomes questionable, the currency loses its value and may need to be replaced. In the past, as countries moved away from the gold standard or any tangible collateral to support their currency, the stability and reliability of currencies have become a significant risk for investors. This has resulted in currency collapses occurring multiple times over the last century.
The BRICS nations’ initiative to establish a unified currency indicates a shift away from the U.S. Dollar as the dominant global currency. Furthermore, countries like Saudi Arabia and France have started conducting major transactions using the Chinese Yuan instead of the U.S. Dollar. These trends have led to concerns that the U.S. Dollar could potentially collapse and lose its value. The fear arises from the possibility of other countries losing faith in the U.S. Dollar as a reliable store of value and transaction medium.
Overall, the developments with the BRICS nations’ unified currency and the shift away from the U.S. Dollar in major transactions raise concerns about the stability and future of the U.S. Dollar as the global currency standard.
History of Hyperinflation and Currency Collapses
Germany Weimer Republic (1922 – 1923)
Post WWII Germany found it impossible to meet all its debt obligations after losing most of their productive and industrial regions to France and Belgium.
Hungary (1945-1946)
The Great Depression and the Treaty of Trianon put a major strain on the Hungarian economy ultimately impacting the Pengő. The highest denomination was a $1,000 note, which quickly became $100,000,000,000,000,000 by the end of 1946 because the value of the currency had become almost worthless.
Chile (1971-1981)
Socialist President, Salvador Allende, decreed that many of Chile’s leading industries would be nationalized. As the government overspent, the Chilean Central Bank began printing unbacked currency at an alarming rate. This resulted in an inflation rate of 600% by the end of 1972.
Argentina (1975-1992)
Unprecedented growth rates, a trade surplus, and political unrest led to the sharpest recession the country has ever experienced. The Argentinian government made some decisions not to intervene to cover trade deficits, leading to the worst GDP since the great depression.
Peru (1988-1991)
The Peruvian Government increased spending. The growing national debt and negative economic growth led to hyperinflation.
Angola (1991-1999)
Plagued by a civil war for much of the late 20th century, the country was stripped of much of its industrial resources and economic value.
Yugoslavia (1992-1995)
The Yugoslavian government began printing unbanked money to pay for military expenditures, leading to hyperinflation of 100% per day at its peak.
Belarus (1994-2002)
Currency fluctuation caused by aftershocks of the Cold War and the fall of the Soviet Union.
Zimbabwe (2000-2009)
Ramped inflation from over-printing of money led to major devaluation of the Zimbabwe dollar which was once more valuable than the U.S. dollar.
These events were all accompanied by political disorder, war, overspending, overprinting of money, inefficiently run government programs, and hyperinflation, all common recipes for a currency collapse. While it is technically possible for any currency, including the U.S. dollar, to collapse, the U.S. dollar is still currently backed by the largest economy and the most advanced regulatory structure in the world. This, along with the trust placed in the United States’ ability to honor its IOUs, makes it unlikely for the U.S. dollar to collapse anytime soon.
The question arises whether other countries, such as the BRICS nations (Russia, China, India, and South Africa), could be trusted more than the United States in terms of social and financial practices. Considering the geopolitical landscape and the challenges faced by these nations, doubts arise about their ability to threaten the U.S. currency reserve status. For instance, China and India have had various contentious issues (energy, immigration, and foreign trade) despite their Strategic and Cooperative Partnership for Peace and Prosperity agreement.
Although some transactions are being explored using alternative currencies, the U.S. still holds the status of the default global reserve currency. Billions of dollars’ worth of trades are executed daily using the U.S. dollar, and it would require a significant event to change this. The U.S. dollar system is deeply ingrained, and it would take a long time for the BRICS Nations to challenge its global infrastructure. Does that mean the U.S. should continue to print money at its current alarming rate? Or knee jerk reaction to every economic speed bump? Absolutely not, because even a strong GDP and a productive economy has its limitations. But the reality is the federal reserve has worked overtime to control prices over the last 6 months, raising rates at a record pace. As inflation peaked at 9.06% in June 2022, it has slowly declined to more modest levels of 4.99% as of March 2023.
For context, hyperinflation is defined as when prices of goods and services increase by 50% in one month. Inflation has been high the past 2 years but even the most pessimistic economist would find it difficult to outline a realistic path that our nation would experience such an event.
While the U.S. has faced economic and political challenges in the past, it has proven to be resilient. The U.S. dollar’s collapse would be devastating, but planning for such an extreme scenario without significant evidence or probabilities is challenging. More importantly, over speculation could prove devastating to your long-term financial well-being.
Investors should stay informed and educated about the risks involved. While history has shown that unexpected events can occur, focusing on risks closer to home, such as overspending, poor asset allocation, sector concentrations, and market timing, is more important than worrying about the failure of the U.S. dollar. Diversification is considered the best way to protect against various risks, and this includes currency risk. Having a diversified portfolio can help limit potential damage even in unlikely events. Remember, in order to attain reserve currency status, a country must have a strong military presence to protect its treasury resources, liquidity in the bond market, open trade policies and economic stability. Very few nations qualify to be in the conversation, let alone present an imminent threat.
Visit our Portfolio Management page to find out more about how to minimize your risk. If you have any questions or concerns about your portfolio, contact an HFG Trust Financial Advisor today.
William Wang, CFP®
Managing Director, HFG Trust
