United States Financial and Dollar Outlook

A recent UN report is giving the U.S. two-to-three years to make significant reductions in debt, and to increase the value of the dollar against other currencies, or face collapse of the U.S. dollar.  The UN report is not saying that such a collapse is guaranteed but states that the conditions would be even more favorable if the U.S. can not accomplish those two things.  This of course come as no surprise.  The United States has been spending money and increasing debt quickly, eventually that type of behavior will catch up with the U.S.  The part that should be the most alarming to everyone is that the UN has come out publicly about the collapse of the United States dollar.

Courtesy of Wikimedia Commons

China has continually discussed removing the U.S. dollar as the world currency with a new currency or different currency, like their own.  China has reached trade agreements with several countries were the U.S. dollar plays NO role.  The countries are instead trading with China's currency.  This shows the lack of trust in our countries future and leaders.  This could have horrible effects to the U.S. financially.  If we were to lose our place as the world's reserve currency the U.S. dollar would surely began to devalue very quickly.  As the dollar devalued inflation would rise, the economy would weaken, and the likelihood of an economic collapse or depression would be very high.  The fact that the United States is the world's reserve currency has kept the economy, and the country afloat.  Being the world currency creates demand for our dollar, and gives other countries the incentive to invest in our countries debt.

I've thought for awhile that may have some time yet to get the house in order, so to speak, but I started thinking about something very profound recently.  Politicians and governments typically do not start to discuss and tackle serious issues until they are forced to.  This mentality got me thinking and I believe the politicians and the governments of the world are finally talking about debt because the collapse is closer than expected.  There are really only a two key things keeping the US afloat:

1. Foreign investment
2. Being the world's reserve currency

Both of these items are tied together, without one another the whole thing falls apart.  Foreign investors continue to invest in order to prop our economy, which in turn keeps the U.S. dollar more valuable, which keeps currency exchange rates predictable.

It is the fact that the U.S. economy and dollar is so unstable that has pushed numerous countries to question whether the United States dollar should be the reserve currency.  With many organizations and countries pushing to use other currency sources (new or different) for trade, the United States may become a less important player in international trade transactions.  This in turn could eliminate the "requirement" for other countries to invest in the U.S.  If the United States can start reducing the national debt quickly and increase the value of the dollar then this may be avoided, but if the United States continues down the same path it has been on we will surely see some very difficult times ahead.

The below paragraph is a simplified version of how money is exchanged between countries:

If the U.S. is given a $2 million (USD) loan from China, China has to spend $12.96 million (CNY) in order to fulfill that loan.  If the U.S. dollar's value increases, then China will receive a larger sum of their own currency back when we pay off the $2 million (USD) loan.  On the contrary, if the U.S. dollar's value decreases then when we pay back our $2 million (USD) loan, China will be receiving less money than they had gave us in the first place, thus losing money.  This is because of how currency exchange rates work.  In order for China to give us $2 million (USD) they have to exchange their own currency into United State dollars (USD).