What Would Happen if the USD Collapsed?
This paper looks at some kind of estimate of
the economic losses/damages the world would incur if the USD
went to zero next week. The conclusion is that it is inconceivable
that any world central bank would ever
even think of allowing a total USD collapse because
of the financial and economic Armageddon that would follow
for every nation in the world regardless of how much they
like or hate the US and the USD….
Since World War 2, the USD has become the de
facto world reserve currency. Right after WW2, the US had
accumulated well over half the total world gold because of
WW1 and WW2 arms sales to allies much of which were paid for
in Gold initially. Of course, we know that the US then went
to a ‘Lend-Lease’ policy of outright arms gifts
to allies as WW2 progressed.
But After WW2, the world economies were destroyed
and the USD was allowed to become the de facto world currency
because we had accumulated so much gold. The other nations
decided in the Breton Woods agreement to fix their currencies
based on a ‘gold dollar’. Until 1970, this was
a de facto gold currency until Richard Nixon closed the gold
convertibility of the USD. The effect was, and is, that most
of the world’s wealth today is inextricably tied to
At that time, the penetration of the USD worldwide
was so vast that the world economy continued to base all prices
of commodities, and prices, on the USD. Basically, even though
the US had taken the USD completely off the gold standard,
the financial mass and utility of the USD in the world economy
was so powerful that the USD remained the de facto world reserve
Basically, the vast majority of the world’s
wealth is now inextricably tied to the USD. This means that
world central banks will not willingly permit its uncontrolled
collapse. But there is another alternative which will be looked
at in the end of this piece. That is an unforeseen or accidental
financial meltdown that destroys the USD anyway.
A US treasury official in the 1970’s talked
to a world central banker about the banker’s complaints
that the US had a free ride, and was taking advantage of the
de facto USD world currency standard. The Treasury official’s
“Hey, it’s our dollar, but its your
No doubt the world is reliving that conversation
at this time. China, Japan, Russia, the Middle East oil kingdoms,
Korea, Taiwan, and all the other major industrial powers of
the world today are locked in a no win situation of having
to take USD’s for all their goods, and having to allow
the US to run ruinous fiscal and trade deficits. They really
have little choice because every industrial and commercial
process from banking to making TV sets is cost based in USD
and paid for predominately in USD.
To get to the point:
What would happen if the USD system collapsed?
Wouldn’t every industrial process, banking
transaction, retirement fund, manufacturing process stop dead
for a time?
Wouldn’t that mean that the world economies
would have to endure a major depression and financial collapse
because the oil in the world financial machine (the USD) ran
Wouldn’t there be massive shortages, as
just in time manufacturing for everything under the sun stopped
cold because the USD financial payments for everything from
commodities inputs to worker paychecks, to truck drivers,
to fuel payments for trucks became worthless?
Would the world have to find a new way to clear
every financial transaction
from a paycheck to even a box of pencils for a factory? Find
out how to clear the entire mass of USD transactions that
encodes every thing that is made, paid,
invested – every second everywhere…
I.e. if the USD collapses the entire world economy
stops cold. And then consider the fact that just in time manufacturing
means that the entire supply of every thing has about 3 days
inventory, and if factories have trouble making payments to
suppliers for example, the factories have to stop, and 3 days
later, there just aren’t any more critical ‘XXX’
(you fill in the blank).
Imagine every USD denominated bank account becoming
worthless. Imagine trillions of dollars of retirement funds
becoming worthless. Imagine China losing 2/3 of its trillion
dollar foreign reserves - and Japan, and Russia, and Taiwan,
I have tried to guesstimate the total amount
of USD denominated wealth in the world. IE the total amount
of everything that has become irreversibly
tied to a USD since Breton Woods:
If you were only to look at just the US - USD
cash out, something like the old US M3, that figure is around
$11 trillion. Then add about oh $3 trillion of USD cash foreign
reserves in places like China and Japan. Of course, some of
that is double counted because some of it would be considered
in the old M3 figure (the old M3 figure is all USD cash and
quasi cash the US has outstanding, including things like money
But these figures – about $14 trillion
are a small fraction of the real amount of USD assets. To
really get an idea of this figure, we need to include the
total value of the US stock market. Total value of the US
mutual fund industry. Total value of USD denominated insurance
outstanding. Total value of much of the commodities valued
and the commodities exchanges and commodities trade.
I’m just broad brushing this. Also include
the total value of USD loans outstanding in Real Estate if
you really want to boost the calculation. Also include the
total amount of USD treasury bonds. Also include the total
amount of USD denominated derivatives!
General stab at listing the above:
USD real estate loans : $50 trillion
USD bond universe: $50 trillion (wild guess)
USD derivatives of every type: $300 trillion
USD valued/contracted commodities outstanding $50 trillion
USD financial instrument universe outstanding $100 trillion
USD financial obligations of the US Federal government $50
Now, this is all very broad brush and rough.
But this all comes to a cool
I guess I have missed about half of everything
because this listing would really be about 5000 pages. I just
picked some of the big items. SO let’s double this figure:
$1200 trillion of USD denominated and irreversibly
connected world assets and money.
All this linkage was created mostly since Breton
Woods in 1944 which was created to keep cash from draining/rushing
out of Europe in World War 2.
Now I want to do another modification. These
values are all only the static value of these amounts. To
really get an idea of what wealth would be lost to the world
if the USD totally collapses, we need to include something
like a capitalization for the lost yield on these assets while
the world figured out how to replace the USD with some other
If I capitalize $1200 trillion dollars at a
very conservative 5%, for say a very conservative 10 years
merely to try to get back to where we were just before the
USD collapsed, we have to include another 50% on top of that
figure, and I am not even amortizing.
SO add at least another $600 trillion.
Now, finally, we need to look at the incalculable
value of what a real world reserve currency does for financial
and manufacturing efficiencies. I would say that these efficiencies
the world relies on for all its business and transacting would
be at least 1/3 more of the total value of the whole thing.
This is probably one of the more vauge things I am including
in this calculation. That component comes to:
Another $400 trillion.
Grand Total: $2200 trillion
If these calculations make your eyes glaze over,
imagine what it is doing to the world central bankers!
“the USD is our currency but it is your
Ok, let’s put this whole thing into perspective:
If the USD collapsed to zero tomorrow, the entire world economy
would stop cold, and the total loss to world wealth would
be something like $2200 trillion over a period of ten years.
I think this is a low estimate actually.
It would take the US with a GDP of $14 trillion
a year 157 years to replace all that wealth.
It would take the world with a GDP of about
$50 trillion a year 44 years to re create all that wealth.
And of course how would the US or the world
earn all that back if the world economy stopped cold for about
ten years in the mean time till they came up with an alternative
to the USD?
This may all sound preposterous. You know, the
idea that so much world wealth would disappear if the USD
were to go to zero like that. However, I would like to point
out that there is an event we can look at that has comparable
type factors in the above calculations, not due to a currency
collapse but in terms of the economic losses incurred.
That would be the Great Depression of the 1930’s.
In that depression, the US and most financial
markets lost about 90% of their entire market capitalization.
They lost about ten years of GDP, in the case of the US alone
the lost GDP was about 30%. Many other trading nations with
us in that time lost more than 50% of their yearly GDP because
so much economic activity stopped.
Hundreds of millions of people world wide literally
starved for ten years, and also did I mention that WW2 cost
the world about 100 million casualties, and that war had lots
of its causes directly related to the Great Depression and
the social and international stress it created.
Then calculate the hundreds of trillions of
USD losses of capital, plants, and destroyed cities from that
war, and we have a definite analog to the kind of scenario
I just played out in my estimate of the economic damages /
losses that would come from a USD collapse.
In short, literal and real world financial Armageddon.
The US would not be the only loser.
We have already seen such kinds of losses of
such magnitudes before less than 80 years ago!.
So don’t think this is so way out there
because it is not way out, this stuff happens!
Now, I have to make one final observation. People
think that world central banks would be the ones to sell/kill
off the USD, IE that is the only way it can be wiped out.
The scary reality is that they may not be able to stop it
from happening if they wanted to stop it. The fact is, a financial
accident of market dominoes could easily cause a panic rush
out of the USD. In the great depression, there was flight
into the USD. This time, if there is a big worldwide financial
collapse/panic, there will likely be flight OUT of the USD…..The
central banks might easily not be able to stop a real USD
panic even if they tried concertedly.
I have written again and again that your retirement
funds and investments are probably mostly in USD assets, and
are subject to vaporization if a major world financial accident
happens, central banks or no central banks. This might not
happen for years. But we are definitely on the precipice of
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