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 the USD.
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 currency.
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
“Hey, it’s our dollar, but its
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)
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, and Korea.
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 funds).
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
$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 system.
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
That would be the Great Depression of the
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
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
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 it.
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