Daniel Lacalle

Is the Dollar Under Threat?

The first sign of a country’s fall is the destruction of its currency

The u s . dollar enjoys its world reserve currency status due to numerous factors: legal and investor security, an open and transparent market, as well as independent institutions with checks and balances that limit political power and strengthen the country’s currency in relative terms.

No, a country doesn’t have a world reserve currency due to military power. No one accepted the kopek when the Soviet Union ruled half the world. For a fiat currency to be a world reserve, it needs to be widely accepted as a unit of measure, method of payment, and reserve of value.

Increasing pressure from politicians is threatening the reserve of value status of fiat currencies, and the political threat isn’t only against monetary authorities but also aimed at all institutions that provide independent checks and balances that limit political imposition.

When politicians talk about the “social use” of money, what they’re basically saying is that you’ll suffer higher inflation for longer. It means using the currency to disguise massive fiscal imbalances under the illusion that citizens will always have to use the local currency. It makes no sense.

A fiat currency, like any other good or service, is subject to supply and demand. Excessive supply damages its purchasing power in the same way that excessive supply lowers the price of a good, but weakening demand added to rising supply leads to the collapse of the currency.

The moment politicians stop defending the reserve of value status of their currency, they’re destroying the country they promise to defend.

Destroying the currency is the first sign of the decline of a nation. The rulers of the state never think that it will end, because the process is slow until it suddenly accelerates with hyperinflation and the state crumbles. This happens when neither domestic nor foreign citizens will accept the state currency as a means of payment and reserve of value. It erodes slowly and the collapse happens fast.

Countries lose their currency demand when governments attack the reserve of value status and the independence of their institutions under the perception that nothing will change. Assessing the patience of foreign and domestic users of a currency always ends badly.

However, political powers believe that they can always issue a devalued currency to hold hostage citizens who can only use the credit note issued by the state. It’s false. When domestic citizens lose their patience with an increasingly worthless currency, they move on to other systems of trade, using other means of payment and even barter.

In fact, most politicians believe that if “nothing” has happened so far and the country’s currency remains widely used, then they can continue eroding the independence of institutions and the currency’s purchasing power forever. It’s incorrect, and all empires have vanished under this illusion—the illusion of monetary sovereignty.

This is why modern monetary theory is so wrong. It assumes that monetary sovereignty is static and gives the right to governments to mismanage money at will. And monetary sovereignty vanishes as quickly as the fallacy of endless money printing.

The federal government and the central bank may believe that there’s no contender today because other fiat currencies are worse, and they’re right in that analysis. The problem is that alternatives may come from truly independent means. So far, the Fed has been smart enough to point at the Achilles’ heel of cryptocurrencies: liquidity. However, regardless of the weakness of the currently available alternatives, the only thing that will strengthen a fiat currency is for it to be a reserve of value.

Politicians demolish the independence of institutions and the purchasing power of the currency via inflationary measures because they probably believe it’s for a greater good and for “the people,” but the road to hell is paved with good intentions.

If the Fed and the U.S. government ignore the importance of the currency’s reserve of value as a policy, the end of the United States’ global status will be closer.