• TennHedge

What Is the #1 Threat to the U.S. Economy?

Amidst the backdrop of these trying times of global unrest and pandemic, what do you think the #1 threat to the U.S. economy currently is?


Is it the growing strain in Sino-U.S. diplomatic relations?


Changing domestic demographics?


Perhaps it is the runaway Federal debt?


These are all plausible guesses, but none are correct.


The #1 threat to the American economy, and American global dominance in general, is the American dollar's status as the global reserve currency.


The Bretton Woods System ensured that the U.S. dollar would be the unit of account and settlement for the worldwide financial system, with the dollar at that time being fixed/redeemable to a certain quantity of gold.


As time went on, and as the U.S. government began spending more heavily, it became clear that the dollar being redeemable for gold just wasn't going to work, as U.S. gold stores were plunging. President Nixon removed the U.S. from the "gold standard" in 1971, through the closing of the "gold window" as it was known.


In an address to the nation, Nixon stated:


"I have directed Secretary Connally to suspend temporarily the convertibility of the dollar into gold or other reserve assets, except in amounts and conditions determined to be in the interest of monetary stability and in the best interests of the United States."


Notice how Nixon said "temporarily," in regards to his decision. The problem with government spending and debt monetization is that they are a hard habit to kick voluntarily - much like a drug addict trying to quit cold turkey.


Since 1971, the U.S. still enjoys the benefits of having its currency as the world reserve currency, with the added benefit of free-floating exchange rates. With the dollar being tied to nothing but the "full faith and credit of the United States," the U.S. theoretically can spend an infinite amount of money so long as the demand for dollars internationally is sufficient to keep the dollar from quickly losing value. In other words, the world has financed the U.S. budget, and thus the American lifestyle, for nearly 50 years.


The COVID-19 pandemic has changed the paradigm, as the U.S. has added trillions and trillions to the national debt in just a few months time, almost overnight, in an attempt to keep the economy afloat during periods of lockdown. The U.S. Federal Reserve simply monetizes the debt by purchasing treasury bonds from the U.S. Treasury through what is now known as quantitative easing, and this has worked for around a decade now.


What happens when this quits working?


If the demand for the dollar weakens abroad, or if the demand dries up altogether in a shift in the dollar's reserve status, the ramifications would be tremendous for the United States.


The American way of life and the dominance/size of the current American government and military apparatus would simply not be possible if the dollar became just another currency. I would not posit that America would suddenly become a minuscule concern, that will never happen due to geography and demographics; however, American strategic interests would be gravely threatened, and there would be a great economic power vacuum leftover to be filled by a nation such as China.


-TH


You should always consider seeking financial advice from a licensed advisor before making decisions with your money, and you should not consider anything I write as financial advice but merely my opinion. Getting your financial house in order is a prerequisite for Bitcoin saving, in my opinion.


Disclosure: nothing in this article should be considered financial advice and I am not a financial advisor. Do your own research as everything in finance carries risk.