We could see the dollar collapse in the blink of an eye.

Steven Roach –
"The COVID Shock to the Dollar"

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– Flash Points –

1 – The dollar could collapse at warp speed.
2 – The US has many structural problems that will hamper any recovery.
3 – The lack of savings will force the country to borrow more and more.

– Synopsis –

In a recent article on Project Syndicate, Stephen Roach, senior fellow at Yale University’s Jackson Institute for Global Affairs, implied that a dollar collapse could occur at “warp speed.” Just as the world was blindsided by the coronavirus pandemic in the short timeframe of a few months, so too will the economic consequences come at us in shock waves. Consequently, a crash of the dollar could happen much sooner than expected – possibly within 2–3 years. 

A Flimsy Structure and a Weak Economy

Any economic recovery in the US will be hampered by the “deep-rooted structural problems”  of its economy. For the past 15 years or so, the US has manage to survive with only “a razor-thin margin of subpar saving.”     _{(Image source)}

Over 1960–2005, the net national saving rate averaged 7%, and it reached as high as 11.5% during the economic heyday of the 1960s. These days, however, it’s down to a paltry 1.4%. Roach states that a country’s saving potential is its “seed-corn of long-term economic growth.”   

Borrow to Oblivion 

The severe lack of savings in the US necessitates that the country constantly borrow from abroad, forcing it to run “current-account deficits in order to attract the foreign capital.”

While the US could continue to do so in normal times, the pandemic might result in a record current-account deficit, and force the net national saving rate down to –10% over the next 2–3 years. The result could well be a deterioration of the country’s currency – even the death of good ol’ King Dollar.

– Insight from Outside –

Many observers have noted that the US never really recovered from the 2008 crash. It simply stuck a few king-size bandages on the wounds and pumped the sick patient full of monetary methadone.  

Unwell During the Unrest 

Another larger crash would have come eventually. As it turns out, the coronavirus pandemic brought it along quicker, owing in part to the confused and misguided response of the US leaders. According to Roach, the US’s “abysmal failure”  to deal with the pandemic or the civil unrest of these times may have long-lasting and wide-ranging consequences for the dollar.  

How Soon is Soon? 

Many readers of these “Death of the Dollar”  posts write that they do not expect the dollar to collapse, and that any eventual collapse will occur in the distant future. Usually, I agree with them, since we can be quite certain that the dollar will not collapse next month, nor next year.   

But, as Roach points out, a major collapse could happen within 2–3 years. Looked at from a broader historical perspective, that means that we could see the dollar collapse “in the blink of an eye.”    _{(Image source)       Previous posts in this series – "Death of the Dollar, Posts 1–30"}