When will this happen?
Maybe five billion years from now, give or take.
But because this estimate is just a little outside of my window of worry, I’m not investigating planets for colonization. Instead, it’s a thought experiment – what will people do when this happens?
As for something more connected to our current way of life…
I know that the earth will run out of fossil fuel…
The first estimate I can recall for the date of severely constricted fuel supplies was the year 2000. That was obviously wrong.
Ten years ago I remember being told that the end of oil and gas as major sources of energy was probably 2050. Now, with fracking, the current estimate is well beyond 2100.
None of this negates the fact that we will run out of fossil fuel, but it sure changes how we behave between now and then.
Yes, energy efficiency is important, but it’s more about saving dollars in my wallet – as well as sending fewer petrodollars to the Middle East – than it is about stopping oil drilling in a forest.
I’m glad people and companies are pursuing alternative energy, even if I disagree with some of the government subsidies used for such purposes. We… or more to the point, my great grandchildren… will have to deal with this.
I consider this situation from time to time, and see how people might deal with it, but it is not something I have to worry about today.
At some point, the dollar will lose this privileged status. Holders of wealth around the world will find a way to conduct trade and settle contracts that don’t require the interim step of both parties holding dollars or dollar substitutes, like U.S. Treasury bonds.
The reasons for this are obvious. Foreign parties with no ties to the U.S. see the involvement of the dollar as nothing more than added complexity and cost.
The benefits of using the dollar in trade, now that the ties to gold have been cut, involve an agreed upon standard between the parties, as well as an internationally recognized storehouse of value.
As both of these things change – with international parties able to use baskets of securities and other measures as a standard, while the dollar loses its grip on holding value relative to other currencies – the tendency to use the dollar will fade.
That makes sense.
Because the dollar is no longer convertible into gold, and most foreign currencies don’t maintain a fixed exchange rate into the dollar, there are no other structural reasons for people to use the dollar as a meeting point.
That doesn’t mean there are no reasons to use the dollar. In fact, there are two very good reasons to use the dollar:
1. The lack of suitable alternatives, and
2. National security.
When it comes to choosing a currency in which to settle contracts, or in which to conduct trade, there aren’t a lot of choices.
The three largest currencies are the euro, the yen, and the dollar. As we’ve discussed often, picking one of these is like trying to find the cleanest shirt in the dirty laundry.
People might not like the dollar, but they’re downright fearful of the yen and distrustful of the euro.
Parties to a contract can always choose their local currencies, like the recent Chinese and Australian agreements, but these become subject to large fluctuations… like the 8% drop in the Aussie dollar since May 1.
As for national security, this is a much broader idea and one that many people either dismiss or simply don’t contemplate.
When it comes to choosing a currency, you certainly want to use one issued by a country that will be on the winning side of any war. While there are no major conflicts anticipated in the world today, there’s no question that the U.S. is the sole superpower, and possesses the most highly trained and experienced military on the planet.
We’ve spent a decade honing our war craft, which has certainly not escaped the notice of people who engage in large export trade, like oil producers. It’s only logical that they would choose to use a currency that looks likely to prevail in any armed conflict.
So even though the fall of the U.S. dollar as a reserve currency is much closer than the burn out of the sun, and most likely closer than the end of fossil fuel, chances are it’ll not occur tomorrow.
Or even the next day.
This would require other currencies to regain stability and credibility at a rapid pace, as well as to have military power much more equally distributed among the large, developed nations of the world. Those things don’t look too likely in the next several years.
So do yourself a favor: Don’t base your financial decisions on the possibility of the dollar losing its reserve currency status. Instead, make decisions that enable you to profit as the dollar strengthens ahead.
Ahead of the Curve with Adam O’Dell
The dollar has traded up and down in a tight range this year. And I see it setting up for a big breakout.