The Chinese People’s Liberation Army has described attacks on our currency as a means of financial warfare capable of destroying a superpower. The Iranians, Venezuelans, and North Koreans have all dreamed of the day that the dollar would collapse, knowing that would end America’s global leadership.
What makes the dollar so very vulnerable is our massive global debt and utter dependence on dollar acceptance to fund continuing deficits. Official statistics show American debt topping $17 trillion and growing by about $1 trillion each year. This only happens because the world needs dollars for global trade, especially for oil. Until recently, when nations like China and Brazil conducted trade with one another, they would do so with American dollars. When Saudi Arabia sells oil, it demands dollars in return. And, when nations have excess money, called currency reserves, they typically hold those in dollars.
The dollar has long been viewed as the primary reserve currency of the world. This has allowed us to issue more debt than any nation ever before in history yet maintain extraordinarily low interest rates. So, when we want to expand military spending, we have been able to issue IOUs in the form of Treasury bonds. There has been no limit to American spending capacity.
Even despite our enormous debt, as recently as this past summer the government was able to borrow money for 10 years for just 1.5% annual interest. More recently, the 10-year rate has been closer to 3%, which is still quite low. Just imagine, however, what would happen if people ceased wanting dollars altogether. Lenders were paid 10% or more to loan money to the U.S. government in the first half of the 1980s. If that happened today, the interest alone on our debt would approach $2 trillion per year, barely below total Federal revenues. We’d be essentially broke as a nation, unable to finance even the most basic of government services. We wouldn’t be able to borrow, having to print money to pay debts, and this would eventually cause a financial death spiral. And that’s just from a return in interest rates to levels of 30 years ago.
If the dollar were suddenly removed from its preeminent status as global reserve currency, our government would quickly lose the ability to borrow at all, and the consequences would be even worse. When a reserve currency collapses, the effects are devastating, both to the nation and also to its unprepared citizens. Our enemies are aware and our allies are afraid.
The worst part is that just a handful of the many nations who have publicly called for the dollar to be diminished could, if they worked together, effectively destroy our currency. To date, it has not been in their interest or power to do so. But Saudi Arabia and other OPEC nations could replace the dollar in oil trade, or China in the trade of goods, and the fuse would be lit.
Prudent Americans must consider taking steps collectively to protect our currency and individually to protect our wealth. There are certainly things we can do that would blunt a dollar attack. Unfortunately, our hubris has caused most Americans to ignore our very real vulnerabilities.
Ayman al-Zawahiri, current head of al-Qaeda, has studied our weaknesses closely. Last September, on the 12th anniversary of the 9/11 attacks, he stated:
“America is not a mythic power and the Americans, after all, are humans who can be defeated, felled, and punished.”
How did he suggest taking America down? By defeating America economically, urging the Islamic world “to abandon the dollar and replace it with a currency of other countries.”
Zawahiri may be right. America may not have the mythic power of Achilles. But we certainly have his heel.
Kevin D. Freeman, CFA, is the author of Game Plan: How to Protect Yourself from the Coming Cyber-Economic Attack. Personally selected by Sir John Templeton to help build the Templeton Private Client Group, he has more than thirty years of experience in financial markets.