by Peter Reagan
What happens when the world stops trusting the dollar? Global investors are already backing away – and the reckoning may have begun – just hit its 25th all-time high of 2025. Are you prepared?
It’s said that if you asked a fish if water is wet, the fish would reply, “What is water?”
In the same way, most Americans when asked if the dollar could lose its status as the reserve currency for the world, as the default currency of the world, would ask, “What is a reserve currency?” (In short, it’s the currency nearly every nation uses to buy and sell when they each use different currencies – learn more about global reserve currency.)
Most people don’t know that the perceived stability of the U.S. dollar (and it really is only a “perceived” stability) is one of the key factors which has enabled American prosperity for decades…
Perception is important, because in reality, this stability simply doesn’t exist.
The “stability” of the dollar is an illusion
Just to make absolutely sure we’re being crystal clear, let’s start with what “stability” actually means. According to the Cambridge Dictionary, stability is “something is not likely to move or change.”
A dollar is a dollar. Hard to argue with that! However, as we’ve all seen first-hand over the last few years, the dollar’s purchasing power is far from stable. I’m not just talking about the price of eggs – I’m talking about the price of everything.
Over the last five years alone, the dollar’s purchasing power has officially declined 20% (check the chart at the link – I’ll wait.)
This isn’t so much because all prices went up 20%, either. It’s because the U.S. dollar, like every other currency in the world today, is what’s called a fiat currency.
The word “fiat” (before it meant an Italian car company) is Latin, meaning “Let it be done.” Today, fiat means an authoritative or arbitrary command. If you aren’t familiar with the term fiat currency, here’s a definition:
Fiat money refers to any currency lacking intrinsic value that is declared legal tender by a government. [emphasis added]
Fiat currencies have no inherent value. They only have utility because a government mandates their use (usually to pay taxes, or here in the U.S. “for all debts, public and private”).
Without the power of government coercion, no one would use fiat currencies. No one would want them – they’re just pretty pieces of paper.
So the real answer to the question of lost purchasing power goes back to the number of dollars in circulation. Government debt creates more dollars – and when the global supply of dollars grows a bit more slowly than the global supplies of other currencies, we say “the dollar is strong.”
It’s important to understand this “strength” is relative – usually relative to all the other 180-odd legal tenders printed around the world. As I like to say, the dollar is “the least dirty shirt.”
Well, it was – recently, it’s starting to look distinctly shabbier…
The foundations of dollar stability are cracking
The Economist described the situation this way:
The dollar is meant to be a source of safety. Lately, however, it has been a cause of fear. Since its peak in mid-January the greenback has fallen by over 9% against a basket of major currencies. Two-fifths of that fall has happened since April 1st…
More alarming, the dollar’s relative strength decayed despite an increase in the yield of federal government debt.
Government debt is sold at auction. Willingness to pay higher rates on government debt generally attracts more lenders – which increases demand for, and the strength of, the dollar. (I hope this helps you understand why the Federal Reserve fights inflation by raising interest rates – higher rates means more demand for dollars and vice versa). But that didn’t happen this time.
The yield on government debt rose nearly 50 basis points (half a percent) in a week. Let me explain why that’s a big deal:
- The average weekly change in government debt interest rates over the past few decades is roughly 2–5 basis points
- Moves of 10+ basis points in a week are considered notable
- A 50 basis point spike is exceptionally rare and typically only happens during major financial shocks
And this specific move (up, not down) is a clear sign that lenders were concerned. Back to The Economist:
That mix of rising yields and a falling currency is a warning sign: if investors are fleeing even though returns are up, it must be because they think America has become more risky. Rumours are rife that big foreign asset managers are dumping greenbacks.
Now, you may think that is no big deal. Our credit card rates go up or down 50 basis points all the time and nobody loses sleep over it.
Here’s Scott Galloway to give us some context:
An increase of 50 basis points on a $36 trillion debt adds about $180 billion per year in additional interest – the equivalent of 13 aircraft carriers (we currently have 11), or $30 billion more than DOGE claims it’ll save taxpayers this year. [emphasis added]
That’s right – we lost the financial equivalent of 13 aircraft carriers in a week! Or the net worth of two Warren Buffetts. This is an unimaginable amount of money!
Now, if there was a legitimate global financial crisis, you’d expect lenders everywhere to reconsider their risk profiles, wouldn’t you? That’s not what happened.
That very same week, the cost for the government of Germany (world’s third-largest economy) to borrow money was unchanged.
The major concern here is the loss of trust in the stability of the dollar. If the U.S. dollar loses the perception, the illusion, of stability? Well, currently about $1 out of every $4 the government borrows comes from global investors – primarily from Japan, China and the UK.
What happens if the world’s lenders go on strike? Well, the federal budget is dependent on turning their loans into spending. The Economist speculates:
What would Congress do then? …during the global financial crisis and the pandemic, it acted forcefully. But those crises required it to spend, not to impose cuts. This time it would need to take an axe to entitlements and raise taxes quickly. You need only consider the make-up of Congress and the White House to see that the markets might have to impose a lot of pain before the government could agree on what to do. As America dithered, the shock could spread from government debt to the rest of the financial system, bringing defaults and hedge-fund blow-ups. [emphasis added]
No one likes tax increases. And entitlement cuts are political suicide, so, they aren’t likely to happen. After all, political power comes from spending money, not from saving money.
We could be looking at a destructive feedback loop – where instability causes more hesitation, sending the government’s debt financing costs up, causing more instability…
The U.S. has 4% of the world’s population, a 25% share of global GDP – but we also have 60% of the entire world’s capital markets. Because international investors (and lenders) think the U.S. is the best place to get a good return on their investment.
What happens if they change their minds?
“Outflows from the U.S. will likely continue”
Foreign investment, in our economy and our government’s debts alike, has been vitally important in keeping the U.S. economy strong even during the worst economic times.
Because the U.S. has a lot of advantages! Here are just a few:
- Well-developed contract law and investor protection
- An independent central bank
- A diverse, robust and frankly huge economy with almost no capital controls
- Many natural resources
- A world-class educational system that produces many new patents and start-ups
- A culture that respects and honors the rule of law
Contrast with China, for example:
- Opaque legal system with weak protection for foreign investors
- State-controlled central bank, tightly aligned with political leadership
- Heavy state involvement in the economy, including aggressive crackdowns on private enterprise
- Severe capital controls that make it difficult to repatriate profits
- Tight censorship and surveillance, creating information risk for investors
- Political risk from geopolitical tensions and unpredictable regulatory crackdowns
- A culture that places the well-being of the state above the welfare of citizens
…it’s easy to see why 5x more long-term global capital investment has gone to the U.S. than to China.
But we could be seeing that scenario changing… As Reuters recently reported:
“The three pillars of support that helped the dollar (were) U.S. exceptionalism, high interest rates, and strong [foreign direct investment]. All three have been severely weakened and potentially reversed…” said Paresh Upadhyaya, director of fixed income and currency strategy at Amundi, the biggest European asset manager.
Earlier this week, Deutsche Bank warned of the risk of a crisis of confidence in the U.S. currency, while bond giant PIMCO said it had turned more cautious on the dollar.
Satori Insights founder Matt King said outflows from the U.S. would likely continue.
Listen: I’m a patriot. I love my country and I have incredible faith in our ability to overcome any obstacle.
Even so, I do not trust the stability of the dollar. I do not believe it’s wise to rely on the dollar to preserve our wealth or our purchasing power. If an increasing number of other people around the world start agreeing with me, well, we all have a lot to lose…
What a loss of confidence in the dollar means for you
If the dollar isn’t stable, that damages the stability of our economy. Not knowing what a dollar will buy us next week or next year makes planning for the future an exercise in futility.
That makes investment in our nation more challenging – how can you build a new factory if you can’t anticipate the costs of construction? How can you bring a new product to market if you can’t guess how much it will cost to build?
We say “capital hates uncertainty.” What we mean is uncertainty makes economic growth difficult because investors hesitate when the risk side of their risk-reward calculation is unclear. Too much uncertainty makes the economy stumble. Families cut back spending. Businesses shrink through layoffs and terminations. CEOs put expansion plans on hold. Mergers and acquisitions stop altogether, new business ventures are shelved…
It’s bad news. And unlike confidence, stability isn’t something you can “fake till you make.”
I really really hope our federal government can get this situation under control without further loss of stability. I’m hoping for the best – at the same time, I’m preparing for the worst. And a lot of other people are, too…
You may have noted that, the same week these questions about dollar stability arose, the price of gold hit its 25th all-time high of 2025 at over $3,300. That’s because gold is a safe haven asset, a beacon of stability in uncertain times.
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