Top 10 Reasons the U.S. Economy Won't Collapse
Have you come across those websites that urge you to prepare for the coming U.S. economic collapse? They start by saying the debt is unsustainable, the dollar is in a bubble, or the Federal Reserve is printing dollars. Those assertions are all true, but they’re nothing new and nothing to panic over.
The fallacy in these arguments occurs afterward. You'll notice the doomsayers say "if" a specific event occurs, then the economy will collapse. For example, "if China sells its dollar holdings" or "if the U.S. defaults on its debt." But, they don’t tell you that these events are not at all likely. They suggest that you buy guns, gold coins, or their survival book to prepare for the event "just in case."
Why the U.S. Economy Won't Fail
In fact, the U.S. economy is doing fine. Here are the top 10 reasons why it won't collapse. Included are rebuttals to the negativists' claims.
- The U.S. debt is $21 trillion, more than the economy produces in a year, but although the debt-to-GDP ratio is in the danger zone, it's not enough to cause a collapse. First, the United States prints its money. That means it is in control of its currency. Lenders feel safe that the U.S. government will pay them back. In fact, the United States could run a much higher debt-to-GDP ratio than it does now and still not face economic collapse. Japan is another strong economy that controls its currency. It has had a debt-to-GDP ratio above 200 percent for years. Its economy is sluggish but in no danger of collapse.
- Obama added to the debt to get us out of recession, not send us into collapse. Many of these doomsters accuse Obama of deliberately increasing the debt to destroy the United States.
- The United States won't default on its debt. Most members of Congress realize a debt default would destroy America's credibility in the financial markets. The tea party Republicans in Congress were a minority that threatened to default during the 2011 debt ceiling crisis and in 2013.
- China and Japan are the biggest owners of the U.S. debt, but they have no incentive to create a collapse. The United States is their largest market. If it fails, so do their economies. Furthermore, China is not selling all of its dollar holdings. It has remained above $1 trillion since 2013. For more, see U.S. Debt to China.
- If anything, the dollar would slowly decline instead of collapse. It fell 40 percent between 2002 and 2008. It has gotten stronger since then because of the financial crisis. Investors flock to ultra-safe U.S. Treasurys and the U.S. dollar as a safe haven.
- The dollar won't be replaced as the world's global currency. The doomsayers point to gold, the euro, or Bitcoin as a replacement for the dollar. China has said it would like the yuan to replace the dollar. It's true that the dollar's value is supported by its role, but none of these other alternatives have enough circulation to replace the dollar.
- The Fed's quantitative easing program and low fed funds rate won't cause hyperinflation. If anything, these programs have created a liquidity trap. That's when people, businesses, and banks hoard the extra cash instead of spending or lending it. The real cause of hyperinflation has been debt repayments to fund wars.
- The stock market hit new highs in 2015 and 2016. Stock prices are based on corporate earnings, so that’s a sign of business prosperity.
- Consumer confidence hit a nine-year high in 2016. Consumer spending drives almost 70 percent of the economy.
- Economic growth is slow but stable. Since the Great Recession, the economy has grown between 1.5 - 2.7 percent per year. According to business cycle theory, a bust only occurs after a boom. That's when GDP is more than 3 percent. It hasn't been that high since 2005 according to a review of GDP by year.
What It Means to You
Before you run out to buy gold or stock up on canned goods, do two things. First, read the articles linked in the 10 points above. They will give you the facts the naysayers ignore. Or read "How the U.S. Economy Works."
Second, understand what a real economic collapse looks like. On September 17, 2008, the U.S. economy almost collapsed. That's when companies pulled out trillions of dollars from money market accounts. It would have created a severe cash crunch had it continued. The nation's trucking industry would have ground to a halt. Gas stations would have gone dry. Grocery stores shelves would have gone empty. But those things didn’t happen because the Federal Reserve prevented the collapse. It guaranteed money market accounts and restored confidence.
Iceland's economy collapsed in 2008. Its banks had defaulted on $62 billion of foreign debt. They had used the debt to finance foreign acquisitions. But Iceland's entire gross domestic product was only $14 billion. When the banks defaulted, foreign investors fled. Within a week, the krona lost half its value. The stock market dropped 95 percent. That's when almost every business in Iceland went bankrupt.
Although the Great Depression wasn't a collapse, it was close. GDP fell by half. Global trade dropped almost two-thirds. Unemployment was 25 percent. What caused it? Government actions turned a recession into a depression. First, the Fed used contractionary monetary policy like raising the fed funds rate to protect the gold standard. Congress cut back on spending as soon as the New Deal got the economy back on its feet and that contractionary fiscal policy brought back the depression in 1937. It didn't end until the military build-up to World War II, but we aren't headed for a second Great Depression.