Have you come across those websites that urge you to prepare for the coming U.S. economic collapse? They start by saying that the debt is unsustainable, the dollar is in a bubble, or that the Federal Reserve is printing dollars. The coronavirus pandemic is one reason why some worry about an economic collapse heading into 2022.
All these assertions are true, but they’re nothing to panic over. The doomsayers say that "if" a specific event occurs, "then" the economy will collapse, such as, "If China sells its dollar holdings..." or "If the United States defaults on its debt..." But they don’t tell you that these events are not at all likely. They suggest that you buy gold coins or their survival book to prepare for the event "just in case."
- The economy is based on confidence. Fortunately, consumers and investors see the U.S. economy as reliable.
- U.S. debt has reached dangerous levels, but investors remain confident that it will be repaid.
- Globalization has made international markets more intertwined. Foreign countries have no incentive to cash in their debt quickly because it would affect their economies as well.
Why the U.S. Economy Won't Fail
It doesn't mean the U.S. economy will fail even if it enters a deep recession or even a depression. There are 10 good reasons why it won't collapse.
Unemployment Is Declining
The unemployment rate peaked at 14.8% in April 2020, according to the U.S. Bureau of Labor Statistics (BLS). This doesn't come close to economists' direst projections during the early days of the pandemic, but it's still the highest unemployment rate since the Great Depression. Fortunately, many of those people are returning to work as employers figure out how to keep their workers safe, and as the vaccine rollout continues.
The Stock Market Is Recovering
The market hit new highs, then it crashed in 2020. The highs were a reflection of underlying investor confidence. The lows were a result of uncertainty caused by the pandemic. The market has recovered as uncertainty has continued to dissipate over time.
The Economy Is Not on the Verge of Collapse
The U.S. national debt limit was set at $28.4 trillion in August 2021. Government spending in response to the pandemic drove that figure higher. Congress acted in December 2021 to increase the debt ceiling by another $2.5 trillion, to almost $31.4 trillion.
The debt-to-gross domestic product ratio is in the danger zone, but it's not enough to cause a collapse. First, the United States prints its money. It's 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 and still not face economic collapse.
Japan is another strong economy that controls its currency. It's had a debt-to-GDP ratio above 200% for years. Its economy is sluggish but in no danger of collapse.
The U.S. Won't Default on Its Debt
Most members of Congress realize that a debt default would destroy America's credibility in the financial markets. The tea party Republicans in Congress were a minority who threatened to default during the 2011 debt ceiling crisis and in 2013.
China and Japan Have No Incentive to Create a Collapse
The United States is the largest market for China and Japan. Their economies will also fail if the U.S. economy fails. China is not selling all of its dollar holdings, despite what doomsayers may claim. The U.S. debt to China has remained above $1 trillion since 2013.
The Dollar Would Decline Instead of Collapse
The dollar fell by 58% between 2002 and 2008. A euro could only buy $0.90 on Jan. 3, 2002. It was worth $1.42 by Dec. 29, 2008. The dollar's value falls as the euro's value strengthens. That was a huge drop in the dollar's value, but it was far from a collapse.
The Dollar Won't Be Replaced
The doomsayers point to gold, the euro, or Bitcoin as replacements for the dollar as the world's global currency. China's shows that it would like the yuan to become a more widely traded currency. None of these other alternatives has enough circulation to replace the dollar. Bitcoin has become the currency of choice for the underground economy.
Low Fed Funds Rate Won't Cause Hyperinflation
The real cause of hyperinflation has been debt repayments to fund wars. The Fed's programs created a liquidity trap. People, businesses, and banks hoarded cash instead of spending or lending it.
Consumer Confidence Hit a 19-Year High in 2018
Consumer spending drives about 70% of the economy. Confidence has been hit hard by the pandemic, but its strength will return.
The Great Depression Was the Worst
And as bad as the Great Depression was, it wasn't a collapse.
What All This Means to You
Do two things before you run out to buy gold or stock up on canned goods. First, read the articles linked in the 10 points above. They will give you the facts that the naysayers ignore. Or read "How the U.S. Economy Works." Second, see what a real economic collapse looks like.
Companies pulled out trillions of dollars from money market accounts in September 2018. 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 shortages didn’t happen because the Federal Reserve prevented the collapse. It guaranteed money market accounts and that restored confidence.
Even the Great Depression wasn't a collapse, but it was close. GDP fell by half. Global trade dropped by two-thirds. Unemployment was 25%.
What caused the Great Depression? Government actions turned a recession into a depression.
The Fed raised the fed funds rate to protect the gold standard. Congress cut back on the New Deal too soon. That brought back the depression in 1937. It didn't end until Congress started spending again to build up the military for World War II.
We aren't headed for an economic collapse or even a second Great Depression. The coronavirus pandemic caused a severe recession lasting several months, but a depression lasts for years.
Frequently Asked Questions (FAQs)
What type of economy does the U.S. have?
The U.S. has a mixed economy that combines elements of market and command economies. Most major economies are mixed economies, though the U.S. lands further along the market side of the spectrum than a country like China (which emphasizes more command economy characteristics).
How much money is in the U.S. economy?
At the end of 2020, there were 50.3 billion notes in circulation totaling roughly $2.04 trillion. That includes Federal Reserve notes, U.S. notes, and some types of currency that are no longer issued.
Another way to measure money in an economy is the gross domestic product (GDP), which is the total value of all economic activity in a country. The U.S. GDP in 2021 totaled just under $23 trillion.