Top 10 Reasons Why the U.S. Economy Won't Collapse

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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. By the way, those three assertions are true and have been for years.

The fallacy in these arguments occurs afterward. You'll notice the doomsayers say "if" a second event occurs, then the economy will collapse.

For example, "if China sells its dollar holdings," or "if the U.S. defaults on its debt." They usually suggest you buy guns, or gold coins, or their survival book, to prepare for the event "just in case."

In fact, the U.S. economy is doing just fine. Here are the top ten reasons why it won't collapse. Included are rebuttals to the negativists' claims.

  1. The U.S. debt is $19 trillion. That's more than the economy produces in a year. Though 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. That makes 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, another strong economy that has its currency, has had a debt-to-GDP ratio above 200% for years. It is in no danger of collapse.​
  1. Obama added to the debt to get us out of recession, not send us toward collapse. Many of these doomsters accuse Obama of deliberately increasing the debt to destroy the United States.
  2. 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
  1. 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 its dollar holdings. It's remained around $1.2 trillion since 2013. For more, see U.S. Debt to China.
  2. If anything, the dollar would slowly decline instead of collapsing. It fell 40% between 2002-2008. It's gotten stronger since then because of the financial crisis. Investors flock to ultra-safe U.S. Treasuries and the U.S. dollar as a safe haven. 
  3. 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. 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. See Will the Yuan Replace the Dollar?
  4. The Fed's Quantitative Easing program and low current 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.
  1. The stock market hit new highs in 2015 and 2016. That's a sign of business prosperity since stock prices are based on corporate earnings.
  2. Consumer confidence hit a nine-year high in 2016. Consumer spending drives almost 70% of the economy. 
  3. Economic growth is slow but stable. Since the Great Recession, the economy has grown between 1.5% to 2.7% per year. According to business cycle theory, a bust only occurs after a boom. That's when GDP is more than 3%, which hasn't happened since 2004 and 2005. For more, see 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 linked articles in the 10 points above.They will give you the facts not explained in the naysayers' articles. 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 DID collapse. 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. Fortunately, the Federal Reserve 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 Gross Domestic Product was only $14 billion. When the banks defaulted, foreign investors fled. Within a week, the krona lost half its value, and the stock market dropped 95%. That's when almost every business in Iceland went bankrupt. (Source: "How Iceland Emerged From Its Deep Freeze,"  The Wall Street Journal, July 5, 2015.)

Although the Great Depression wasn't a collapse, it was close enough. GDP fell by half. Global trade dropped almost two-thirds. Unemployment was 25%. What caused it? Government actions that turned a recession into a depression. First, the Fed used contractionary monetary policies like raising the Fed funds rate to protect the gold standard. Congress cut back on spending just as the New Deal got the economy back on its feet. That contractionary fiscal policy brought back the depression in 1937. It didn't end until the military build-up to World War II. Here's why we aren't headed for a second Great Depression.

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