Top 10 Reasons Why 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."
- The economy is based on confidence. Fortunately, the US economy is seen as reliable by consumers and investors.
- While U.S. debt has reached dangerous levels, investors remain confident that is will be repaid.
- Globalization has made international markets more intertwined. Foreign countries have no incentive to quickly cash in their debt since it would affect their economies as well.
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 $23 trillion, more than the economy produces in a year. 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's had a debt-to-GDP ratio above 200% for years. Its economy is sluggish but in no danger of collapse.
- 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 the largest market for these countries. If the U.S. economy fails, so do theirs. Despite what doomsayers may claim, China is not selling all of its dollar holdings. The U.S. debt to China has remained above $1 trillion since 2013.
- If anything, the dollar would slowly decline instead of collapse. It fell by 58% between 2002 and 2008. On Jan. 3, 2002, a euro could only buy $0.90. By Dec. 29 2008, it was worth $1.42. The dollar's value falls as the euro's strengthens. That's a huge drop in the dollar's value, but it's far from a collapse.
- 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's actions indicate it would like the yuan to become a more widely-traded currency. None of these other alternatives have enough circulation to replace the dollar.
- The Fed's quantitative easing program and low fed fund rate won't cause hyperinflation. The real cause of hyperinflation has been debt repayments to fund wars. If anything, the Fed's programs created a liquidity trap. That's when people, businesses, and banks hoard the extra cash instead of spending or lending it.
- The stock market hit new highs in 2020. Stock prices are based on corporate earnings, so that’s a sign of business prosperity.
- Consumer confidence hit a 19-year high in 2018. Consumer spending drives almost 70% of the economy.
- 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%. It hasn't been that high since 2005 according to a review of GDP by year.
- President 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.
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, see 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.
Shortages didn’t happen because the Federal Reserve prevented the collapse. It guaranteed money market accounts and restored confidence.
Although the Great Depression wasn't a collapse, it was close. GDP fell by half. Global trade dropped almost two-thirds. Unemployment was 25%. 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.
Treasury Direct. “The Debt to the Penny and Who Holds It,” Accessed Jan. 6, 2020.
The World Bank. "Finding the Tipping Point--When Sovereign Debt Turns Bad," Accessed Jan. 7, 2020.
U.S. Department of the Treasury. “Major Foreign Holders of Treasury Securities, Holdings 1,” Accessed Nov. 20, 2019.
U.S. Department of Treasury. "Major Foreign Holders of Treasury Securities," Accessed Jan. 7, 2020.
Board of Governors of the Federal Reserve System. “Foreign Exchange Rates - H-10,” Accessed Jan. 8, 2020.
Yahoo! Finance. “Dow Daily Highs, Lows, and Closes Since 1985,” Accessed Jan. 8, 2020.
Consumer Confidence Board. "Consumer Confidence," Accessed Jan. 8, 2020.
Bureau of Economic Analysis. “National Income and Product Accounts Tables," Table 1.1.5. Accessed Jan. 6, 2020.
Bureau of Economic Analysis. “National Income and Product Accounts Tables,” Table 1.1.1. GDP Growth. Go to "Modify" and set starting year to 2007 and select "Annual." Accessed Jan. 6, 2020.
Stanford University. "The Facts of Economic Growth," Page 5. Accessed Dec. 25, 2019.
Bureau of Economic Analysis. “National Income and Product Accounts Tables," Table 1.1.5. Select "Modify,” set starting year to 1929 and click "Annual." Accessed Jan. 6, 2020.
Bureau of Labor Statistics. "Labor Force, Employment, and Unemployment, 1929-39: Estimating Methods," Page 2, Table 1. Accessed Oct. 2, 2019.