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.
The coronavirus pandemic is the latest reason some are warning about an economic collapse.
All those assertions are all true, but they’re nothing to panic over. The fallacy in these arguments occurs after they make the true assertion.
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 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 guns, gold coins, or their survival book to prepare for the event "just in case."
- The economy is based on confidence. Fortunately, the U.S. economy is seen as reliable by consumers and investors.
- While U.S. debt has reached dangerous levels, investors remain confident that it 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
Even if the U.S. economy enters a deep recession or even a depression, that doesn't mean it will fail. Here are the top 10 reasons why it won't collapse. Included are rebuttals to the negativists' claims.
- The pandemic is causing a serious recession. The Federal Reserve Bank of St. Louis forecast an unemployment rate of 32% for the second quarter of 2020. That's worse than the 25% unemployment rate of the Great Depression. Fortunately, many of those people will return to work as employers figure out how to keep their workers safe.
- The stock market hit new highs and then crashed in 2020. The highs are a reflection of underlying investor confidence. The lows are a result of uncertainty caused by the pandemic. Over time, that uncertainty will dissipate. As it does, the stock market will return.
- The U.S. debt is $24 trillion, more than the economy produces in a year. Government spending in response to the pandemic is driving that figure higher. Although the debt-to-gross domestic product 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 was a huge drop in the dollar's value, but it's far from a collapse. Since then, the dollar has strengthened by 24%. The euro could only buy $1.08 on April 3, 2020.
- 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. Bitcoin has become the coin of choice for the underground economy.
- The Fed's quantitative easing program and low fed funds 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.
- Consumer confidence hit a 19-year high in 2018. Consumer spending drives almost 70% of the economy. Confidence has been hit hard by the pandemic. Its strength will return as society learns how to live with a new virus.
- The Great Depression was the worst the economy has ever undergone. As bad as it was, it wasn't a collapse.
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 Sept.17, 2008, the U.S. economy almost collapsed.
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 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 will probably cause a severe recession lasting several months. A depression lasts for years.
Federal Reserve Bank of St. Louis. "Back-of-the-Envelope Estimates of Next Quarter’s Unemployment Rate," Accessed April 7, 2020.
Bureau of Labor Statistics. "Labor Force, Employment, and Unemployment, 1929-39: Estimating Methods," Page 2, Table 1. As of July 1 of each year. Accessed April 7, 2020.
S&P Dow Jones Indices. “DJIA Daily Performance History, “ Download DJIA Daily Performance History. Accessed April 7, 2020.
Treasury Direct. “The Debt to the Penny and Who Holds It,” Accessed April 7, 2020.
The World Bank. "Finding the Tipping Point--When Sovereign Debt Turns Bad," Accessed April 7, 2020.
U.S. Department of the Treasury. “Major Foreign Holders of Treasury Securities, Holdings 1,” Accessed April 7, 2020.
U.S. Department of Treasury. "Major Foreign Holders of Treasury Securities," Accessed April 7, 2020.
Board of Governors of the Federal Reserve System. “Foreign Exchange Rates - H-10,” Accessed April 7, 2020.
Center for Strategic and International Studies. "Is China Ready to Challenge the Dollar?" Page 1. Accessed April 7, 2020.
International Monetary Fund. "Currency Composition of Official Foreign Exchange Reserves," Accessed April 7, 2020.
Review of Financial Studies. “Sex, Drugs, and Bitcoin: How Much Illegal Activity Is Financed Through Cryptocurrencies?” Accessed April 7, 2020.
Consumer Confidence Board. "Consumer Confidence," Accessed April 7, 2020.
Bureau of Economic Analysis. “National Income and Product Accounts Tables," Table 1.1.5. Accessed April 7, 2020.
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 April 7, 2020.
Office of the Historian. “Protectionism in the Interwar Period,” Accessed April 7, 2020.
Bureau of Labor Statistics. "Labor Force, Employment, and Unemployment, 1929-39: Estimating Methods," Page 2, Table 1. Accessed April 7, 2020.