What Happens in a Dollar Collapse?

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As I write, the gamesmanship surrounding a Greek debt default continues, with Greek Prime Minister Alexis Tsipras seemingly conceding to the country’s creditors, while denying having done so to his voters. My colleague Jeff Opdyke believes that there won’t be a “Grexit” from the euro zone, and he may well be right.

If Greece did abandon the euro, however, the consequences for ordinary Greeks would range from catastrophic (for Greek bankers and households who borrowed abroad in euros) to fundamentally life-altering. For example, when the Greek government abolished subsidies for heating oil, tens of thousands of Greek households resorted to heating their homes with wood and coal instead, leading to a spike in respiratory illnesses which they can no longer afford to treat.

That got me thinking: What happens in a dollar collapse? Specifically, if the U.S. were to suffer a catastrophic currency collapse, what would ordinary consumers notice first? The answer may surprise you.

Before I explain exactly what happens in a dollar collapse, I’ll warn you: Preparation is key. So you might want to start planning ahead for the day when your dollars don’t buy as much as they do today. Here’s why.

According to the classical Ricardian model, international trade is a good thing. It encourages countries to specialize in the production and export of commodities in which they have a “comparative advantage,” and to use those earnings to buy commodities others can produce more cheaply. That’s been the rationale for the dismantling of U.S. manufacturing and its move to Asia, where wages and other input costs are low, relative to the U.S.

In the long-run, trade is undeniably a good thing. But the existence of fluctuating currencies in the global economy means that sudden changes in the relative value of one currency against another can cause extraordinary changes in the price of imports. These changes upend the relative prices of everyday consumer goods. For example, if the Greeks suddenly return to the drachma, they can expect the prices of euro-denominated imports like petroleum, pharmaceuticals and processed foods to skyrocket. Ordinary people would have to learn to live without, or come up with substitutes. I saw this happen firsthand when I lived in South Africa, when the rand collapsed in 1985 and again in 2003.

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Your Daily Imports

Americans are just as vulnerable to a currency shock as Greeks. So what happens in a dollar collapse is that things that we currently take for granted would suddenly become unavailable, or cost a great deal more to obtain.

For example, imported foods like fish, fruit, coffee, cheese and out of season vegetables are imported to the U.S. in vast quantities — more than $12 billion worth every month. A dollar collapse would make them vastly more expensive. In my African days, I got used to drinking rancid powdered “coffee” that was the only thing most people could afford. Even government ministers served it, because the real thing was so expensive. You’d have to do the same if the dollar dives.

Besides food, the list of things we import — and which would suddenly become out of reach for many of us in the event of a currency collapse — include:

  • Apparel: 65% of U.S. clothing is imported, from China (37%), Vietnam (9.4%), Indonesia (7.2%) and Bangladesh (6.7%). Get out the sewing kit!
  • Footwear: Almost all of the shoes bought in the U.S. come from China, Vietnam, Indonesia and Mexico. Cobblers everywhere, on the other hand, would rejoice if imports suddenly became out of reach.
  • Furniture: The same is true for household furniture, 85% of which is imported. On the other hand, eating on the floor is supposed to be good for you.
  • Household appliances: 90% of white goods (washers, fridges, etc.) and consumer electronics are imported. No more iPhone upgrades for you, but your neighborhood appliance repairman would probably become a millionaire.
  • Automobiles: 80% of cars on U.S. roads come from Canada (31%), Japan (24%), Germany (16%) and Mexico (12%). Like Cubans, we’d soon be keeping old clunkers on the road with duct tape and bailing wire.

It gets worse: Many iconic American items are entirely imported. They include baseballs, Converse All Stars, Levi’s, Huffy bicycles, televisions, and most American flags … not to mention Monopoly, Etch-a-Sketch, Radio Flyer wagons and Barbie dolls.

Penny Wise, Pound Foolish

America’s addiction to imports and the strong dollar that underpins them have made most of us vulnerable in ways we don’t even know about. Many of us have taken steps to hedge against this by buying gold, collectibles and other dollar-proof stores of value, but few have thought about how the prices of essentials could skyrocket, wiping out some of that advantage.

That’s one reason the skills I learned abroad will come in handy. I can repair my own car and appliances, repair and even build furniture, and grow my own vegetables. I tend to buy robust, long-lasting furniture and other items so I can keep them for a long time if needed. You can do the same, and given the state of our economy, you should.

Unfortunately, however, there isn’t anything we can do about high-priced imported coffee … except, perhaps, invest in an offshore coffee-producing venture now, before it’s too late.

Kind regards,
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Ted Baumann
Offshore and Asset Protection Editor