I always posit this question, to which I have never received a satisfactory answer: What, exactly, would the US do if the world suddenly decided that the dollar was worth nothing?
Massive buybacks of dollars by the Fed would be seen as an ineffective and desperate move. Besides that, what other recourse do they have?
The US dollar is backed by its military and government. In practice, while the US can reduce supply by buying dollars like you said, it can also increase demand by incentivizing buying US currency (say by raising interest rates, or requiring certain transactions to be done in dollars).
Economically the US is very well positioned - it has friendly neighbors, a robust legal system, a diversified industry and a lot of natural resources, so it would take quite a bit for hyperinflation to occur. Obviously anything is possible, though.
> You gonna force people to buy dollars at gunpoint?
It's only a slight exaggeration to describe taxes like that. There are huge amounts of assets held under the jurisdiction of the US government (probably somewhere north of $100 trillion[1]) and a huge number of people who live under the jurisdiction of the US government (>300 million). If the owners of those assets or the people living in the US don't pay their tax bills, the government can resort to seizing their property to cover the tax bill or jailing the person who didn't pay. If they don't cooperate with that action, the government can send people with guns to force them to comply. Effectively, everyone who lives in or owns property in the US is forced to acquire dollars to pay their tax bill.
One example of this is the US collecting taxes in US dollars. Why not let me pay my taxes in Euros or gold (or bitcoin :D)? And there's the threat of violence backing this. If I refuse to pay my taxes in US dollars, I'll get some angry letters, I'll have my property seized, and then I'll get some police officers showing up at my door - and if I continue to resist, I'll either be arrested or killed. For refusing to pay my taxes in US dollars.
Likewise, US dollars are "legal tender for all debts public and private". If someone (in the US) refuses to accept US dollars to consolidate a US debt, they will be arrested or killed (after several opportunities to course correct) and their property will be forcefully taken.
And for a third example - consider someone trying to set up an unregistered company in the USA. If they get on the government's radar, what do you think their long term prospects are?
Fortunately, our legal system and general social beliefs mean that it rarely if ever would come that far. But the threat of violence is real. And think - without that threat, however far removed, why would anyone pay their taxes or follow most laws?
If you mean the people of the US still value the dollar, i don't think it would be a huge hit.
People will scoop up all the free dollars, and bring them back to the us where they have value.
Contracts still have to be paid in dollars. Some people around the world would be upset that their dollars are worthless, but it turns out they could sell those dollars to people who need to pay debts in dollars. So suddenly this valueless piece of paper has value again, because you can trade it for things you want.
if you can in an instant impose some irrational condition for an instant, i think the global economy will, certainly shift, but people would notice all of the arbitrage opportunities and things would _generally_ go back to the way they were, like a flash crash.
if you could wave a magic wand, and make people think the dollar is worthless for 10 years? That would be weird. i imagine we'd make a new currency, dollar2 and just pay everyone in that. you could bring in old dollars to the us and exchange them for dollar2's. But because people are under a spell, they can't think of the arbitrage idea. so it only happens accidentally.
They would do the opposite of quantitative easing: jack up the Federal Funds rate and reverse open market operations to pull liquidity away from banks. Higher interest rates would encourage people not to dump USD, while also counterbalancing the cheap-money boom created by the influx of USD.
If the influx of USD was higher and faster than could be addressed, the economy would naturally get inflation that would force interest rates even higher up (since no banks will lend at a loss, so borrowing costs get pushed up first by the fed, and then by the need to cover for expected inflation). This would be a death blow to many indebted and highly-leveraged businesses that are dependent on low interest rates for operational purposes (including those in the financial sector) and so they would go out of business. The need for the financial system to write-off the debt held by these companies would also eliminate a certain amount of money in circulation. Eventually enough money has been destroyed/absorbed and the economy is back in equilibrium.
On a less than academic note: this is not a totally unlikely scenario since the flight-to-crypto is a de facto process of de-dollarization, with crypto assets essentially replacing fiat both as store of value as well as medium of exchange. Put another way, the increase in the value of cryptocurrencies is really just a loss in the purchasing power of everyone holding fiat, and since these additional assets are now competing to purchase the same pool of goods, what people think of as bubbles in assets like housing are really just reflective of inflation in the underlying supply of money-that-can-buy-things. And it will get worse when you can sell your house for crypto.
Let's imagine the entire rest of the world thought that the dollar was worth nothing. Well everyone in the US still needs dollars to pay their taxes, so they'll still want to get their salaries in dollars. Similarly, people will sell stuff in dollars too. Now if someone outside the US wants something that someone in the US produces, they'll be able to get it really cheaply by trading their valuable currency for tons of dollars. They'll do that, buy stuff from the US, and make a huge amount of money. This obviously presents an upward pressure on the dollar's value, until the cost of things from the US more or less balances out.
As long as there's a base of goods/services that can be bought and are priced in dollars, dollars will continue to have value.
The backing of the USD is the most powerful military the world has ever seen and the richest economy the world has ever seen.
Why would the world suddenly not want in on that?
When Zimbabwe destroyed its currency the real killer wasn't leaving the printing presses on (it was too late by that point) it was the systematic destruction of its agricultural industry.
One reason might be because this gives the US too much influence over the world (I know I am oversimplifying here). As long as everybody got along well, and most of the countries in the world were growing economically, the dollar served a common goal. But now we are increasingly heading towards a world where trade wars are common and policy makers are looking inwards rather than outwards. Perhaps all the armed conflicts that US has gotten into also lead to more ideological misalignment in the world.
So, in such a world, I wouldn’t find it so surprising that certain countries would like to wean themselves of the dollar. Of course, this it is more important for powerful geo-political actors like China and Russia, than Somalia (uses USD extensively), and as an example you can look at how China is planning on offering a yuan priced oil contract that is backed by gold.
But it’s a pretty far-fetched hypothetical scenario. You could also ask, what would happen if all of a sudden everyone in the world decided that food had no value? Gee whiz, all the farmers and restaurant owners would be screwed!
I'm not sure that you realize that the current monetary system is only about half a century old. Fiat currency, backed by nothing except the government, has only existed since the 1970s.
You might as well ask what would happen if the world suddenly disbelieved in anything else that's just a social construct -- property, authority, family, etc. It's a fun and perhaps enlightening thought experiment, but not much practical use.
The hard basis of USD is printed on the bills. “Good for all depts public and private”. This means that any bills owed to USG is payable in dollars as well as any payment of debt ordered by a court. I agree that the worldwide value is largely theoretical but the non theoretical value is large in a several trillion dollar economy. If the dollar goes down, it is guaranteed to be useful to buy us companies and land. That has a strong lower bound.
Iraq was invaded shortly after Saddam attempted to switch from USD to Euro for their oil exports. I’ve heard various theories for the ultimate reason for the war and of them this one seems pretty convincing.
I always posit this question, to which I have never received a satisfactory answer: What, exactly, would the US do if the world suddenly decided that the dollar was worth nothing?
Massive buybacks of dollars by the Fed would be seen as an ineffective and desperate move. Besides that, what other recourse do they have?