Will the Dollar Remain Dominant? Part II

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Will the Dollar Remain Dominant? Part II

In last week’s episode I shared four reasons I think the dollar remains the most widely held form of currency in the world for the next couple of decades. More so than the strength of the dollar, I highlighted the weakness of other currencies. There just isn’t a formidable challenger in the sphere of other countries’ currencies. But there are assets other than nation-backed currencies that I think will make inroads in the future – two in particular: Gold and Bitcoin. There is one major reason that gives these non-traditional asset classes a following – a lack of fiscal responsibility from governments all over the world. Let’s start with the US.

How can we measure the fiscal challenges for the U.S? One way is by looking at the annual budget deficit. I think it’s more helpful to view the deficit in terms of its percentage of GDP rather than in total dollars. The reason for that is that inflation is going to make comparisons to previous years impossible. Additionally, we want to compare our deficits and our debt, for that matter, with our total production of goods and services. That’s what GDP measures – the Gross Domestic Product.

So as a percentage of total GDP in 2023, the deficit was 6.3%. Doesn’t sound that bad. That is, until we realize that we’ve had a budget deficit every year since 2001, and those deficits have been trending worse and worse. To put that into perspective, we’ve spent more than we’ve taken in every year for over two decades. The cumulative effect of this is an ever-increasing percentage of total debt compared to our GDP. So, in 2001, our debt was roughly 55% of our GDP. In 2024, that number is 120%. All of this data, by the way, is from the St. Louis Fed. People are still willing to lend us money, so it’s not a problem yet. But if the world decides to invest its money elsewhere, we could our cost of borrowing go up, which also means interest rates in general will go up.

How about the debt compared to GDP in other countries? According to the World Population Review, Japan’s is the highest at 264% followed closely behind by Venezuela at 241% and Sudan in 3rd place with 186%. The U.S is 9th on this particular list. The U. K’s debt is roughly 97% of its GDP and China is about 77%. Now this number, in and of itself, is not a sole measure of financial health. But if you see this number for any country increasing over time, it’s an indicator that country is not currently living within their means. As this happens over time, it can erode faith in a country’s currency. As this happens, people will start to store their value in alternative assets – queue the conversation about Gold and Bitcoin.

Why would gold be an alternative to holding currencies backed by governments? Because Gold has its own value that is determined by supply and demand, and it is generally independent of what countries are or aren’t doing. For this reason, gold has been a store of value for centuries. Did you know at one time, every dollar in your pocket was backed by gold? But in the 1970’s the US (along with many other nations) abandoned dollar-backed gold and now the only thing standing behind most paper currency is the nation that issued it. If you have complete confidence in the nation standing behind it, then there are no worries. But many of those who lack that confidence are going to put a portion of their money in an alternative asset like gold. But there are some tradeoffs with gold. It’s not exactly easy to do business with, is it? In other words, it’s hard to pay for a cup of coffee with gold. It’s also expensive to buy gold. And thirdly, it’s hard to store it safely. This leads us to talk more about Bitcoin.

Bitcoin has been referred to as digital gold. But most Bitcoin enthusiasts might actually say that it is better than Gold. Why is that? Two main reasons. Number 1, Bitcoin is easier to buy and sell and use than Gold. You actually can buy a cup of coffee at Starbucks with Bitcoin. Number 2, there is a finite supply of Bitcoin. Although it takes a lot of time and effort to mine for gold, theoretically, there is more gold to be found in the world. Bitcoin must also be mined, but there is a cap on how much Bitcoin will eventually be in circulation. This limits the supply. But since Bitcoin, and gold for that matter, don’t have countries standing behind them, the price is mainly determined by demand. How confident are people in the value of Bitcoin? Right now, they are very confident, with one Bitcoin worth over $100,000 as of today. But with the public’s confidence being one of the primary determining factors of the value of Bitcoin, this can lead to volatile price swings that can be jaw dropping – in both directions.

I want to be clear that I’m not recommending that you buy gold or Bitcoin. But I am making the statement that I think both will grow in popularity over time. Just because they grow in popularity and usage doesn’t necessarily mean they will be worth more – but I think you will know more people that own one or the other a decade from now. You might even own some yourself, by then. But even if that is the case, I think people will own these assets as a supplement, or maybe even as insurance to their primary holdings, which I think will continue to be in U.S. Dollars for the foreseeable future. How long that lasts will depend on how well our government stewards the dollars we give them in the future. In our next episode, we’ll talk about the means we are using to pay for things, including some facts that you might not know about Venmo, Apple Wallet and Pay Pal Stable Coins. We will also talk about the effect they may have on the banking system in the future.

Speaking of stewardship, at Foundation Bank and Mckenzie Banking Company, that’s how we view money management – as stewardship. If you need to borrow money, contact us. If you want to save money, we can help. If you want to manage your day-to-day dollars more effectively (including how you pay for stuff) that is right up our alley. Start your financial conversation with us at foundationbank.org. We also hope you’ll subscribe to this podcast in your favorite podcast app and share it on social media. These episodes are not recommendations specific to your own unique circumstances. Please consult your own advisors. Foundation Bank and MBC are a member FDIC and an equal housing lender, and until our next episode, God bless you.

-President Chad P. Wilson, CFP

Today’s episode of “Money Matters” was written and recorded by President Chad P. Wilson of Foundation Bank/McKenzie Banking Company on December 17, 2024. This episode does not constitute financial advice. Please consult a financial professional to discuss your specific needs. Any rates mentioned are subject to change and are accurate as of the recording date. MBC/Foundation Bank is an Equal Housing Lender, Member FDIC.