The Big One …

Ed Lander
The New Economics Forum
8 min readJan 21, 2024

In the world of economics, ‘The Big One’ is often referred to the event in which the US dollar faces sudden and irreparable decline. After a number of turbulent years, not least including the COVID-19 pandemic and the associated lockdowns, but also the surge in inflation in the wake of the global economy rebooting after the pandemic and being almost immediately faced with energy shocks due to the global sanctions on Russian Federation gas — in response to the 2022 invasion of Ukraine — Americans are feeling uneasy about their economy …

Four years of a Trump presidency has left many Americans traumatised and worried about a potential second Trump term and what that may mean for the US economy, US foreign policy and US democracy. Conversely four years of a Biden presidency since has left others worried about global security, economic stability and the potential impacts of runaway inflation …

And it’s true that, with interest rates at highs not seen since the 2008 financial crisis, consumers and businesses alike are feeling the pain … and many people do not see, nor understand, the links between central bank interest rates and monetary inflation in the economy. And, for those readers who feel that they also do not grasp this link, here’s an earlier article I wrote on the subject back in July 2022 that performs a deep dive into this phenomenon. But back to the subject of this article — why is a sudden and irreparable decline in the US dollar such a problem? Well, the US dollar has been the de facto global reserve currency since the Bretton Woods system was established and implemented at the end of the Second World War. This special status, under the Bretton Woods system, has given the US dollar and US economy a unique boost over the past eighty years or so. As most global trading, under the Bretton Woods system, is required to be done, or at least partially performed with US dollars, this means that there is always massive global demand for US dollars. And, subsequently, there has long been strong demand for US treasury bonds — US federal government debt — from banks, central banks and investors around the globe. However, in recent years, there has been less appetite for US treasury bonds, particularly with investors having doubts about the leadership of the United States and whether it can still be considered a responsible borrower and currency issuer …

From Obama to Trump to Biden, US public debt has been on an upwards trajectory for many years, as shows in the first graph below. However it’s when you zoom out to a much large time-frame that you really start to see an exponential shape to this debt, and particularly pronounced in the 21st century, as shown in the second graph below.

US Government debt (2000–2023) [1]
US Government debt (1900–2023) [2]

So what events have occurred along the way that have made these changes so sudden and so pronounced … ? Well, the first major event was the so called ‘Nixon Shock’ of the early 1970s, where then US President Richard Nixon enacted far reaching financial and monetary reforms in response to massive inflation, not least in part due to the Vietnam war and the public monetary pressures created in keeping the conflict going …

One of the most profound changes in the ‘Nixon Shock’ package of economic and monetary changes was the United States dollar coming off a gold standard and issuing in an era of global ‘fiat currency’, where currencies are traded relative to each other but not strictly tied to any underlying resources — hence why some people say that currencies are simply ‘floating’ these days. And this is true. Prior to Nixon closing the gold window, anyone holding US dollars could exchange those notes — or promises from the US Treasury — for a fixed amount of gold or silver. These days, with digital currencies and contactless payments, this idea seems quaint and somewhat archaic in comparison. However breaking the gold standard allowed future politicians and economists to vastly inflate the US dollar supply without any requirements to match the paper supply with precious metals or other finite resources …

And looking back at the chart above, we can see the largest uptick in US government debt after the 2000 Dotcom bubble collapse, which saw the US tech stock NASDAQ index fall by nearly 80% in just over two years, as shown in the chart below. This massive collapse in confidence in US tech stocks required radical intervention by US politicians and central bankers. In fact between 2000 and 2004, US central bank interest rates were slashed from as high as 6% down to around 1%, as shown in the second chart below. And just as the US economy started to show recovery, with interest rates rising back up over 5%, we had one of the greatest financial crises of living memory — The Great Financial Crisis of 2008. As you can see from the chart, interest rates were again slashed in the aftermath of the collapse of Wall Street investment banks, such as Lehman Brothers and Bear Sterns, as well as the collapse of insurance giant AIG and the US federal government takeover of mortgage securitisation enterprises Fannie Mae and Freddie Mac. This chaos that effectively brought the global financial system to its knees and almost ended capitalism as we know it, ushered in a new era of zero interest rate policy (ZIRP for short) …

NASDAQ index (1994–2005) [3]
US Federal Reserve base rate 1999–2023

As you can see from the chart above, US Federal Reserve interest rates stayed at these historic lows for many years, and only started climbing again during the Trump presidency era, in response to the massive tax cuts implemented by the Trump administration. Of course, during the COVID-19 pandemic, and the associated lockdowns, interest rates were slashed to near zero again, to support the fragile global economy, and only cranked up again as the global economy was rebooted with all the surplus cash from government support programmes circulating in the economy and fuelling inflation.

So why does this all matter? Well, as I have written about previously, we have recently witnessed a number of non-inconsequential bank failures in the United States — not least Silicon Valley Bank (SVB), but also Signature Bank and First Republic Bank (FRB) — and even the takeover of Swiss giant Credit Suisse by its Swiss rival UBS. These banks were essentially undermined by historic bets that interest rates would stay low forever. Of course, loading up on cheap US Federal debt only to see interest rates hiked at unprecedented historic levels — in the wake of the Russian invasion of Ukraine — meant that lots of otherwise stable banks found themselves facing massive losses on their bond portfolios and being forced to sell them at a loss to cover cash call requirements in the event of depositors getting spooked and starting a bank run …

And bank runs there were … ordinary citizens and investors alike were plenty spooked by the sudden and unexpected failures of Silicon Valley Bank and Signature Bank … and the US Federal Reserve had to setup massive loan guarantee mechanisms to prevent any further banks failing in the same way.

Of course, since the failure of Credit Suisse and First Republic Bank, there has yet to be any indications that another financial crisis is imminent. However, with two major wars raging in Eastern Europe and the Middle East, US government spending — particularly on military aid to the Ukraine and Israel — has once again put added pressure on the US Federal debt load. And, of course, the debt becomes harder to service with higher central bank interest rates … and here it’s worth taking a look at the US Federal Reserve balance sheet itself, which often hides the true extent of US Federal government debt, and especially with historic buyers of US Treasury bonds, such as Japan and China, choosing to diversify their assets in recent years …

In the chart below, from JP Morgan Asset Management, you can clearly see the US Fed adding massive amounts of mortgage backed securities (MBS) to its balance sheet during the 2008 financial crisis, as well as US Federal government debt ballooning during the COVID-19 pandemic with the associated lockdowns and government stimulus measures. This latter aspect is crucial, as the US Fed only purchases US Treasuries when there isn’t enough demand in international markets to satisfy the amount of debt the US Federal Government is issuing — it’s a temporary measure, with the intent of the Federal Reserve to sell those bonds back into the markets at a later date … however this is not always guaranteed, as is shown in the trend from 2008 onwards in the chart below — the Fed’s balance sheet just keeps growing, which is ultimately inflationary …

US Federal Reserve total assets (2003–2025)

Anyway, the latest data from the Federal Reserve indicates that, despite massive military spending, the Fed’s balance sheet is actually shrinking in accordance with JP Morgan’s predictions (see chart below from Statista). There are also expectations that 2024 may include cuts in global central bank interest rates, to ameliorate concerns of a global recession. However 2024 is a US Presidential election year, so it’s impossible to know for certain what events may occur in the near future that could jeopardise a smooth economic trajectory for the United States and the world as a whole …

US Federal Reserve balance sheet (2007–2023) [4]

So, coming back to the subject of this article, ‘The Big One’, what is the key component of such a cataclysmic event for the United States? Well, it would be a massive loss in confidence in the dollar, which would result in it losing its de-facto status as the global reserve currency …

There have been many economists speculating that the Chinese Yuan will replace or complement the US dollar in a new multipolar world order, where the United States no longer serves as the global hegemon. However, with the Chinese housing market looking shaky still, in the aftermath of the collapse of Chinese real estate giant Evergrande, and with Chinese consumer sentiments looking continually pessimistic, perhaps this paradigm change is still some way off …

Even so, if the US dollar was supplanted as the global reserve currency, all those special privileges would cease — the US Federal government would need to make massive spending cuts to avoid uncontrolled currency inflation, and it’s likely that the enormous US military budget would inevitably be in line for dramatic reductions, further curtailing America’s military capabilities and inviting America’s adversaries, from Russia to Iran to China and North Korea, to continue to test US and NATO power around the world by starting conflicts at known flash points such as Eastern Europe, the Middle East and South East Asia …

[1] Source — Treasury.gov

[2] Source — Treasury.gov

[3] Source — Wikipedia

[4] Source — Statista

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