Over the long term, the dollar is declining. The dollar has declined 40% since 2002, and could decline further still for the following five reasons:

1. An $18 trillion U.S. federal debt,
2. Excess liquidity causing inflation or, as is occurring now, asset inflation.
3. The unsustainable personal debt of U.S. citizens,
4. A massive trade deficit. 
5. The strength of emerging market countries, like China, which are becoming less dependent on holding U.S. dollars to keep the value of their currencies low.?

All of these forces drive down the value of the dollar, but only in the long term.

Many experts believe there will be a tipping point, causing the dollar to collapse suddenly. This would create global economic turmoil. Investors would rush to other currencies to escape further losses. Global trade would seize up, because the majority of international contracts demand a dollar payment. Other assets would skyrocket, especially the euro, the yuan and gold. Interest rates in the U.S. would probably rise, as demand for Treasuries fell. 

For example, the authors of The Coming Collapse of the Dollar and How to Profit from It  predict a dollar collapse that is not well-substantiated, and plays on fear. This very popular book was written by two authors with great economic credentials. Their research into the causes of the current weakness of the U.S. economy is very thorough and easy-to-understand. In fact, everyone should read the chapters in Parts One and Two.

However, the authors' assertion that the U.S. dollar will collapse because all governments' currencies collapse is based on only four examples: Ancient Rome, Revolutionary-era France, Weimar Germany, and Argentina.

None of those examples are really similar to the modern-day U.S. economy.

The authors have not made a well-researched argument to support their conclusion that these conditions will lead to the inevitable collapse of the world's reserve currency. They simply state that the dollar is not sustainable as the world currency because it is no longer on the gold standard. 

How to Hedge to Protect Yourself,

Some of the ways to protect yourself from a potential dollar collapse are also good ways to protect your assets from the far more likely dollar decline. First, keep your investments diversified away from the dollar by making sure you hold foreign mutual stock and bond funds and some gold. For more, see Why Invest in Gold.

The authors of The Coming Collapse of the Dollar suggest, like many others, that you hoard gold and other hard assets. Their recommendation to buy gold, precious metals and shares in gold mining companies is narrow and flies in the face of modern portfolio theory. The authors also concede that one of them, James Turk, could profit from a gold boom, since he publishes the Freemarket Gold and Money Report. 

They also recommend short-selling stocks of companies that will be hurt by a falling dollar. This is also known as timing the market, and is not recommended for the average investor. 

If the dollar were to absolutely collapse, as they predict, it would wreak devastation upon the world's economy in ways that are really unimaginable. Owning gold might be the best way to go, or it might not. That's why a well-diversified portfolio, and constant attention to key economic indicators, is a better way to protect your personal finances than putting all your eggs in one basket...even if it IS made of gold.

How should you protect yourself from the global economic turmoil? This high level of uncertainty could occur from any sudden shift in the world economy. The best defense is to be mobile. That means keeping your assets liquid, so you can shift them quickly. Don't tie a lot of money up in real estate, which could tie you down. It's also difficult to sell when the real estate market goes south. You could even lose money if you can't get renters.

Invest in yourself and in your knowledge. Stay on top of the global economy. Understand investing. And it's never a bad idea to keep your passport updated --just in case!

 

Readers' Suggestions:

Well first let me say I don't claim to know what to do for everyone. It took me five years but I finally left the USA and live in South America and I am trying to create new income streams outside the USA. I don't plan on ever moving back to the USA to work or stay. Few people will ever take the route that I have chosen so I am preaching exile so much as wanted to chime in say Good Luck Everyone! Math is a hard taskmaster and she is going to teach the Ole USA a few very difficult lessons in the coming years. For those thinking about fight back.....jajaja... you will end up in a FEMA camp with shackles on... What I do suggest is realistically evaluating your options and create a plan [it things get bad enough] to alter the wave you live, perhaps where you live and with whom you live. It's your life, they have not yet finished the FEMA Gulag Archipelago yet.. and remember there are places like Puerto Rico, US Virgin Islands, etc. that are legally part of the USA, .... etc

As dollar ceases as world currency, two things happen. First dollars previously printed start coming home to the USA. Second Fed Reserve dollars printed to finance the government are no longer lost in the global world, but increase the number of dollars floating around at home. The result is hyper inflation. Best strategy is to be in debt but still have valuable hard assets. Example, go into dollar collapse owing loan of $500,000 and with gold worth $150,000. Collapse of dollar makes payoff of loan cheaper. Eggs will cost $15 per dozen in the store, therefore assuming you are still employed you will earn a lot more also. Gold value will skyrocket as people seek out someplace save for their money. At some point maybe your gold holdings you purchased for $150,000 will pay off your $500,000 loan. Solitary Pillar

Do what DAD SAVE 30% of your income grow veggies in the garden.Sew your own clothes. Be independent. America is resilient Margarie Torres

Apparently the author of this article, which was well written, doesn't really know very many Chinese people. To say that it wouldn't be in their interest to dump dollars because they own $1T spins their thought process and priorities as very American. Chinese definitely do not think or prioritize like Americans. If the dumping of their dollar reserves somehow meant the rising of the yuan and a significant boost to the pride and position of the Chinese people and government, they would dump the dollars without a second thought. As one said to me when I asked why English was mandatory in school his reply was tell-tale. "We learn English, so that one day our children will never have to learn English again."  Dan

July 2010 Low-risk hedge: "Commodity-currency" ETFs: The Australian dollar (NYSE: FXA), the Brazilian real (NYSE: BZF), and the Canadian dollar (NYSE: FXC), of which resource-rich countries are all net exporters of energy, iron ore, wood products and beef; and collectively plenteous in crude oil, copper and sugar. Moderate Risk: Dollar-priced commodity stocks. Oil (NYSE: OIL): as demand rises and the dollar falls, its value grows; Gold (NYSE: GLD): regarded for its intrinsic value and as a hedge against inflation; and Copper (NYSE: JJC): a primary Chinese import used in construction. High Risk: Pengrowth Energy Trust (NYSE: PGH) and Enerplus Resources Fund (NYSE: ERF). Both are Canadian oil producers and solid companies that pay attractive dividends. I consider direct company-stock purchases high risk because there is no guarantee the shares will perform well. Consider foreign-withheld taxes, as well. Tony Richardson