Imagine waking up to a world where the U.S. dollar (USD), the bedrock of global finance, has collapsed. This scenario may seem far-fetched, but its a narrative often found on dubious platforms pushing gold, crypto, and extremist political views, and it occasionally creeps into mainstream discourse. The greenback has always had its external foes during the long period of its dominance—from the communist bloc and anti-colonialists to contemporary adversaries like China, Russia, and other emerging powers. Meanwhile, critics argue that mounting inflation, the rising U.S. federal deficit, and government entitlements could bring down the USDs dominance from within.
Given the ever-present economic and political uncertainty of geopolitics, pundits have predicted the dollars collapse ever since the greenback gained worldwide supremacy. Theyve been wrong each time—though a prognosticator needs to be right just once to gain fame in financial circles. Nevertheless, we shouldnt be too sanguine: history shows that even the sturdiest of human edifices crumble, becoming ruins future generations barely notice as they trammel them underfoot.
To be clear, there are no such signs on the horizon. While about a fifth of the foreign currency reserves of the worlds central banks have moved away over the last quarter century, from 71% to 58%, thats still a dominant position of strength for the greenback worldwide, let alone as a worthwhile currency within the U.S. In this article, well explore the calamitous coincidence of events needed to dethrone the dollar, examining historical precedents, contemporary vulnerabilities, and potential scenarios.
A collapsing US dollar can have major implications for homeowners with mortgages. While no one can predict exactly how a currency crisis will play out, history provides some clues of what to expect if the dollar loses significant value. This article explores the potential impact on mortgage holders and steps you can take to protect yourself financially.
Mortgage Payments Could Increase Drastically
If the dollar declines rapidly against other currencies, the Federal Reserve would likely raise interest rates to prop it up. This means adjustable-rate mortgages (ARMs) would see sizable increases in monthly payments as rates reset at higher levels. Even fixed-rate loans could get more expensive for new borrowers as prevailing mortgage rates rise across the board.
Unfortunately, lenders won’t cut you any slack – you’d still owe the full monthly payment even if keeping up becomes difficult during a dollar crisis. Missed payments could quickly lead to foreclosure.
Your Home’s Value Could Plummet
As the dollar drops, inflation usually spikes, diminishing the currency’s purchasing power. The same amount of dollars suddenly buys a lot less. This affects real estate markets similarly. Home values would likely fall substantially relative to prices before the currency destabilization.
If you need to sell during the downturn, your sale price could leave you owing more on your mortgage than the home’s current market value This “underwater” scenario makes it tough to tap home equity or refinance.
Consider Paying Down Mortgages More Aggressively Now
To mitigate risks ahead of any potential dollar crisis, one strategy is paying extra principal on your mortgage to lower the balance owed This reduces the impact of future payment shocks and minimizes how underwater you could become
Building up emergency cash reserves provides more buffer too. That way you can temporarily cover higher payments if your income also takes a hit during the economic turmoil.
Review Mortgage Terms Carefully
Before a dollar collapse, take time to review the fine print of your mortgage thoroughly. Look for clauses that let the lender accelerate the loan or take other actions that could exacerbate hardships. For adjustable-rate loans, check how high the interest rate caps go. Know when and how payments can adjust.
Forewarned is forearmed. Identify any vulnerabilities so you can plan accordingly or try negotiating better terms now. Ask the lender to explain anything unclear. Don’t wait until problems arise.
Consider Refinancing to a Fixed Rate
If you have an adjustable-rate mortgage, refinancing to a fixed rate can provide stability by locking in your monthly payments. This avoids being subjected to rising rate resets. Evaluate if refinancing makes sense based on your personal situation, current rates, and closing costs.
A fixed-rate FHA loan or VA loan can provide options even if you have limited home equity. Explore what’s available before any dollar emergency makes financing more difficult.
Alternative Strategies May Help Long Term
Some preppers fear currency debasement could eventually render dollars nearly worthless. In that extreme scenario, solely relying on fixed mortgage payments as protection might not be enough.
More aggressive investors might shift assets into inflation hedges like gold/silver, bitcoin, or foreign currencies. Paying off property ahead of time becomes more urgent. For your primary residence, concurrently holding the title outright provides extra reassurance.
Don’t Expect Mortgage Forgiveness
Don’t anticipate any debt forgiveness, reductions, or delays from lenders during a dollar crisis. Mortgage agreements signed today will still be legally enforceable. Banks care about their bottom line, not personal hardships.
Whether the collapse is sudden or gradual, keep making payments per your contract until granted relief. Consult a financial adviser for guidance to avoid default or foreclosure. Proactively communicate with your lender instead of hoping problems magically disappear.
Explore All Assistance Options Available
If keeping up with mortgage payments becomes impossible, immediately contact your lender and explain the situation. Inquire about any hardship assistance programs or loan modifications available to help struggling borrowers.
Non-bank mortgage servicers may have fewer options, but it’s still worth asking what they can do. Loan modifications, forbearance agreements, and repayment plans can sometimes provide temporary flexibility or breathing room during economic disruptions.
Consider Selling Before a Collapse if Possible
Ideally, anyone extremely worried about mortgage pitfalls in a possible dollar crisis should weigh selling their home preemptively before values drop. This eliminates concerns about future price declines or unaffordable payments.
After selling, you can rent for more flexibility, pay cash for a home, or downsize to reduce housing expenses. Weigh options carefully – selling into a healthy housing market likely produces the best outcome vs trying to time the peak.
Brace for a Rocky Road
Potential Threats to the Dollar’s Status
Americas fiscal and monetary policy can make the long-term purchasing power of the U.S. dollar uncertain. Large budget deficits of just over 6% of gross domestic product (GDP) and trade deficits of about 3% of GDP, funded by foreign investors through dollar-denominated securities, often raise concerns, especially with those critical of expansionary fiscal policy. Against gold, for example, the dollars purchasing power has fallen by 99% since 1972. If these imbalances grow and erode faith in the dollars future value, its status could be jeopardized.
The Federal Reserves unprecedented monetary expansion in response to recent economic crises, such as the 2008 financial crisis and the COVID-19 pandemic, has led to concerns about inflation and the dollars stability. The Feds balance sheet has ballooned because of massive asset purchases (quantitative easing) and low interest rates, which some argue could debase the currency over time.
If the U.S. continues to run large deficits and the Fed maintains an accommodative monetary stance for an extended period, it could lead to a loss of confidence in the dollar. Investors might fear that the U.S. will resort to inflation to erode the real value of its debts or that the dollar will depreciate significantly against other currencies.
What Would Happen to My 401(k) If the Dollar Collapses?
If the dollar collapses, your 401(k) would lose significant value. Exponential inflation would result if the dollar collapsed, decreasing the real value of the dollar compared with other global currencies, which, in effect, would reduce the value of your 401(k).
What Happens To Your Debt When The Dollar Collapses
FAQ
Where to put your money if the dollar collapses?
Gold. Like commodities, gold is generally priced in dollars. The dollar is no longer backed by physical gold, but the value of the dollar is one of many factors that impacts gold’s value. Gold prices have soared in recent years as investors use the precious metal to hedge against inflation.
Should I pay off my mortgage before the dollar collapses?
Even if the economy crashes, what would you accomplish by paying off the mortgage? If you lose your job because of a downturn, you’re better off keeping the mortgage open and using your bank balance to not only make monthly payments but also to buy food and pay utility bills.
What happens to mortgage rates if the economy collapses?
Mortgage rates tend to decrease during a recession, but that doesn’t mean homebuyers will be so quick to jump into the housing market during such economic uncertainty. Mortgage rates typically decline during a recession, but that may not be enough to lure homebuyers back into the market.
What happens to my mortgage if the bank collapses?
Do you still pay your mortgage if your lender goes bankrupt? Yes, even if your lender goes bankrupt, you still have to pay your mortgage. As part of the bankruptcy proceedings, your loan will likely be sold off to another company, and they’ll expect you to continue payments.