bw asks for a gaze into the future:
"what'll happen if (when) the world dumps the USD and turns to the Euro?"
Of course, what follows is speculation. Informed, perhaps, but speculation nonetheless. The future is far too complicated to play if/then/else games with. However, realizing that something is a foolhardy endeavor has never stopped me from undertaking it.
First of all, we must understand what the question means, because that will affect the answer no little bit. Currently the world uses the dollar as a
reserve currency, which means that the dollar underlies the value, such as it is, of their own currencies. A very simplified reason why is this: the world left the gold standard during WWI because war was too expensive to pay for with gold (a good argument for gold, but I digress) and by the end of WWII, the US had the lion's share of the world's gold. Gold, being banned by our government to Americans, was still exchangeable to other central banks at a fixed rate. But dollars are more convenient than gold (and US bonds pay interest) so the world was happy to use the dollars they held, which were backed by and exchangeable into gold as their
reserves, that money they could use to repurchase their own currencies and thus manage them. Rather than shipping old all over the world, they used dollars.
By the 70s, nations like France that had accumulated a lot of dollars had the audacity to deliver them to the US for payment in gold. Since we had printed far more dollars than we had gold for (inflation) this caused a drain on US gold reserves and Nixon "shut the gold window," refusing to redeem those dollars. Therefore other nations which has undergirded their currencies with dollars exchangeable into gold suddenly found that they had currencies undergirded by just dollars. Through intertia, that's more of less the system that exists today. But nations, because of the continued inflation of the dollar, are starting to back their currencies with other things besides dollars.
That's a horribly boring intro (and I apologize for it) but it must be stated, for where we are is a function of where we were. The question does not exist in a vacuum.
There is an easy answer and a hard answer. The easy one is simple supply and demand. As nations cease to accumulate dollars, demand drops. As the US continues to run fiscal and trade deficits, supply increases. As a result, the value of the dollar must drop a) in relation to other currencies (that's why European vacations are so expensive today) and in relation to goods (that's "inflation," price increases due to increased dollar creation). Things get more expensive, with imported goods increasing faster than domestic goods. Think of the 70s on steriods: high interest rates, high unemployment, price increases every year. That's the easy answer, and it's mostly wrong because it's oversimplistic. Those things will happen, but they are not the whole story.
The hard answer must take into account that the question simply cannot come about, at least not in the short term.
The first reality is that the world cannot "dump the dollar," if that we mean that everyone outside the US sells their dollars for other currencies. To whom will they sell them, and for what? Because the dollar is so integrated into international markets and foreign central banks, only the smallest countries can dump their dollars in any meaningful way, and they are all susceptible to US military strongarming and/or economic warfare. Nations like Japan and China - which may be economically strong enough to stand up to the US - cannot do so without endangering the value of all the other dollars they hold. It's like Bill Gates' holdings of Microsoft: they are so huge that if he tried to sell them all he would swamp the market and drive his own wealth into the ground. So he is rich, but he is also stuck.
The second reality is that the potential replacements for the dollar, whether the Euro in Europe or the Yen in Asia, or any other regional currency, are in the same boat as the dollar. They are fiat instruments that represent only the power to tax. They are substitutes, but they have the same potential problem as the dollar: the central bank can at any time create as many as it wishes. There is right now no currency that does not have the potential to be destroyed by overissuance, and all of them are overissued to some extent*. The dollar, to be sure, is more guilty than most (empire is expensive) but give the Euro 20 years of Islamic immigration and an aging population and they will simulate the same problems. In short, one can flee the dollar, but fleeing into the Euro is no solution.
The third reality is that under modern economics (which is run by idiots trapped in an opium den) a weak currency is desireable because it stimulates domestic production. That means that other nations, even as the dollar drops, will be attempting to weaken their own currencies in order to keep their goods competitive in America. This will continue until Americans have no money left to spend**.
So all that said, I think we can expect that the world will not dump the dollar*** so much as it will move out of it in short steps, always attempting to maintain its value compared to theirs, both for the purpose of keeping value in their remaining holdings and in order to be able to export here. However, I also expect that the insane creation of dollars by our government will continue, and may very well overwhelm the rest of the world's efforts to save the dollar. Either way, so long as our government keeps creating dollars like they are going out of business, they will eventually go out of business, but it will be a slow process for those who check their stocks twice a day****.
What I think we are about to see is the effects of the simple answer: higher prices ($3 gas last summer, $4 gas this summer, $5 gas next summer), rising unemployment - or rather underemployment - and a drop in the value of the dollar compared to everything that is not a dollar. The economy may actually be "good," partially because inflation creates activity (which is all modern economists measure) and partly because government numbers are fake (being a creation of those same economists). But it will become harder and harder for the average person to make headway. This will eventually come to the attention of our Reptilesbian Overlordess who will have no choice but to impose government solutions on government-created problems. Those solutions are political control, domestic scarcity, and international warfare.
People don't realize that the end of the Roman Republic was not the end of Rome; it was in fact the beginning of Rome's greatest expansion, where it tried to sack the rest of the world in order to meet its voracious apetite for money. I don't think this model is out of date, and may actually occur a lot faster here than there because of technology.
In short, the whole world is going to pay for the fact that we have built modernity on promises to pay nothing, and switching from one currency buys time but not salvation. But what specific form that payment takes cannot be described from this side. It can only be feared and prepared for.
* Global money creation runs annually in double digits. Why do we need all that money when with stuff we are to buy with it increases a small percentage of that?** which, unfortunately, may not be far off.*** unless it becomes in their interest to completely destroy our economy over a long weekend. The problem with nations holding trillions of dollars is that they can do so. It will cost them dearly, but one might someday find it worthwhile.**** It will be a heartbeat in history books, however.
If you listen closely, you can hear the undermarket move:
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