dollar currency crisis

If a dollar currency crisis does occur, does this mean the value goes literally to zero or a large devaluation ( say > 15% )? Would the currency be replaced?

What would happen if you held a position in a dollar denominated asset (e.g. on index like DOW or S&P)?

The value of the dollar won’t drop to zero while it’s still legal tender in the US. But in a worst case scenario involving hyperinflation, it could lose so much of its value that it becomes virtually worthless. For instance, a loaf of bread could cost millions of dollars.

Here are some links about hyperinflation:

http://www.econlib.org/library/Enc/Hyperinflation.html

http://www.investopedia.com/terms/h/hyperinflation.asp

http://en.wikipedia.org/wiki/Hyperinflation

Different countries have used different strategies for trying to deal with hyperinflation. It’s well documented, and you can find examples with a little research. One strategy is to replace the currency with something else. In this case the old currency is officially made worthless on a certain date, and people are responsible for exchanging their old coins and banknotes for the new legal tender. The US could possibly do this. But it doesn’t solve all the problems, and the folks in power might choose other methods.

A more likely scenario than hyperinflation is several years of inflation and devaluation against other currencies. Over 15% (as mentioned by you) is certainly possible. But nobody knows for sure how bad it will get. What’s happening right now with dollar denominated assets is that they are becoming more valuable (worth more dollars) as the dollar devalues. It seems logical to assume that this trend would continue during the period of devaluation. Especially if it was gradual and contained.

Hope this helps some.

A currency crisis where the value goes to zero and the currency gets replaced stands zero chance of happening in the United States. A higher (but still small) chance of it happening stands in emerging market economies like Russia, Turkey, China etc. Developed economies like U.S. Britain, Germany etc stand closer to zero chance of it happening.

What would happen to dollar denominated assets? Assuming the devaluation happens gradually and not overnight you will start to see significant capital outflows of the U.S. equity markets. Also a greater reluctance to buy U.S. debt. This would compound the problem of a weaker dollar.

If your interested you could read about the crisis that occurred in Russia during 2008.

http://www.wsws.org/articles/2008/oc...russ-o01.shtml

To sum it up:

1. Stock market collapse
2. Currency collapse which forces the Russian central bank to use up tens of billions of dollars to attempt to prop up the currency
3. Months of capital outflows because of people are scared of the fragile financial markets, currency, political system, and property rights/contract law. All this was amplified by the war in georgia.
4. Economy too dependent on the price of oil and thus government revenue took a big hit when oil collapsed.

If you think about it, GBP has effectively been devalued against the dollar since its highs in 2008 - a fall of over 20%. The biggest drawdown between Nov 2007 and Jan 2009 was even 35%. This is actually similar to the devaluation of the Russian rouble. Although in Russia the devaluation happened over a much shorter period than in UK.

While both these devaluations have been due to severe economic crises in both countries (in Russia much more severe), they are not bad enough to warrant a replacement of currency. Life just goes on, and it is likely that at some point the value of both GBP and the Rouble will reach the 2007 values.