How worthless is Dollar ?
In this blog, I am going through the decline of GBP (sterling) and trying to gauge where the dollar is today in its own cycle.
Imagine around 1815, at the end of the Napoleonic Wars, when British government debt reached a peak of £1 billion (that was more than 200% of GDP) some “intellectual yet idiot” comes on the CNBC forecast sterling is worthless this is not sustainable buy gold, sterling going to lose its reserve currency status.
The truth is the price of gold remained remarkably stable for long periods of time. For example, Sir Isaac Newton, as master of the U.K. Mint, set the gold price at 17 per troy ounce in 1717, and it remained effectively the same for two hundred years until 1914. The only exception was during the Napoleonic wars from 1797 to 1821. The official U.S. Government gold price has changed only four times from 1792 to the present. Starting at $19.75 per troy ounce, raised to $20.67 in 1834, and $35 in 1934.
And for more than the next 100 years sterling remained the reserve currency.
During World War I, the British Government was forced to borrow heavily in order to finance the war effort. The national debt increased from £650m in 1914 to £7.4 billion in 1919 (crazy 11x increase in 5 years) . Today people going crazy about Fed printing 20- 30 % of national debt but during world war alone the UK increased national debt by 11x times in 5 years & yet sterling remained the reserve currency and gold was still a tribble asset class to own.
Just to give context as a % of GDP, UK debt increased from 25% of GDP to 121%.
During World War II the Government was again forced to borrow heavily in order to finance war with the Axis powers (The Axis powers, also known as “Rome–Berlin–Tokyo Axis” was a military alliance that fought in World War II against the Allies.)
After the war the debt gradually decreased as a proportion of GDP, but it was until 1970s, following a Sterling crisis, during which British Government was forced to seek help from the International Monetary Fund (IMF), The “Intellectual yet idiot” was right in 1815 about the forecast but he was off by 150 years.
One day this might happen to USD but it could take longer than anyone could predict.
If you look at U.K interest cost, which went as high as 10% as a percentage of GDP during 1920’s as shown below –
Today for the U.S its hovering around 1 to 3%. Dollar is worthless?