Russian Drops U.S. Dollar. Will This Lead to a Currency Collapse?
What did Russia do?
Russian uses its National Wealth Fund as a rainy day fund to shore up the holdings of the nation. Recently, Russian has announced that it will eliminate U.S. dollars from the NWF. In its place, Russian will increase its holding of the Chinese Yuan and gold. This would give Russia’s NWD portfolio a mix of 40% Euros, 30% yuan and 20% gold. The Japanese yen and the British pound will account for the other 10% of the fund.
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Why did Russia ditch the U.S. dollar from its National Wealth fund?
The move to ditch the dollar was seen as political posturing by the Putin administration before a Russia-U.S. summit on June 16, 2021. The Biden administration is expected to be less friendly to the Putin administration than the Trump administration. In fact, the White House recently announced sanctions against Russia for its alleged malicious cyber activities. Therefore Russia is looking to weaken the U.S. dollar so they can potentially negotiate with the United States from a position of strength.
How does this impact the U.S. dollar?
The U.S. dollar has seen some downward pressure in the past couple of years to the increase of the national debt. As of June 1, 2021, the United States has a national debt north of $28 trillion dollars. This debt is expected to rise as the Biden administration proposes an over $6 trillion dollar fiscal budget. Also, the rising price of commodities including gold and lumber can further put downward pressure on the U.S. dollar.
How do I protect myself?
You can protect yourself by diversifying your investment portfolio into a wide range of assets. For instance, you can hold 25% of your assets in stocks, 25% of your assets in gold, 25% of your assets in long term treasuries and 25% of your assets in cash or t-bills. Since all of these assets are generally uncorrelated, you will be well protected in the case of a collapse in the U.S. dollar.
Preparing your investment from a possible collapse in the U.S. dollar
Throughout human history, there has never been a fiat currency that has survived for more than several hundred years. If the U.S. dollar continues to be replaced in sovereign wealth funds, the world reserve currency could see further devaluation. Diversifying your portfolio is one of the most effective ways to potentially protect your wealth and purchasing power.
REFERENCE:
https://www.statista.com/statistics/273294/public-debt-of-the-united-states-by-month/
