Many of the world’s currencies rely on the US dollar as a world reserve currency to hold for their own stability.
But Alasdair Macleod, head of research for GoldMoney, argues that action to protect the dollar by rapid monetary expansion since the Great Depression in 2008 has led to an excess of paper money representing $trillions in debt held by emerging markets, which use it as an international settlement medium.
He warns that this excess of money, which central banks control through interest rates, is now getting beyond this form of control.
The US needs to continue monetary expansion by printing more paper money and bank credit to avoid a depression in its own economy but this is likely to undermine confidence in the dollar as a global currency.
Macleod argues that this has increased the risks of global financial instability.
The problem is that there is a lack of appetite for borrowing by sound businesses due to subdued economic growth. This has also affected commodity prices, such as oil, steel and various minerals leaving the countries that produce them with unsustainable dollar debts.
It is a precarious situation and should there be some event, similar to the dot.com Bubble of the 1990s or a housing market crash, it is likely to lead to a loss of confidence in the dollar.
At that point people would be likely to dispose of dollars or spend them as quickly as possible in preference for ownership of goods.
The knock on effect would impact on the Japanese Yen, the Euro and Sterling and all the other currencies tied to the dollar, whereby they too would suffer.
The prospect of a global recession is not one anyone wants to talk about but it may be the elephant in the room.
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