How can the dollar crash without the world ending?

I would like to address a question that I have seen over the past few years that I think belies a basic misunderstanding of gold, the dollar, and their relationship. Many people in the US (and actually in many parts of the world) consider the dollar to be inviolable. Therefore, the end of the dollar is always somehow equated with the end of civilization. I have seen this sentiment voiced by friends, family, and all over the internet. Let me make an analogy: GM was the greatest car company in the world for decades. The bankruptcy of GM was inconceivable to many (including Rick Wagonner up to a month before the event.) And yet we all know that GM did go belly up, and that the world continued on much as it did before.

Likewise, the US dollar was as good as gold for close to 200 years, and to most in the world it would have been inconceivable that the dollar would be worth just a few percent of its value early last century. Fast forward to the present day, and we are in a situation where the dollar has been depreciated by a roughly 2 percent for the better part of a century, but it has been managed so well that it is inconceivable to most that it would spin out of control (and create a dollar crash.)

The following are typical of the comments that I regularly see, most recently from some intelligent posters on MarketForum:

"When I see gold's value stated, it is always stated in terms of the dollar...

If - according to the gold theorists - the US dollar is not worth anything because it is not backed by anything, then how does a gold bug come out ahead if he is investing in something that is valued in another entity (dollar) that is itself essentially worthless?

Your home, garden, tractor, truck, irrigation system... they have real value.
Gold and the dollar are worthless in the end."

These are attractive arguments but there are valid counter-arguments. There is a widespread belief that if the dollar was worthless, then essentially we are at the point of armageddon. I have felt the same way before so I understand the impulse, but I think taking a hundred steps back or so, it is pretty clear that this viewpoint could stem from cultural hubris. I suggest that there are items of tangible intrinsic value but that even intrinsic value is relative to circumstances. If you can't breathe, then you have no use for staying warm and dry. If you can't stay warm and dry, then you have no use for hydration. If you can't get hydrated, then you have no use for food, etc. True, you cannot eat gold or put it over your head to keep you dry. But people have valued "money" for eons now - because of the efficiency and convenience it contributes to trade. If we are talking about a survival situation then, yes, gold is useless. But we are so far from survival living that it is a joke! I was in India for four months a few years back, so I know a few things about what "subsistence" living looks like. And let me tell you - our standard of living can drop a heck of a long way and we still won't be at subsistence, let alone survival, levels of existence.
America has an incredibly productive population - we have some of the most creative, entrepreneurial, intelligent spirits in the world. Ask any foreigner that and they will tell you the same. True, the average American has dumbed down over the past couple of decades, but that is simply the result of easy living, much of it subsidized by a currency system that allows us to over-consume on the backs of future generations and on the back of a powerful currency. If the brown stuff hit the fan we would return to our hard working roots within a decade. And I seriously doubt - given the amount of capital and natural resource available in this country - that a decade is enough to get us to subsistence, much less survival levels of consumption.

Therefore, assuming we are above subsistence levels of consumption, then there will still be the existence of normal commerce, just as there exists in the backwaters of India. And from the backwaters of India to the richest chateau in France, people have always needed a convenient way of settling accounts. Gold has an intrinsic value not just because it makes pretty jewelery, but most of all because it has historically functioned as money; that is (1) a numeraire for all other goods, (2) a means of exchange, (3) a store of value (i.e. it doesn't go bad) (4) a source of liquidity (5) easy to transport and identify, (6) durable, (7) easily divisible, (8)hard to counterfeit (9) easy to store and (10) not arbitrarily available to a select few (as is fiat money.) If Americans lose their faith in the dollar which they could in any number of scenarios, they will still want something to function as money. And they won't want to carry tractors or trucks or gardens or irrigation systems around in their back pocket to negotiate business.

US dollars derive their value from the same place as gold: its use as money. However, US dollars have an Achilles heel: the US dollar has no intrinsic value if people lose faith: faith in the issuing agency (Federal Reserve) printing policies, faith in the future growth of the US economy, or faith in the political structure of the US. Therefore, I would suggest that the intrinsic value of US dollars is on a lower rung than that of gold. Gold has an intrinsic value so long as we need an efficient means to trade. The intrinsic value of the dollar also requires faith in a list of other things.

The reason that I feel, like so many others, that the US is behind the 8 ball is that our increased debt levels. Our financial situation, and particularly our net international investment position has deteriorated so much in the past 30 years. I would add to this the possibility that natural resource constraints will lower the natural rate of growth in GDP over the next decade. If the natural rate of growth is low or negative, than this affects all of the debt-GDP ratios negatively. If the natural rate of growth goes negative for a 5 year period, there could be a game changer regarding the incentive to save and invest. I think we are starting to see this in China, as the central government is focusing more on consumption and less on investment.