International concern over foreign debt and potential implications for the U.S. dollar: viewpoint
The U.S. national debt, currently over $37 trillion and exceeding 120% of GDP, has raised valid concerns about fiscal sustainability and interest rates. However, it is not an immediate threat to the creditworthiness of the U.S. dollar as a global currency.
The debt is large and growing, and while this could push long-term interest rates higher, the U.S. retains strong borrowing capacity due to its economic size and the dollar's reserve currency status. Economists caution the rapid growth rate of the debt and its future trajectory, which could raise long-term interest rates by more than 1.5 percentage points, thereby increasing the cost of debt servicing and crowding out other investments.
Despite the large debt, the U.S. dollar remains the dominant global reserve currency due to the scale and stability of the U.S. economy, deep financial markets, and trust in U.S. institutions. This status supports ongoing demand for U.S. Treasury securities, helping keep borrowing costs relatively low.
The U.S. transformed into a global leader with superpower status after World War II and assumed the role of the world's financial leader from the United Kingdom following the adoption of the Bretton Woods financial system in 1944. Signatories of Bretton Woods transferred their gold reserves to the U.S. as collateral.
The purchasing and saving power of any asset, including the U.S. dollar, is based on the trust of its holders. The loss of trust in any asset can instantly cause it to lose value. However, the U.S. consistently pays its obligations, and its treasury bonds have the highest investment status.
While the current U.S. debt level is a cause for concern, it does not undermine the creditworthiness of the U.S. dollar as a global currency. Maintaining growth and responsible fiscal policy remain critical to preserving confidence in the dollar.
[1] Congressional Budget Office Report [2] Congressional Research Service Report [3] International Monetary Fund Working Paper [4] Peterson Foundation Report [5] Congressional Budget Office Long-Term Budget Outlook
- Personal-finance considerations warn that the rapid growth rate of the U.S. national debt could increase long-term interest rates and the cost of debt servicing, potentially making it challenging to undertake other investing opportunities.
- Business analysts suggest that the U.S. dollar's dominance as a global reserve currency, coupled with its strong economy, deep financial markets, and trusted institutions, help support low borrowing costs, even with the substantial U.S. debt.
