October 14, 2019

The Biggest Threat to the Dollar

“In American politics, worries about the national debt are often closely followed by worries about the global reputation of the U.S dollar. That’s because America’s currency enjoys a unique role in the world: Virtually all international trade and financial settlements are done in contracts written in dollars. This gives the U.S. some unique advantages.

But now Democrats are talking about big policy ideas like a Green New Deal and Medicare-for-All, and about using deficits and borrowing to finance much of that agenda. That’s making some economists nervous that mounting debt could finally undo the dollar’s global privileges: “How much more debt can you have on the U.S. balance sheet and not have global financial markets react? I don’t know the answer to that,” Douglas Holtz-Eakin, a conservative economist and a former director of the Congressional Budget Office, told the Wall Street Journal. “I see no reason to run the experiment, ‘When do we have a crisis?’ Let’s just not.”

But how would such a crisis unfold, exactly? And how much debt would it take?

Let’s start by looking at how things work for everyone else. If you’re not the U.S., and you want to trade with other countries, you have to deal in dollars. You get paid in dollars for your exports, and you pay in dollars for imports. In fact, your exports are how you get the dollars to pay for your imports. You can create as much of your own national currency as you want, but you can’t create more dollars; you have to go get them somehow.”

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