National Debt Threatens Status of the Dollar as World Currency

Member Group : Lincoln Institute

Unparalleled economic growth, unemployment well below 4%, the inflation rate hovering around the Federal Reserve target rate of 2%, and greater economic opportunities compared to the rest of the world have overshadowed the exploding U. S. debt load.

While the unemployment numbers in 2019 have continued to improve, great concerns remain about the static labor force participation rates which have somewhat masked the true unemployment numbers.  The unemployment rate of 3.6% is the best in decades yet the labor force participation rate remained stagnant for the past five years at 62.8% compared to the averages in 2004-2008 of over 66%.

Concurrent with the contradictory labor rates and low inflation, the national debt has exploded to beyond $22 trillion compared to $17.9 Trillion in October 2014 and $5.8 Trillion in January of 2000.   The Federal deficit in fiscal year 2019 is projected to be $896 Billion.

The explosion of debt and deficits when coupled with low federal government interest rates and conflicting labor rates sets the perfect storm for an economic quagmire/disaster unless government is able to get more people back to work to reduce the deficit,  reduce debt, and improve economic growth.

The disaster, should our debt load not be addressed, is the potential for the United States dollar to no longer be accepted as the world reserve currency.

The economic war against the United States has already begun in terms of an extensive cyber security campaign against our nation.  The next face of the battle will be the brewing controversy of the dollar as the world reserve currency.

The Chinese government has already announced that it intends to have the renminbi (RMB) as the world currency.  The renminbi (RMB) is the official currency of the Chinese.

The value of the dollar being the world currency is clearly known and presented by Dallas Federal Reserve head, Bob McTeer.  His analysis shows the value and risks of being the world currency for a nation to be:

  • Allows the United States to focus on a clearly domestic agenda
  • Reduces transaction costs for Americans
  • Enhances monetary policy for the U. S. with our ability to “sell” U. S. dollars and debt to foreign nations, and
  • The U. S. faces the risk of having “too much” debt which would jeopardize the world currency status.

While the world currency status appears to be a purely academic exercise, it is not.  The extensive unfunded liabilities and the massive explosion of U. S. federal debt combined with a “toxic” Federal Reserve balance sheet with almost $4 Trillion Quantitative Easing program, puts the domestic policy of our nation at significant risk.

Currency only has value as a fiat currency when “buyers” of the currency have the perception that the currency is backed by a nation that has fiscal discipline and the ability to control its spending.

The Federal Reserve ending of quantitative easing in October 2014 is a step in the right direction.  The Fed has also reduced quantitative easing funding since the 2008 crisis but the Federal Reserve Balance Sheet is still not as robust as compared to its pre-2009 balance sheet.  The Fed’s capital ratio is only .1% of 1 percent in 2018 compared to 2.3% in 2008 leaving the Federal Reserve weaker to deal with any future financial crisis.

The federal government must significantly reduce the federal deficit and national debt at the same time.  Should the short-term interest rates rise to the pre-2008 levels, however, the interest on the current federal debt will immediately increase the annual deficit in the United States to over $1 trillion per year further reducing confidence in the dollar as a world currency.

Some may ask why we should care about our national debt, deficits, and the strength of the Federal Reserve.  The answer is simply a potential for a loss of world currency status which would leave us vulnerable and strategically weak as a nation.

The loss of world currency status for the United States would have the following immediate effects on our citizens:

  • Higher inflation rates in our nation
  • Greater currency volatility
  • Higher national borrowing costs and increasing deficits
  • Potentially negative effects on international competitiveness for U. S. firms and our workers

There is still time for the U. S. to retain our leading status as the world currency.  Fiscal discipline in terms of a government priority to get more people back to work to reduce the deficit, reduce debt, and improve economic growth would have a significant effect on reducing our dependency on debt.  Federal and state efforts to get healthy welfare recipients back to work are essential to protect the most vulnerable when the next recession hits.

It is essential that we solve our national debt and deficit problems by expanding the workforce and reducing spending rather than by an economically stifling tax increase.  We will all suffer, especially the most vulnerable, unless we continue to improve our fiscal and monetary policies.

It is time to help put people back to work, reduce federal spending, and strengthen the Federal Reserve before a major recession does it for us.

Frank Ryan, CPA, USMCR (Ret) represents the 101st District in the PA House of Representatives.  He is a retired Marine Reserve Colonel, a CPA and specializes in corporate restructuring.  He has served on numerous boards of publicly traded and non-profit organizations.  He can be reached at [email protected].