Dollar’s global reserve status and monetary sovereignty grant unique advantages, dismissing debt sustainability concerns oversimplifies the risks. Yes, the US can theoretically print dollars to service debt, but this ignores practical constraints. While the US won’t run out of money, unchecked debt could trigger stagflation, a dollar crisis, or a loss of geopolitical leverage. These outcomes are far messier than a technical default.
Unlimited QE or devaluation erodes the dollar’s purchasing power and credibility. Investors may tolerate deficits until they don’t as was seen with the 1970s stagflation spiral, when the dollar’s dominance didn’t prevent a crisis of confidence. If markets anticipate perpetual devaluation, demand for treasuries could collapse, forcing interest rates up and destabilizing the economy.
While Moody’s critique conflates the exchange rate and credit risk, they’re still connected. A weakening dollar makes dollar-denominated debt cheaper for the US to service, but foreign holders like Japan face losses. If they dump Treasuries to cut losses, the fed would have to monetize debt at scale, risking hyperinflation. This would be a de facto default for foreign investors. If the US unilaterally alters debt terms extending maturities or capping rates, that also signals unreliability. Foreign creditors, who hold 30% of US debt, could exit, triggering a liquidity crisis.
Unlimited QE or devaluation erodes the dollar’s purchasing power and credibility.
This isn’t necessarily true. As I said, bond purchases isn’t money printing but rather an asset swap, swapping one asset, treasuries, with reserves, it doesn’t create net financial assets. That’s what fiscal policy does.
While the US won’t run out of money, unchecked debt could trigger stagflation, a dollar crisis, or a loss of geopolitical leverage.
No it won’t. Private debt isn’t same as public debt, what I said applies to all countries with sovereign currencies, look at Japan’s public debt to GDP ratio. The 1970s stagflation was in large part due to oil price shock and capitalists/workers fighting over real output.
Credit ratings agencies have downgraded JGBs many times in the past yet yields remained low and demand for these assets high. 1234
Another good example was Italy, before they joined EMU Euro. Credit ratings agencies downgraded Italian Lira debt because ’ fiscal trajectory’, ‘Unsustainable path’ yet they never defaulted on Lira debt. This was despite low growth, and high(er) inflation. There was no risk of default in the first place.
While Moody’s critique conflates the exchange rate and credit risk, they’re still connected. A weakening dollar makes dollar-denominated debt cheaper for the US to service, but foreign holders like Japan face losses.
U.S. sovereign debt can always be serviced, as I said, it’s not really debt. It is debt in the same way cash in your wallet is debt, except that there is interest, which is a basic income to bondholders.
If markets anticipate perpetual devaluation, demand for treasuries could collapse, forcing interest rates up and destabilizing the economy.
It won’t, short term rates are set by the Fed, and if the interest rate goes beyond its tolerance it has to soak up excess debt to maintain its target rate. Demand for treasuries will always be there because even if foreigners don’t want it, Americans do as it is a risk-free asset.
If they dump Treasuries to cut losses, the fed would have to monetize debt at scale, risking hyperinflation.
No, if they dump Treasuries, they lose their foreign exchange reserves and as the exchange rate depreciates, they’ll get less and less of whatever other currency they are trying to buy. The reason why Chinese and Japanese central banks have reserves in the first place is because they buy up excess Dollars in the forex market so as to maintain trade competitiveness (real effective exchange rate).
If the US unilaterally alters debt terms extending maturities or capping rates, that also signals unreliability.
That is an actual voluntary default. Not the same as exchange rate risks.
Foreign creditors, who hold 30% of US debt, could exit, triggering a liquidity crisis.
There won’t be a liquidity crisis, U.S. Govt is always there to supply liquidity if needed.
The key issue is with confidence. I’m not saying that QE can’t work in principle. Obviously a government can issue as much currency as it wants up to unlimited amount. The problem is with the way the US economy is structured around the dollar being the reserve.
It’s not about debt, it’s about perceived value of the dollar. If holding US bonds means you’re just losing money long term then you have no choice but to divest from US bonds.
Demand for treasuries will always be there because even if foreigners don’t want it, Americans do as it is a risk-free asset.
That, once again, relies on the confidence that holding treasuries will actually be risk-free in the long run. Furthermore, the US is not a self sufficient economy, and it needs to import goods for the economy to function. If the value of the dollar continues to fall relative to other currencies, as it is right now, then costs of imports go up.
There won’t be a liquidity crisis, U.S. Govt is always there to supply liquidity if needed.
Again, there will be direct negative consequences of the US government doing that. It would be a huge market shock.
That, once again, relies on the confidence that holding treasuries will actually be risk-free in the long run.
As long as Americans have to pay debts (public or private), and the debts are enforced, they will want Dollars, and the only risk free interest bearing Dollar assets are Treasuries. Also keep in mind that people have to give their (existing) Dollars in form of bank reserves mostly to get Treasuries.
This credit rating nonsense has happened before too. Also see. Nothing happens. In a week everyone will forget.
If the value of the dollar continues to fall relative to other currencies, as it is right now, then costs of imports go up.
True, but that will happen long term. Not instantly, and there will be adjustment in living standards in the U.S., also depends on the willingness of China and others to accumulate US Dollar assets.
Again, there will be direct negative consequences of the US government doing that. It would be a huge market shock.
No there won’t be, look at 2008 or 2020. Federal Government has successfully backstopped private financial assets many times. Is this good? No, but it’s (mainly) because private sector messed up.
Again, I’m not saying the credit rating itself will have any impact long term. What I’m saying is that it signifies continued loss of confidence in the US economy by global investors. It’s pretty clear that China is dumping treasuries at a record rate, and has already dropped below UK in terms of holdings. Meanwhile, the BRICS are actively working on doing trade outside the dollar which will obviously have an impact on the status of the dollar going forward as well.
No there won’t be, look at 2008 or 2020. Federal Government has successfully backstopped private financial assets many times. Is this good? No, but it’s (mainly) because private sector messed up.
The collapse in spending leads to a classic capitalist crisis of overproduction that feeds into itself. And if US consumption drops, then its main appeal as a global trading partner evaporates as well. Which will necessarily lead countries to continue devesting from US.
Dollar’s global reserve status and monetary sovereignty grant unique advantages, dismissing debt sustainability concerns oversimplifies the risks. Yes, the US can theoretically print dollars to service debt, but this ignores practical constraints. While the US won’t run out of money, unchecked debt could trigger stagflation, a dollar crisis, or a loss of geopolitical leverage. These outcomes are far messier than a technical default.
Unlimited QE or devaluation erodes the dollar’s purchasing power and credibility. Investors may tolerate deficits until they don’t as was seen with the 1970s stagflation spiral, when the dollar’s dominance didn’t prevent a crisis of confidence. If markets anticipate perpetual devaluation, demand for treasuries could collapse, forcing interest rates up and destabilizing the economy.
While Moody’s critique conflates the exchange rate and credit risk, they’re still connected. A weakening dollar makes dollar-denominated debt cheaper for the US to service, but foreign holders like Japan face losses. If they dump Treasuries to cut losses, the fed would have to monetize debt at scale, risking hyperinflation. This would be a de facto default for foreign investors. If the US unilaterally alters debt terms extending maturities or capping rates, that also signals unreliability. Foreign creditors, who hold 30% of US debt, could exit, triggering a liquidity crisis.
This isn’t necessarily true. As I said, bond purchases isn’t money printing but rather an asset swap, swapping one asset, treasuries, with reserves, it doesn’t create net financial assets. That’s what fiscal policy does.
No it won’t. Private debt isn’t same as public debt, what I said applies to all countries with sovereign currencies, look at Japan’s public debt to GDP ratio. The 1970s stagflation was in large part due to oil price shock and capitalists/workers fighting over real output.
Credit ratings agencies have downgraded JGBs many times in the past yet yields remained low and demand for these assets high. 1 2 3 4
Another good example was Italy, before they joined EMU Euro. Credit ratings agencies downgraded Italian Lira debt because ’ fiscal trajectory’, ‘Unsustainable path’ yet they never defaulted on Lira debt. This was despite low growth, and high(er) inflation. There was no risk of default in the first place.
U.S. sovereign debt can always be serviced, as I said, it’s not really debt. It is debt in the same way cash in your wallet is debt, except that there is interest, which is a basic income to bondholders.
It won’t, short term rates are set by the Fed, and if the interest rate goes beyond its tolerance it has to soak up excess debt to maintain its target rate. Demand for treasuries will always be there because even if foreigners don’t want it, Americans do as it is a risk-free asset.
No, if they dump Treasuries, they lose their foreign exchange reserves and as the exchange rate depreciates, they’ll get less and less of whatever other currency they are trying to buy. The reason why Chinese and Japanese central banks have reserves in the first place is because they buy up excess Dollars in the forex market so as to maintain trade competitiveness (real effective exchange rate).
That is an actual voluntary default. Not the same as exchange rate risks.
There won’t be a liquidity crisis, U.S. Govt is always there to supply liquidity if needed.
The key issue is with confidence. I’m not saying that QE can’t work in principle. Obviously a government can issue as much currency as it wants up to unlimited amount. The problem is with the way the US economy is structured around the dollar being the reserve.
It’s not about debt, it’s about perceived value of the dollar. If holding US bonds means you’re just losing money long term then you have no choice but to divest from US bonds.
That, once again, relies on the confidence that holding treasuries will actually be risk-free in the long run. Furthermore, the US is not a self sufficient economy, and it needs to import goods for the economy to function. If the value of the dollar continues to fall relative to other currencies, as it is right now, then costs of imports go up.
Again, there will be direct negative consequences of the US government doing that. It would be a huge market shock.
As long as Americans have to pay debts (public or private), and the debts are enforced, they will want Dollars, and the only risk free interest bearing Dollar assets are Treasuries. Also keep in mind that people have to give their (existing) Dollars in form of bank reserves mostly to get Treasuries.
This credit rating nonsense has happened before too. Also see. Nothing happens. In a week everyone will forget.
True, but that will happen long term. Not instantly, and there will be adjustment in living standards in the U.S., also depends on the willingness of China and others to accumulate US Dollar assets.
No there won’t be, look at 2008 or 2020. Federal Government has successfully backstopped private financial assets many times. Is this good? No, but it’s (mainly) because private sector messed up.
Again, I’m not saying the credit rating itself will have any impact long term. What I’m saying is that it signifies continued loss of confidence in the US economy by global investors. It’s pretty clear that China is dumping treasuries at a record rate, and has already dropped below UK in terms of holdings. Meanwhile, the BRICS are actively working on doing trade outside the dollar which will obviously have an impact on the status of the dollar going forward as well.
The impact of 2008 and 2020 was that millions of people lost all their savings. Each time a crash happens, the working majority ends up on ever thinner margins and less able to withstand the next crash. The US is primarily a consumer economy, and consumption continues to drop because people can’t afford to make ends meet. US consumers have accumulated $74 billion in new credit card debt last year, while defaults surged to levels unseen since the 2008 recession. Over half of US households now rely on credit to purchase essentials like groceries, exposing the collapse of wage growth against inflation. Unsurprisingly, consumer sentiment has cratered to its second-lowest level since record-keeping began in 1952. These pressures culminated in an official GDP contraction during the first quarter of 2024, confirming recessionary conditions.
The collapse in spending leads to a classic capitalist crisis of overproduction that feeds into itself. And if US consumption drops, then its main appeal as a global trading partner evaporates as well. Which will necessarily lead countries to continue devesting from US.