Nagy: The U.S. dollar and the world
America has the great fortune to be included among a small group of countries who can slap colored ink on a piece of paper and magically turn that into something which everyone in the world accepts as having real value.
Adding further to our blessings, at least for now, most of the world believes that our colored paper is the most trustworthy, reliable, and secure – among all the colored papers in the world – making the US dollar the world’s reserve currency.
While few Americans fully appreciate how incredibly significant this is to our well-being, every one of us benefits through our quality of life, wide selection of available products and services, and how little we pay for them. Using the dollar also greatly aids our businesses and gives them a competitive advantage. Contrast that with people in a place like Zimbabwe, whose money is much more attractive than ours, but can’t be used for the most basic of purchases or for imports, resulting in sky high inflation, shortages of essential goods, and even power outages because they can’t pay for fuel.
But if we’re not careful our idyllic status may end, as our global adversaries are already employing tactics to knock king dollar off its throne. Regrettably, our leaders are helping them through the political gamesmanship happening now over our national debt limit. And if we actually “default” on our debt, we will have scored an unconscionable ‘own goal’.
Given the hype and hyperbole of the current political impasse – where Congress and the White House seem more interested in blaming the other side than achieving a genuine solution – it’s important to define exactly what it means to exceed the established debt ceiling and thus “default.” The sky will not fall, as the technical definition is narrow: failing to pay interest or principal on maturing debt. Same as a family who has maxed out their credit cards, while their growing expenses are greater than their income. So next month they need to choose whether to make minimum interest payments on their cards and forego some essentials (rent, doctors bills, etc.) or ignore paying on the card and cover all living expenses. Not paying interest will tank their credit rating, but not buying essentials could result in hunger, homelessness, or a medical crisis.
Similar to families, countries need to borrow to meet expenses, and their “credit cards” are debt instruments (e.g., bonds, like “IOUs”) sold to their own citizens and international purchasers, who can be individuals, companies, banks, or other countries’ national treasuries. America’s IOUs total about $31.8 Trillion (T) of which the US Government holds $6.8T, the American public holds $24.5T, and foreigners hold $7.4T. Japan (about $1T) and China (about $855 Billion) are the two largest foreign holders. All countries must regularly pay interest on their debts, but the US is almost unique in the world in having a Congressionally imposed ceiling (debt limit) on how much principal and interest it can owe (like the family’s credit card limit). And of course, it’s Congress which incurs the debt through its spending. Given our nation’s continuously growing economy and size, Congress has had to increase America’s debt limit 78 times since 1960 -- and we have never defaulted.
Unlike the family described above, the U.S. could operate without a “credit card” limit since the dollar is (still) the world’s reserve currency. Consider: one third to one half of global trade is conducted in dollars; the dollar is involved in 90% of foreign-exchange transactions; and 60% of global central bank holdings are in dollars. In effect, everyone wants dollars because everyone else wants dollars. But things are changing as China has become the world’s factory and is increasingly the largest trading partner of most nations. And China has clearly indicated that it wants to supplant the US dominated global economic and political system with its own – and this would include replacing the US Dollar with the Chinese Yuan. An already worrying trend is that more and more global transactions are now using the Yuan – not just for China’s trade but also for third party deals (e.g., India buying Russian oil). China has even established an international network to process financial transactions, CIPS, as an alternative to the Western dominated SWIFT global interbank system used by 11,000 banks.
Despite our enemies’ best efforts, the US dollar still stands strong because it’s the currency most trusted in the world, due to America’s sterling fiscal reputation and historical reliability. If we were a family, our FICO score would be well over 800 -- so as a country we can take advantage of the best interest rates and borrow as we need to. This is why the current game of “chicken” being played by Washington politicians over America’s debt limit increase is ridiculous and could be dangerously self-destructive. If we are so shortsighted as to actually default, the Chinese, Russians, and every country that wishes us ill will be cheering. Our reputation will take a major hit, our credit “score” will drop, the interest rate we’ll have to pay to borrow will increase, and more and more people around the world will question “why use the US dollar when alternatives may be better?” No currency can hold the global reserve status forever; witness how the US dollar replaced the British pound sterling after WWII. But we can still have a long run if our leaders focus on America’s interests, not their political talking points.
Ambassador Tibor Nagy was most recently Assistant Secretary of State for Africa after serving as Texas Tech’s Vice Provost for International Affairs and a 30-year career as a US Diplomat. Follow him on Twitter @TiborPNagyJr
This article originally appeared on Lubbock Avalanche-Journal: Nagy: The U.S. dollar and the world
