One topic that has come up a few times here, covered in The Dollar posts, is what the future impact of the government’s current monetary and fiscal policies will be. The nexus of government debt, interest rates, and the relative value of the US dollar. Specifically, how will this affect the Bretton Woods economic system? Could the paradigm whereby creditor countries instinctively place their reserve funds in to US debt be changed?
The Washington Post takes a look at the issue in an article today, US Could be Facing Debt ‘Time Bomb’ This Year.
Some analysts also worry that foreign investors, the largest U.S. creditors, may prove unable to absorb the skyrocketing debt, undermining confidence in the United States as the bedrock of the global financial system.
The point and a counterpoint:
Even a $2 trillion increase would push the U.S. debt to about 53 percent of the overall economy, “only a few percentage points above where it was in the early 1990s,” [Scott Lilly, a senior fellow at the Center for American Progress] writes, noting that plummeting interest rates show that “much of the world seems not only willing but anxious to invest in U.S. Treasurys, which are seen as the safest security that an investor can own in a risky world economy.”
Still, some analysts are concerned that the deepening global recession will force some of the largest U.S. creditors to divert cash to domestic needs, such as investing in their own banks and economies. Even if demand for U.S. debt keeps pace with supply, investors are likely to demand higher interest rates, these analysts said, driving up debt-service payments, which last year stood at $250 billion.
While covered in the article, the possibility of the United States defaulting on its debt is still very remote (although, for the first time, you can now buy credit protection on US government debt). The real question is what would changes in the economic system do to how American live their lives? If you think the current troubles in the housing market are big news, imagine what would happen to home prices if China stops buying Fannie Mae and Freddie Mac packaged securities. While it is in the country’s best interest to maximize the benefit it derives from the current economic system, abusing the system could have distinctly negative implications.
From previous posts: