United States’ Debt

The Mexican devaluation in nineteen ninety-four, as mentioned in the first part, shows what could be expected if the debt problem were to get out of control in the United States. The United States is following in the same steps as Mexico and Argentina along the same profligate path – currency inflation, abnormal increases in foreign-held debt, budget deficits, unconscionable growth in overall public and consumer debt, and so forth, these economic ailments characterize the United States’ economy today just as they did the Argentinean and Mexican economies before they were respectfully devaluated and collapsed.

As mentioned briefly in a previous part, what has saved the United States from a similar fate has been the dollar’s unique position as the world’s reserve currency. Because other countries are willing to hold the dollar in their treasuries as a reserve item, the United States has until now escaped full market retribution. Take the reserve currency advantage away and the United States could very well fall into the same financial abyss that wreaked havoc in Mexico and Argentina.

Former director if the International Monetary Fund, Dr. H.J. Witteveen, clarified the dollar reserve phenomenon after the following manner:

• This system, the dollar standard, can be criticized, because foreign exchange reserves are created as a consequence of balance of payment deficits of the United States without any relationship to world reserve needs. Implicit in this an unfair advantage to the reserve country, the United States, because it can finance its deficits by paying in its own currency. This makes it too easy to run deficits, and it creates an inflationary element in the monetary system, compared to the classical gold standard... By paying in its own currency, the Untied States could continue to finance enormous deficits without being forced to introduce adequate deficit reducing measures.

This seeming uneasiness on the part of international dollar holders gives us some serious questions, most importantly, what might happen to the typical American investment portfolio, should the dollar’s reserve status diminish radically?