A Story About A Threat To The U.S. Dollar That Has Nothing To Do With Bitcoin
Forget about cryptocurrencies for the moment. Mounting debt is a far bigger peril.
That could easily lead to a real U.S. dollar crisis. Maybe even sooner than anyone expects. That’s one thing we agree with Rand Paul about.
Right now lots of foreign governments help the U.S. finance its budget deficit by buying lots of U.S. treasury bonds. China and Japan are the biggest, together accounting for about 11% of U.S. debt. Since the bonds are denominated in dollars, they have to buy lots of dollars in order to do that. But even in countries that are sworn enemies of the U.S., like North Korea, the U.S. dollar is still the currency of choice.
And it makes sense: as a reserve currency, and long the world’s most accepted global currency, there’s lots of stuff that has to be paid for in dollars whether you like it or not. Oil is the big one. Planes from Boeing. iPhones from Apple. Defense equipment from Lockheed-Martin (if you’re on our good side).
So with stable interest rates, and a strong dollar, there’s little risk for foreign countries to keep a big chunk of their money in dollars because they’re going to need dollars anyway.
But what if that changes? What if China’s New Silk Road initiative is successful and it decides its cash is better spent in developing countries where there’s a prospect for higher rate of return (not to mention increased political influence)? Especially with Trump decreasing their risk by making it very clear the U.S. is fully focused on “American First”, which means it won’t move as aggressively to compete with China in partnering and building new factories overseas.
What if Trump cuts back on visas so sharply that experts in technology and other industries go to Europe or Asia instead and lead to what’s been a predominantly U.S. led technology boom to shift to companies over there?
All that coupled with a bumpy stock and bond market could lead to less trust in U.S. government securities, meaning less trust in the U.S. Dollar, and less need on the part of foreign governments for dollars. And that could create a very deep hole for the U.S. to climb out of, and increase the cost of paying off the debt we took on a lot more of just today.