Although America’s recent economic troubles have caused damage to the reputation of the U.S. dollar, many economists are claiming it is still the strongest and most trusted currency. According to this article on USA Today.com, although our country has debt problems, they are not nearly as bad as the troubles other countries are having. Additionally, no other country has a currency as strong or as well-regarded as the U.S. has, even with its current fiscal woes.
Could the debt eventually push the U.S. away from its status as a reserve currency and into second-tier status?
"It's very difficult for a reserve currency to lose that status," says Kristin Lindow, vice president at Moody's Investors Service. "It takes another nation to take its place, and right now, there isn't one."
As long as the U.S. looks better fiscally than other nations, it will be able to finance its deficit. But that doesn't mean it can continue to bleed red ink forever. In the short term, interest rates are likely to remain low as the Federal Reserve tries to nurse the economy out of recession. In the long term, however, unchecked borrowing could lead to higher interest rates and slower economic growth. As such, the debt has serious implications for savers and investors.
Fears of dire economic consequences have mounted as the U.S. annual budget deficit has soared — and the warnings aren't just coming from Republicans. President Obama last month created a bipartisan panel to rein in the nation's deficits. In November, Treasury Secretary Timothy Geithner called the deficit too high. The Federal Reserve Chairman Ben Bernanke is also worried about the deficit.
"We have a debt that will continue to grow," Bernanke told Congress in February. "It's important to look at the deficit as it goes forward."
But even though the nation's debt, relative to gross national product, is the highest since World War II, the financial markets seem unconcerned. Investors eagerly buy our debt and use the dollar as the premier trading currency worldwide.