Maybe loss of global primacy isn’t bad for the US dollar

There has been a lot of talk recently about the US dollar losing its status as the world’s primary reserve currency and Treasuries losing their status as the world’s primary safe-haven asset.

Some experts see that happening because of large US tariffs and the erratic way they’re being imposed. The loss of that special status for the dollar and Treasuries is generally seen as a bad thing.

That’s because a weak dollar can push foreign investors away from the US, potentially leading to a domestic capital shortage. At the same time, weaker demand for Treasuries pushes up US interest rates, making it more expensive for the government, consumers and businesses to take on debt.

Excessive debt enabler

But another way to look at it is that the reserve currency status of the dollar and the safe-haven status of Treasuries have allowed the US government, consumers and businesses to take on excessive debt by making foreign investors comfortable to finance that debt.

As for the government, its debt totals a whopping $36 trillion, or 123% of GDP. Household debt rose 5.4% in the fourth quarter from the third to a record $18.04 trillion, with delinquencies climbing. And non-financial corporate debt totaled $13.74 trillion in the fourth quarter, up 2.3% from a year earlier.

If the dollar and Treasuries cede their exalted status, foreigners may be unwilling to finance those debts, forcing the government, consumers and corporations to become more fiscally responsible.

To be sure, some debt is frequently necessary for all three sectors to grow. So it could be a problem if foreigners went on a buying strike of US debt because they no longer trusted the dollar and US Treasuries.

Global implications

But the problems caused by the special status has hurt more than the US, says Michael Pettis, senior associate of the Carnegie Endowment for International Peace. “The US dollar’s role as the primary safe currency has made America the chief enabler of global economic distortions,” he wrote in the Financial Times.

For example, the dollar’s strength makes it cheap for the US to import goods from China and emerging markets, giving them trade surpluses and the US a trade deficit. 

So the loss of special status for the dollar and Treasuries may not be such a bad thing.