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U.S. dollar is still the world's most trusted currency
Updated 8:41 PM
"It's very difficult for a reserve currency to lose that status," says Kristin Lindow, vice president at Moody's Investors Service.
By John Waggoner, USA TODAY
The U.S. will spend about $1.8 trillion more than it gets in revenue this year. Next year, it will add an estimated $1.2 trillion to the debt.
Expenses in the billions may not attract much attention these days, but when it gets to the trillions, people sit up and take notice. In a CNN/Opinion Research poll conducted in January, 83% of those polled thought the federal budget deficit was extremely important or very important. The debt and the deficit are enormous political issues and will likely play a big role in the 2012 elections.
But there's one big group that's singularly unimpressed by the size of the deficit: the world financial markets.
As big as the U.S. debt is, it's not as bad as many other countries' debt, relative to gross domestic product. 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. And Federal Reserve Chairman Ben Bernanke is worried about the deficit, too.
"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.
Auctions tell a tale
To get some idea of the demand for Treasuries, just look at the most recent auction. The government sold $136 billion in Treasury bills — short-term, government-backed IOUs. Of that, about $29 billion was new debt. The rest was rolled over from maturing debt.
You'd think that a borrower that added billions more to its debt each week would be getting the stink eye from lenders. But not when the borrower is the U.S. government.
Monday's Treasury auction was an astonishing success:
Investors bid $4.27 for every $1 of debt the government had to sell. The yield: a rock-bottom 0.15%. That same day, the dollar was in the middle of a two-month rally. A stronger dollar means a buck buys more of a given currency. A euro cost $1.37 on March 8, down from $1.51 on Dec. 3.
And the dollar remains the premier currency of world trade. Oil is bought and sold in dollars, for example, and more than a dozen countries, including China, peg their currencies to the greenback. About 61% of bank foreign reserves are denominated in dollars, according to the International Monetary Fund.
So far, there's no other currency that has the liquidity and acceptance of the U.S. dollar.
"From the market's standpoint, other currencies and other economies have more serious and immediate fiscal concerns than we have here," says Brad Tank, chief investment officer for asset management firm Neuberger Berman.
Even though China may grouse about U.S. deficits, it doesn't have many other places to put its reserve currencies.
And if China suddenly sold its $1 trillion in dollar holdings, its currency would soar, making its goods too expensive for the U.S., its largest trading partner.
One reason it buys is to keep its own currency cheap vs. the dollar. But the Chinese have been net sellers of Treasuries in recent months, Gross says.
Updated 8:41 PM
"It's very difficult for a reserve currency to lose that status," says Kristin Lindow, vice president at Moody's Investors Service.
By John Waggoner, USA TODAY
The U.S. will spend about $1.8 trillion more than it gets in revenue this year. Next year, it will add an estimated $1.2 trillion to the debt.
Expenses in the billions may not attract much attention these days, but when it gets to the trillions, people sit up and take notice. In a CNN/Opinion Research poll conducted in January, 83% of those polled thought the federal budget deficit was extremely important or very important. The debt and the deficit are enormous political issues and will likely play a big role in the 2012 elections.
But there's one big group that's singularly unimpressed by the size of the deficit: the world financial markets.
As big as the U.S. debt is, it's not as bad as many other countries' debt, relative to gross domestic product. 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. And Federal Reserve Chairman Ben Bernanke is worried about the deficit, too.
"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.
Auctions tell a tale
To get some idea of the demand for Treasuries, just look at the most recent auction. The government sold $136 billion in Treasury bills — short-term, government-backed IOUs. Of that, about $29 billion was new debt. The rest was rolled over from maturing debt.
You'd think that a borrower that added billions more to its debt each week would be getting the stink eye from lenders. But not when the borrower is the U.S. government.
Monday's Treasury auction was an astonishing success:
Investors bid $4.27 for every $1 of debt the government had to sell. The yield: a rock-bottom 0.15%. That same day, the dollar was in the middle of a two-month rally. A stronger dollar means a buck buys more of a given currency. A euro cost $1.37 on March 8, down from $1.51 on Dec. 3.
And the dollar remains the premier currency of world trade. Oil is bought and sold in dollars, for example, and more than a dozen countries, including China, peg their currencies to the greenback. About 61% of bank foreign reserves are denominated in dollars, according to the International Monetary Fund.
So far, there's no other currency that has the liquidity and acceptance of the U.S. dollar.
"From the market's standpoint, other currencies and other economies have more serious and immediate fiscal concerns than we have here," says Brad Tank, chief investment officer for asset management firm Neuberger Berman.
Even though China may grouse about U.S. deficits, it doesn't have many other places to put its reserve currencies.
And if China suddenly sold its $1 trillion in dollar holdings, its currency would soar, making its goods too expensive for the U.S., its largest trading partner.
One reason it buys is to keep its own currency cheap vs. the dollar. But the Chinese have been net sellers of Treasuries in recent months, Gross says.
