Since World War II, the dollar has played a dominant role in global financial markets, maintaining America’s global economic leadership. This affords the United States “exorbitant” privileges no other country enjoys, such as lower borrowing costs, the absence of fluctuations in the value of its debt due to exchange rates, and the power to impose far-reaching sanctions on its adversaries. The dollar’s centrality is underpinned by extremely high faith by investors in U.S. creditworthiness.

  • Confidence in U.S. creditworthiness may be undermined by a rapidly deteriorating fiscal situation, an increasing concern with federal debt set to grow substantially in the coming years.
  • A loss of America’s relative economic advantage due to fiscal mismanagement would lead to lower growth, higher unemployment, and less investment wealth in the long run.
  • Regular brinkmanship over addressing the federal debt limit—a symptom of broader fiscal dysfunction and mismanagement—could have a catastrophic impact on the U.S. credit rating, the dollar’s role, and U.S. global leadership.

Risks of Growing Public Debt

Our national debt has grown rapidly over the past quarter of a century. Debt held by the public sits at $28 trillion, almost 100% of gross domestic product, meaning it is roughly equal to the nation’s annual economic output. The gross debt is even higher, nearing $36 trillion. The debt to GDP ratio is near record levels, and the Congressional Budget Office projects debt to continue outpacing economic growth in the decades to come. As the national debt rises, increasing shares of government revenues are diverted towards interest payments on the debt, which are now close to $3,000 per individual each year.

Declining Confidence in the Dollar Reduces Our Economic Strength

The dollar is dominant in global financial markets, as evidenced by its use in nearly 90% of global foreign exchange transactions, nearly 60% of global foreign exchange reserves, and invoicing for over half of global trade. However, the growing U.S. national debt may diminish the dollar’s global preeminence and U.S. leadership on the international stage. It could mean a loss of the exorbitant privileges the U.S. enjoys, which would lead to lower economic growth, higher unemployment, and lower equity wealth in the long run.

The weakening of the dollar’s status could reduce U.S. businesses’ attractiveness to global credit and capital markets, leading to higher barriers to financing new investments and expanding operations. Businesses and consumers who rely on imported goods could also face higher prices.

Rising Debt Undermines Confidence in U.S. Creditworthiness

With America’s fiscal trajectory set to worsen and seemingly no appetite among leaders in either party to address it, investors’ strong faith in the country’s ability and commitment to meet its debt obligations could begin to waver. The Treasury Department would have to pay higher interest rates to attract increasingly wary new buyers of its debt. This would in turn impact the dollar’s global status.

This concern is already materializing: Fitch Ratings downgraded the U.S. credit rating in 2023, citing rising debt and growing budget brinkmanship. As Figure 2 shows, the dollar’s share of global reserves has fallen noticeably in recent decades (from over 70% in 1999 to 58% in 2024) in the same period that U.S. debt as percent of GDP has skyrocketed (from 38% to nearly 100%). It should be noted, however, that the U.S. fiscal situation isn’t the only reason behind the dollar’s declining share of global reserves. Other factors like increasing liquidity of “nontraditional” reserve currencies, the rise of central bank digital currencies, and concern over U.S. sanctions have all contributed. However, rising U.S. debt has been a key factor and will continue to be in the years to come if left unaddressed.

Debt Limit Confrontations

While the growing national debt poses a medium to longer-term threat to the U.S. dollar, a more immediate concern is brinkmanship related to the federal debt limit. The debt limit is set by law and restricts the amount of debt the U.S. government can hold. When the debt limit is reached, Treasury can temporarily draw on accounting maneuvers known as “extraordinary measures” that allow the government to continue standard operations for a limited period of time. Once those measures and the Treasury’s cash reserves run out, the U.S. government would be unable to meet all its financial obligations in full and on time, which BPC has coined the “X Date.”

Defaulting or delaying payments on the federal government’s obligations could set off a catastrophic sequence of events for the economy, including a global recession and an immediate U.S. credit downgrade resulting in increased borrowing costs for individuals and businesses. A sharp rise in the interest rates that the Treasury pays to borrow would further increase the national debt from its already staggeringly high levels. This would severely threaten the dollar’s status as a safe haven currency and its dominant position in world financial markets.

Until now, the threat of default has made Congress ultimately agree on a deal to raise or suspend the debt limit. In recent years, however, numerous eleventh-hour confrontations have made default a real possibility. The closest near-miss was on August 2, 2011, when (after months of deadlocked negotiations) Congress passed the Budget Control Act of 2011, raising the debt ceiling with new fiscal austerity measures, hours before the deadline. Even coming close to a default has its consequences: In 2011, Standard & Poor’s downgraded America’s credit rating after the debt limit impasse, citing political brinkmanship. Analysis from the Federal Reserve also found that the Treasury’s borrowing costs increased by hundreds of millions of dollars in the lead up to the X Date in 2011 and 2013 due to elevated interest rates on Treasury securities.

The Path Forward

America’s worsening fiscal trajectory, combined with repeated brinkmanship relating to the debt limit, will continue to erode faith in our creditworthiness. Even in the absence of a major event like a default, there could be a long-term negative impact on the dollar’s status as a global reserve currency.

Although there are other external factors that could threaten the dollar’s dominant global status in the years to come, the U.S. has direct control over its fiscal trajectory. Congress must address the rapidly growing debt as well as de-risk the debt limit to take the possibility of default off the table. These steps would ensure that global trust in America’s creditworthiness is maintained, which is crucial for the dollar’s dominant role in global finance and consequently U.S. economic strength.