According to former International Monetary Fund official Barry Eichengreen, the continuation of the dollar's supremacy hinges on whether the U.S. can effectively address its debt issues.
In a recent op-ed published by Project Syndicate on Monday, the UC Berkeley economist highlighted increasing concerns about the possibility of a rival currency eventually replacing the greenback. This concern arises as nations like China and Russia use local currencies for trade.
However, Eichengreen said the actual threat to the U.S. dollar's position as the world's primary reserve currency is rooted in the escalating pile of U.S. debt.
Eichengreen emphasized that the mounting debt played a significant role in the decline of the sterling as the world's primary currency in the early 1900s. While geopolitical factors contributed to this decline, scholars agree that World War I and II increased the nation's debt by sixfold to 130 percent of its GDP.
"Thus, whether the dollar retains its global role will depend not simply on U.S. relations with Russia, China or the BRICS. Rather, it will hinge on whether the U.S. brings its soaring debts under control, avoids another unproductive debt-ceiling showdown, and gets its economic and political act together more generally," he said.
Concerns regarding rising debt
Economists have raised concerns about the rapidly rising U.S. public debt, with the total deficit reaching $32 trillion for the first time this year.
According to a recent estimate by the Congressional Budget Office, the debt-to-GDP ratio stood at 123 percent in the last quarter. It could climb to 181 percent in the next three decades.
Fitch Ratings' downgrade of the U.S. credit rating this summer highlighted concerns about the nation's ability to meet debt obligations due to political polarization. Moody's downgrade of 10 U.S. banks reflected structural pressures from tighter credit conditions and the Federal Reserve policy within the banking sector.
Debt levels are rapidly rising across various sectors. In 2023, credit card debt surpassed $1 trillion for the first time, and personal unsecured loans reached an unprecedented $225 billion, as reported by TransUnion.
According to Janus Henderson, corporate debt also surged by 6.2 percent over the past year, reaching $7.8 trillion. On the public front, the national debt exceeded $32 trillion this year. Bank of America (BofA) projects the potential addition of $5 billion daily over the next decade.
As interest rates climb, companies are struggling with their debts. Moody's data indicate that 55 U.S. companies defaulted on their debt in the year's first half, marking a 53 percent increase from the 36 defaults in 2022.
BofA strategists cautioned that up to $1 trillion in corporate debt could default in the event of a full-blown recession. However, they currently do not view a recession as likely in 2023.
In the commercial real estate sector, the Mortgage Bankers Association reported that property owners with late payments of 30 days or more — or those who defaulted on their mortgages — had increased to three percent in the first quarter. It reversed a previous downward trend.
The data mirror the growing delinquency rates for commercial mortgage-backed securities loans. Fed data also showed that the delinquency rate for all personal loans rose to 2.23 percent in Q1, up from 1.7 percent in the same period in 2021.
In response to heightened default risks, commercial banks like JPMorgan, Goldman Sachs and Capital One are seeking to offload high-risk loans, even if it means selling them at a discount.
Banks are scaling back their involvement in debt dealings amid tightening financial conditions. It posed a challenge for the commercial real estate industry since approximately $1.5 trillion of commercial real estate (CRE) debt is nearing maturity in the coming years and must be refinanced.