For those of you who don't know, the U.S. debt has already exceeded 100% GDP. At the same time, the Fed is planning to keep on raising the key interest rate. To be more specific, Janet Yellen’s latest speech triggered a new wave of positive market expectations regarding the likelihood of further interest rate hikes.
Stocks started getting stronger as traders, investors and market observers became aware that the key interest rate is going to grow slowly and within the scope of under 1% this year. Strange as it may seem, the U.S. Dollar continued its downtrend against a basket of other major currencies. The downtrend has been underway since late 2015.
At the same time, some representatives of the international trading community expect a dollar crash in the near future. They back their prediction by the fact that the U.S. debt is so huge that there is no way the Americans can handle it anymore. It has already exceeded the entire U.S. GDP. All of that triggers interest rate hikes, which leads to inability to service such an immense debt, they say.
Indeed, the American economy ahs a lot of challenges to overcome. Some of them look really threatening, including a relatively slow pace of economic growth amid unprecedented monetary stimulation. At the same time, the budget deficit has been huge for years.
However, other experts believe that despite all those challenges out there, the U.S. Dollar is not going to collapse anyway, at least over the next couple of years.
While the advocates of the dollar crash say that the debt is above 100% of the GDP, there are several cases when this is not a problem for the economy. For example, the Japanese debt is well above 200% GDP, but this doesn’t prevent the Japanese economy from staying strong and coming up with new variations of budget and monetary policies. It was Japan that first introduced the so-called quantitative easing, and that happened long before the 2008 crisis. Japan has been seeing a 6% budget deficit for a couple of years. Singapore is another example. By the way, it often cited as an example of fast economic growth. At the same time, its debt has been well above the GDP for years.
At the same time, the advocates of the dollar crash also back their prediction with another factor. The thing is that over the period of more than 30 years of financing the U.S. budget at the expense of expanding the U.S. debt, the amount of time required to cover it at the expense of budget profits has already increased from 2 years all the way up to 7 years. Over the same period, the Fed rate has been cut by hundreds of times.
Indeed, that’s a big problem for the U.S. economy and national currency, but there is no fatal problem in the near future, the opponents reply. Any debt has 2 components, the borrowed amount and the interest on it. It is also important to keep in mind the average lifetime of the debt as well as the average rate. For the borrower, a big problem comes when there is no chance to pay it off on time or when the borrower has to pay off the interest to the full. When it comes to the USA, the interest payments have been almost unchanged – around 230 billion dollars. At the same time, the share of the payments in the U.S. budget spending has been going down ever since. At this point, it makes up a relatively small part of the spending. That’s why there is no reason to expect any major problems with servicing the U.S. debt over the next 10-15 years! On top of that, the U.S. Dollar remains the world’s major currency. It makes up some 50% of the entire turnover in contemporary financial markets.
