The US national debt officially crossed above $37.5 trillion on Wednesday, according to data from the Peterson Foundation. Debt per single person in America is now at a historic high of over $110,000. The US dollar is facing a crisis as the national debt is increasing at record levels.
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Why the US Dollar is in Danger If the National Debt Rises
- More Printing By the Federal Reserve
The first currency to face the heat if the national debt spirals out of control is the US dollar. If debt grows, the Federal Reserve will issue more Treasury bonds, but seeking buyers at a time of de-dollarization will be challenging. If demand for the Treasury bonds weakens, the Fed will be forced to print more money to eventually buy them.
- Demand For the USD Will Decline
This will lead to a new financial problem as the supply will be more with less demand. The more the supply, the less demand for the US dollar, as the national debt is not brought under control. Emerging economies will begin to diversify their central bank reserves, giving first preference to local currencies and gold.
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- Loss of Investor Confidence
Not just emerging economies, even general investors will begin to lose confidence in the US dollar if the national debt increases further. If the US cannot manage its debt, why would traders find buying Treasury bonds attractive? The status of the safe-haven currency will be eroded, giving them alternative options to invest in.
- Risk of Inflation is Higher
If the national debt increases and affects the US dollar, the chances of a recession are higher. Inflation dissolves purchasing power, leading to a grind in consumption. The development would make businesses lose out on sales, making revenues dry up. The worst-case scenario comes now as businesses will begin letting employees go by cutting jobs to stay afloat in an economy that is in turmoil.
