The US needs to get its ballooning debt problems under control to keep the dollar dominant, former IMF official says

• The dollar’s dominance is being threatening by growing debt in the US, economist Barry Eichengreen said.
• High debt caused the downfall of the British sterling as a global currency in the early 1900s, scholars say.
• The US deficit could notch 181% of GDP over the next 30 years, according to a CBO estimate.

The dominance of the dollar depends on whether or not the US can get its debt problems under control, according to former International Monetary Fund official Barry Eichengreen.

In an op-ed for Project Syndicate on Monday, the UC Berkeley economist pointed to growing fears that the greenback could eventually be displaced by a rival currency as nations like China and Russia shifting away from use of the dollar.

But the true risk of the dollar being toppled as the world’s top foreign reserve currency lies in the growing mountain of US debt, Eichengreen said, not tensions between the US and other BRICS nations. 

Mounting debt was responsible for the British sterling’s downfall as the world’s top currency in the early 1900s, Eichengreen said. Though the sterling’s decline was also partly due to geopolitical events, most scholars agree that was set in motion by the huge amount of debt taken out during both world wars, causing the nation’s debt balance to soar sixfold to 130% of its GDP.

“Thus, whether the dollar retains its global role will depend not simply on US relations with Russia, China, or the BRICS. Rather, it will hinge on whether the US brings its soaring debts under control, avoids another unproductive debt-ceiling showdown, and gets its economic and political act together more generally,” he warned. 

Economists have sounded the alarm for the soaring US public debt balance, with the total deficit hitting $32 trillion for the first time this year. The debt-to-GDP ratio – which clocked in at 123% over the last quarter – could soar as high as 181% in the next 30 years, according to a recent projection from the Congressional Budget Office. 

The dollar, meanwhile, has weakened slightly against rival currencies after the blistering rally that carried it through 2022. But a weaker dollar isn’t necessarily a bad thing, as US companies with business overseas can be hurt if the dollar is too strong against local currencies.

The greenback meanwhile is also still the most widely used currency in global transactions and foreign reserves, and there’s been little serious threat from either the yuan or the proposed BRICS currency meant to shift trade away from the dollar.