The U.S. dollar is the leading global reserve currency. It’s where countries, institutional investors and individuals stash their cash. No capital markets are deeper or safer than those for U.S. debt.
If investors lose faith in the dollar, in turn, the implication is that
they’ll take their money elsewhere. There is no such thing as money purgatory; if people sell dollars, they must buy something else.
Would they buy Japanese yen? Not if debt is their concern — Japan’s debt-to-GDP ratio is more than twice that of the United States.
Would they buy Chinese yuan? That isn’t likely given China’s strict currency controls.
Would they buy euros? Again, if fiscal health is the barometer, that seems unlikely.
What about cryptocurrencies, precious metals and wampum? People may move into these on the margins, but that’s not where Saudi Arabia is going to invest its $500 billion in currency reserves.
To be clear, this doesn’t give the federal government a license to issue an infinite amount of debt.
But that’s not what Powell was talking about.
Even the most aggressive bill under consideration by legislators right now contemplates another $3 trillion in fiscal support. That’s a lot of money. But as Powell laid out in his comments, it’s probably cheaper than an economic depression.
• John J. Maxfield, executive editor of Bank Director