US debt could trigger dollar collapse, UN warns

This is all because of anti-Americans around the world deliberutely twisting Things to make America look Bad. It's OUR dollar, and we can make it have any value we like. I'd rather we did have a big AMERICAN deficit than a Euro-Communist "slight" deficit. If it wasn't for us they'd all be speaking German anyway.

Essentially, given the amount of stuff the US is importing and exporting, and the flow of money to finance US debt, the US dollar -should- be declining. This would suck when it comes to imports - the price of foreign goods would rise significantly. It would be great for the domestic manufacturing sector, because the low dollar would make American goods cheaper in foreign markets. Basically, we'd import less and export more, which would mean more jobs but also higher costs for consumer goods.

Mind you, this is not something that you want to have happen if, say, you are China and exporting a ton of goods to the US. The last thing you want to have happen is your foreign market dry up! This is why the Chinese, for example, have worked to keep their currency relatively stable to the dollar - if the yuan were to float "up" relative to the dollar, Chinese exports would fall, and that would significantly affect Chinese growth. It's not just China, either - nobody who's exporting stuff to the US wants the dollar to drop down and hurt their business, and nobody who's worried about competing with US manufacturing in their domestic markets wants the dollar to drop down and hurt THEIR business.

The real problem is if everything breaks loose at once - if there's a massive loss of confidence in the dollar all at once, that affects a LOT of investment, and the US is basically a quarter of world output. In situations where you have a lot of fluctuation in the currency, people tend to pull out of doing business in that currency - nobody wants to turn 100 pounds into 200 dollars if those 200 dollars are only going to be worth 60 pounds next month. That would make it harder for US companies to get foreign investments. And in the domestic market, the lack of foreign purchases for US government bonds would reduce the supply of investment capital, meaning that a large increase in interest rates would be necessary if the government wanted to get its deficit funded. That would tend to reduce economic growth and set off a lot of changes in the US domestic economy, which would further tend to reduce investment activity... you get the idea. It's not totally a downward spiral, but it'd be ugly in the short term.

That's complicated by the fact that the US is, well, the US. US growth has a large effect on EU and Japanese economic conditions too - if the US were to enter a large recession, those economies would almost certainly follow. That's to say nothing of the chances that the US would exercise an, er, non-fiscal policy option; in a very real way, the dollar is backed by steel (in ships) and radioactive elements (in bombs), and when Momma ain't happy, ain't nobody happy. ;p

Of course, the chance that things would suddenly spiral out of control is pretty slim; the other industrial countries have a tremendous interest in keeping the US in the game, so to speak (both for the benefit of their domestic economies, which benefit enormously from the stability that the current system provides, and because an angry and broke US is still more powerful than every other military put together. Boy howdy, if you think what we've -already- done constitutes war for oil, you don't want to see that!) And, bluntly, it's not like the US debt levels are unprecedented - they're more or less middle-of-the-road compared to other industrial nations, so things would have to get continually worse before we stood out of the pack in that respect. But yeah, current spending levels are certainly unsustainable in the long run - eventually the market will not continue to provide the US with a tremendous supply of cheap capital to borrow at current rates.