‘Something’s going to happen to the dollar,’ World Economic Forum panel warns

Unless the U.S. gets its fiscal act together, the dollar could go from the king of currencies to the dustbin of history, according to a powerful panel at the World Economic Forum.

David Rubenstein, the founder of the $382 billion investment firm Carlyle Group, told an audience in Davos, Switzerland, that the United States faces a fiscal cliff that could morph into a political crisis affecting the entire world.

Speaking about the mounting U.S. deficit, Rubenstein said, “If we don’t resolve this, something’s going to happen to the dollar.”

“If the United States can’t get its fiscal act together, at some point, people are going to do what they did to the British pound and the Dutch guilder years ago,” he said.

Singaporean president and fellow panelist Tharman Shanmugaratnam agreed, claiming that “the most important and most neglected area of public policy is fiscal reform.”

The U.S. federal debt recently set another grim milestone, crossing $34 trillion for the first time in history. That included $1 trillion in fresh borrowing over three months, the fastest accumulation since the Covid stimulus.

Since the dollar is considered the global reserve currency, the U.S. government can simply issue new bonds to fund its spending. But as the Davos panel explained, there’s a huge and potentially dangerous trade-off to acquiring all that debt.

How massive deficits could impact the dollar

The U.S. dollar is by far the most widely used currency in the world.

In global trade, it’s considered the primary “unit of account.” And in the foreign exchange market, the greenback is on the side of 88% of all trades, according to the Bank for International Settlements.

But as fiscal watchdog Peter G. Peterson Foundation explains, rising debt “increases expectations of higher rates of inflation and erosion of confidence in the U.S dollar.”

With U.S. debt-to-GDP surging to 123%—anything above 100% means the country borrows more than its economy produces in a year—“the primary use for U.S. dollars has been to buy Treasuries,” according to economist Peter Schiff.

“But since the biggest buyers are now sellers, and the national debt and federal budget deficits are soaring, demand for dollars should collapse as well,” Schiff explained, adding that the only way America can pay the interest on its debt is for the government to continue printing money.

It will do so “until the dollar collapses,” he said, referring to hyperinflation.

Although the government can, theoretically, print more money to satisfy the debt, economists say this isn’t a realistic approach.

“Neither the Treasury nor the Federal Reserve is really supposed to be going rogue and printing money in order to get us out of the debt ceiling standoff,” said Alan Cole, senior economic policy analyst at the Conference Board.

“The long-run solution to the debt, if we’re concerned about its magnitude, is to balance the budget,” not print more money, explained Sean Snaith, director of the University of Central Florida’s Institute for Economic Forecasting.

America isn’t alone

The U.S. isn’t the only country with a massive debt problem. Financial and political leaders at the World Economic Forum this week sounded the alarm on a global debt crisis.

As Tim Adams of the Institute of International Finance noted, “We have the highest levels of debt in a non-war period in modern history,” and it trickles down from the government level all the way to the individual.

“This year, we are more worried about liquidity problems,” the International Monetary Fund’s Gita Gopinath told Bloomberg in Davos. “Debt is at extremely high levels.”

“Many countries borrowed a lot during the pandemic. That was short-term in nature, and that’s coming due,” Gopinath added.

In its 2023 global risks report published last year, the World Economic Forum cited “debt distress on a global scale” as a primary source of concern. This level of debt distress is expected to be widespread over the next decade.