There Is No Alternative to the Dollar

The downgrade of American credit worthiness is a fact and a new reality. As a result, investors will have to abandon the world’s main reserve currency and turn to gold or the Swiss franc. We should, however, examine the long-term effects of the events from the past week.

In the long run, market sentiment will be more important than the actual credit downgrade. It is highly improbable that investors will be able to rid themselves of all of their American treasury notes and dollars, as there is no sensible alternative. The Euro is not a viable choice, since Europe is facing much graver problems. If the American rating has been downgraded, it should be lowered for other countries as well. Even if other nations are not in any financial straits, their reliance on the EFSF system might suck them into the crisis. The Chinese yuan is not a viable alternative either, as it is not a fluid currency, and the Chinese financial markets are not adequately developed. The Swiss franc, which is now treated like gold by investors and sought after during economically troubled times, are not a logical choice for long term investment. Despite the credit downgrade by S&P, the dollar remains the most trustworthy currency in the world. It will remain the stable investment option, which the world will use in times of crisis.

An argument in favor of the downgrade was the grim outlook for the growth of American debt and the growth of the U.S. economy. The Bureau of Economic Analysis released statistics showing that the American GDP shrunk by 3.5 percent, instead of the projected 2.6 percent. Simultaneously, the economy grew less rapidly than predicted. All the data points toward a slow and painful recovery.

The outlook, however, is not all negative. Politicians decide about the level of debt. Has S&P thought about the possibility that after the elections in 2012, there might be a majority more eager to slash deficits? In 2015, the countries who currently have a AAA rating will have accumulated debts ranging anywhere from 30 percent of GDP, like Canada, to 83 percent in France. During this same time period, the United States will have a projected 79 percent debt to GDP ratio. Why should France have the top rating, especially after buying up so much European debt recently? The S&P has argued that as opposed to the United States, the net debt in other countries will go down before or by 2015.This is not a sound argument, as everything depends on the type of government running the country, and the aggressiveness with which they it tackles the deficit problem. The credit downgrade has hurt Barack Obama in his quest for re-election, opening the way for a deficit hawk opponent. Maybe next year S&P will bring back the AAA rating.