US Debt

The US and Its Currency Are Losing Their Characteristic Strength

Last week, after some federal offices were massively shut down for over two weeks and uncertainty within international financial markets started to appear, the U.S. Congress reached an agreement to initiate the fiscal year’s budget, which takes effect in October. This way, the operations of income and expenditure of the U.S. government were re-established.

The U.S. economy has a severe debt problem because of its high parameters of public expenditure. The debt to gross domestic product ratio of the U.S. is around 73 percent, meaning that it is a highly indebted, rich country, just as economist Óscar Ugarteche pointed out some time ago. As a context, let us remember that Bolivia’s debt to GDP ratio was around 65 percent when it managed to have its debt reduced through the Heavily Indebted Poor Countries program.

As on previous occasions, a domestic problem — the resistance of the tea party, the most conservative wing of the Republican Party, to public expenditure, in particular the public health program proposed by Barack Obama, as opposed to U.S. military expenditure, which represents more than 20 percent of the budget — had worldwide consequences because of the size of the U.S. economy and its links with the rest of the world.

One of the most serious consequences for the worldwide economy, which derives from the American budgetary block, is the risk that the U.S. will cease payment of its public debt — approximately $22 trillion. Given the magnitude of this figure, the risk is linked to a loss of value of the U.S. currency, together with a big adjustment in international trade.

China, which is the second economy in the world nowadays, took some measures to resist the effects of what the collapse of the U.S. dollar would mean in the coming years. The Chinese credit rating agency downgraded the U.S. qualification; at the same time, the Chinese government began a series of bilateral and multilateral agreements to reduce the use of the dollar in its international trade. The Asian country has recently reached an agreement with the European Union, so that 10 percent of its trade is comprised of a system of compensation between euros and Yuan.

Latin American countries are not unaware of a reality, in which both the U.S. economy and its currency are gradually losing their characteristic strength. This is why, at least in a conceptual way, some of the governments in the region have undertaken some initiatives to have their own development bank, the Bank of the South, and a common Latin American currency, the sucre. These initiatives are just a blueprint for the moment, but the time will come when we will truly need them.