Has the coronavirus pandemic weakened the U.S. dollar status as the international reserve currency?
The U.S. budget deficit in June is about the same as it was for the full fiscal year of 2019 because of spending to support the national economy during the coronavirus epidemic. At the same time, the revenue of the state treasury has plummeted. This has put additional pressure on the dollar and will make it more difficult for it to be able to maintain its status as an international reserve currency.
According to the U.S. Treasury Department, household spending in June exceeded revenue by $864.1 billion. That’s twice as much as in May. In April, the U.S. Committee for a Responsible Federal Budget predicted that a drastic economic downturn, along with urgent bailouts, would quadruple annual household spending to $3.8 trillion, 18.7% of the GDP. However, this forecast also appears to be overly optimistic. In the first nine months of the current financial year, the budget deficit has already reached $2.74 trillion. The previous negative record of $1.4 trillion was registered in 2009 when the global financial crisis was at its worse.
As the U.S. Treasury Department explained, this colossal increase can be attributed to the gigantic expenditure caused by the coronavirus pandemic and its consequences. The Treasury Department claims that the U.S. has used a lot of money to support companies and their employees who have been hit by the pandemic. In June, $1.1 trillion was spent for these purposes, more than three times as much as a year ago. Household revenue shrank to $240 billion and since March, the bailout has almost reached the $3 trillion mark.
Congress is debating the effectiveness of aggressive promotional measures that were taken prematurely. A June report by the government made it clear that critics of the comprehensive economic aid program were right in many ways. Some of the funds that were intended for the population flowed in an “unknown” direction. Among other things, it turned out that almost $1.5 billion has already been made available to Americans who are dead. This flow of money to deceased people was the result of poor coordination of various authorities. The Treasury and its fiscal services office responsible for these payments were unable to access the full data of the Social Welfare Administration. Now it is necessary to find out what happened to these funds and how many cheques that were intended for dead people have already been cashed.
In addition, the effectiveness of the assistance program for the unemployed and small businesses needs to be examined more closely. There are no mechanisms for controlling these funds and it is quite possible that considerable funds have not reached their recipients. Mark Meadows, the Chief of Staff for the White House, has meanwhile announced that the administration will start working on another package of measures to promote the economy in the coming days.
The largest U.S. banks estimate that the budget deficit will reach $4 trillion this year – a record not seen since World War II. The Federal Reserve System is constantly issuing and distributing new dollars for these anti-crisis measures without getting any valuable assets, which only increases its commitments. At the end of the coronavirus pandemic, the Federal Reserve’s balance sheet is expected to inflate to $10 trillion. The permanent growth of the currency will inevitably destroy trust in the dollar.
U.S. government debt has grown from 108% to 123% of the GDP since January, and it is increasing. In comparison, in 2006, shortly before the world financial crisis in 2008, it had been a maximum of 63%. And if corporate, mortgage and other debts are added, the number rises to as much as 330% of the GDP.
The situation is further exacerbated by the fact that the already huge budget deficit is mainly covered by the sale of government bonds. Many central banks have recently wanted to get rid of their U.S. bonds. Investors are seeing the growth in US government debt and are simply questioning Washington’s ability to meet its obligations.
Former U.S. Treasury Secretary Henry Paulson recently spoke in detail about the risks to the national currency. In his view, the future of the dollar is directly dependent on Washington’s ability to develop a strategy that would solve the national debt and budget deficit problems. It is unlikely that some countries’ investments in U.S. government bonds will be put on hold. But this scenario would be extremely dangerous for the dollar’s status as a reserve currency.
The statements, views and opinions expressed in this column are solely those of the author and do not necessarily represent those of The Duran.