After the U.S. financial crisis helped cause a deep global recession, foreign leaders are worried that history could repeat itself. The fiscal impasse that partially shut the American government and threatened to trigger a U.S. default that would have devastated financial markets worldwide, has resulted in some leading nations, like China; suggesting that the dollar should be replaced as the international reserve currency.
Albeit an interesting approach, experts say there is no viable alternative to the dollar as the centerpiece of the global financial system, and there probably will not be for the foreseeable future. Many say this is the case even despite the fact that Washington’s debt limit standoff, which was reminiscent of similar brinkmanship in 2011, is agitating world leaders and could accelerate efforts to find an alternative. Moreover, the international investment community is openly concerned as well, and in my experience investing I have seen more investors introduce Asian assets to their portfolio; as a precautionary measure.
Most countries hold their foreign exchange reserves in U.S. dollars, because the currency is viewed as the world’s most stable. Thus, given the world financial system’s dependence on the American dollar, a default on payments of interest or principal on U.S. Treasury bonds would be catastrophic for the global economy. Treasury bonds and other dollar-based investments are used as the main form of collateral worldwide, so questions about their security would cause more problems than the financial system failures did, in the fall of 2008. When you stop to consider that China is the largest foreign holder of U.S. debt, with about $1.3 trillion in Treasury bonds, it is understandable why the Beijing government would be concerned about the effect of America’s ongoing failure to keep its fiscal house in order.
The fact of the matter is that Global finance ministers are worried about the uncertainty of a U.S. default in the future. Predominately because it would mean a massive disruption the world over and would push the global economy into a much deeper recession, even as “the world is still crawling its way out of an economic disaster thanks to the voracious Wall Street elites.”