U.S. Debt A) According to Essay

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In most countries, a rise in debt would have a series of economic consequences leading to the devaluation of the currency and a return to an equilibrium. This has not happened with the U.S. dollar because of a unique externality -- its role as the world's currency. However, that role itself dependent on a number of factors, including but not limited to domestic resources stocks, strong legal and political systems and sound economic policy. It is conceivable that a shift in these underlying qualities -- such as the decline in foreign confidence in U.S. accounting systems -- could signal a shift to other currencies such as the Euro as the world's default. Without that key externality, the U.S. dollar would be subject to collapse. This may take more time to occur with the dollar than with other currencies, but ultimately market forces will prevail, meaning that the U.S. debt situation is not sustainable indefinitely.

b) it is worth being worried about the large amount of U.S. debt held by foreigners.

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Such leverage inherently increases risk, meaning that the U.S. economy's risk has been steadily increasing for years. The level of foreign debt can continue to increase in the short run, but in the long run such increases will reduce the stability of the U.S. economy, which could have devastating impacts on the nation's competitiveness as it compromises the underlying systems from which the dollar derives its strength. A weak dollar may improve export prospects, but at the cost of diminished savings and a precipitous decline in quality of life.

Works Cited:

Bureau of Economic Analysis. (2010). Personal Savings Rate. Retrieved March 23, 2010 from http://www.bea.gov/BRIEFRM/SAVING.htm

Bureau of Economic Analysis. (2009). National income and product accounts table. Retrieved March 23, 2010 from http://www.bea.gov/national/nipaweb/TableView.asp?SelectedTable=137&Freq=Qtr&FirstYear=1947&LastYear=2009

Mandel, M. (2008). Real wages continue to fall. Business Week. Retrieved March 23, 2010 from http://www.businessweek.com/the_thread/economicsunbound/archives/2008/11/real_wages_cont.html

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