WASHINGTON—The U.S. economy is grappling with record-high debt levels, sluggish growth, and a shrinking labor force—yet the dollar continues to defy weakness, buoyed by the structural dynamics of the global monetary system.
Debt and Inflation Risks at Historic Highs
The U.S. debt-to-GDP ratio has surged past 130%, the highest in history, raising concerns about long-term economic stability. Economists warn that such elevated debt could stifle growth and trigger extreme inflation, though outright default remains unlikely given the dollar’s reserve currency status.
Despite a 3.5% unemployment rate, broader labor market participation tells a different story. Roughly 8 to 10 million Americans aged 25–54 are neither working nor seeking jobs, dragging the labor force participation rate down to 62%—a sharp decline from 70% in 2000. Factoring in discouraged workers, real unemployment may approach 10%, near recessionary levels.
The Dollar’s Paradox: Weak Economy, Strong Currency
Even as U.S. fiscal and trade deficits widen, the dollar retains its strength—a phenomenon tied to the global Eurodollar system, a web of offshore dollar transactions outside Federal Reserve oversight.
Walter Reston, the late banker who pioneered negotiable certificates of deposit, once likened the monetary system to a closed loop: when dollars move between banks, they don’t vanish but instead influence exchange rates and interest rates. Today, this system is facing a dollar shortage, despite the Fed’s balance sheet ballooning from800 billionin 2008 to over 7.5 trillion in 2020.
Why Money Creation Isn’t Stimulating Growth
The Fed injects liquidity by purchasing securities, creating M0 (base money). However, much of this sits idle as excess reserves rather than circulating in the economy. True monetary expansion depends on commercial banks, which generate M1 and M2 through lending—yet their capacity is strained.
With quadrillions in derivatives underpinned by just $7 trillion in M1, the global financial system faces a structural dollar squeeze. This scarcity, coupled with the Eurodollar system’s reliance on interbank lending, sustains dollar demand even as U.S. fundamentals waver.
Outlook: Sustainability in Question
Analysts caution that the dollar’s strength is not a vote of confidence in the U.S. economy but a reflection of the monetary system’s quirks. Moving forward, shifts in debt levels, inflation, and labor trends will test whether the greenback’s dominance can endure.
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