The U.S. federal debt is presently in trillions of dollars; yet, a lot of people fail to understand what it means for the nation. The national debt and its related issues rule much of the public discussion. Many countries, especially the United States has witnessed debt skyrocket. Financial recession and tax rebates have been the cause of poor tax receipts. Moreover, the government has spent a massive amount on social development and programs to save struggling banks. Besides these expenses, the United States has other liabilities related to entitlement programs. Although debt reduction programs could prove to be of some help, the fact remains that America has been accumulating debt at a tremendously high speed, and chances are not very good for the condition to change anytime soon.
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U.S. debt debacle pointing to the dollar doomsday
Among the various sectors affected by the massive U.S. debt burden, the American dollar has been the most important among them. Way back in 2008, the U.S. dollar got near to losing its position as the global reserve currency. For decades, the dollar has played an important role in the world economy, but America’s increasing debt issue is more likely to hasten an actual universal crisis. But an even bigger risk is the possible loss of the U.S. dollar’s “reserve currency” standing — the chief support of the global economy for the past four decades. Central banks worldwide have been dependent on huge reserves of dollars to make trading easier. That, in turn, has allowed America to print much bigger amounts of its notes, with apparently little inflationary outcomes. The import levels for Americans were much higher than the export level, they consumed more than they produced, and spent more than they earned. However, this scenario changed quickly. With international drop in demand for dollars, central banks all around the globe gradually reduced their dollar reserves. That obviously debases the dollar against other currencies and thereby causes inflation. This added to concerns about the future of the dollar, and America in general.
Time for a dollar comeback
After facing a crisis for quite some time now, the dollar is close to regaining a ground. Considering the present state of the U.S. economy, it can be expected that the greenback will ease a bit more over the coming few months. However, other factors signify a more steady U.S. economy on the close horizon.
The declining U.S. trade deficit is one more feather in the dollar's cap. Both in fixed terms and as a percentage of GDP, the trade gap is getting reduced. In 2008, it was almost $520 billion – a figure substantially below $685 billion (2007) and $758.5 billion (2006).
It is on track toward $520 billion and 3.8% of GDP in 2008, down substantially from $685 billion and 5.1% of GDP in 2007 and $758.5 billion and 5.7% of GDP in 2006. Rampant uncertainties about the U.S.' capacity to sustain ever-increasing trade gaps was an important factor in the dollar's downturn over the last decade. A dwindling gap will now have an entirely opposite, encouraging effect.