Opinion: Dollar's decline: America's fiscal challenges and emerging global power shifts

A trader works on the trading floor of the New York Stock Exchange (NYSE) in New York, the United States, on May 24, 2023. U.S. stocks ended lower on Wednesday. (Photo by Michael Nagle/Xinhua)

The growing U.S. debt burden, political polarization and partisanship in Washington, and the rise of other countries, bring into question the longevity of America's preeminent global position.

The United States has enjoyed global economic and political dominance for decades, thanks in large part to the status of the U.S. dollar as the world's reserve currency. However, the growing U.S. debt burden, political polarization and partisanship in Washington, and the rise of other countries, bring into question the longevity of America's preeminent global position. If current fiscal and political trends continue unabated, a weaker dollar and diminished geopolitical influence will be largely inevitable.

In June, the U.S. Congress faces a deadline to agree on a deal to raise the debt ceiling. The United States faces the prospect of a default if they cannot agree to lift the debt ceiling.

Many commentators point to history showing a deal can be reached on the debt limit, but the widening political partisanship in the United States, along with former President Donald Trump calling on Republicans to take a hardline position in the negotiations, has raised heightened concerns that a default may occur.

U.S. Treasury Secretary Janet Yellen said the impact of deal not being reached would trigger an "economic and financial catastrophe." If it happens, such a crisis would be highly consequential and can be expected to accelerate a move away from the dollar as the global reserve currency.

The debt and deficit of the United States have ballooned to unsustainable levels, topping 31 trillion and 1.4 trillion dollars, respectively. Its debts and deficits have mounted particularly since the financial crisis of 2008. Interest costs are poised to skyrocket if rates rise further or foreign appetite for U.S. Treasuries falls. Eventually, such debt levels will lead to a crisis with the dollar as its true value would be eroded.

Longer term, we should not forget that Social Security and Medicare, two of the largest federal entitlement programs, face significant funding shortfalls over the next decade as the population ages and the ratio of workers to retirees declines. Were they left unaddressed, benefits may need to be cut by up to 25 percent, and that would have a real impact on vulnerable members of society.

However, reforming these programs is politically exceptionally difficult, as they are viewed as "earned benefits" that Americans have paid into over their working lives. While there have been efforts at reform, such as the Greenspan Commission under late President Ronald Reagan and the Simpson-Bowles committee under former President Barack Obama, none have resulted in the necessary substantial changes.

Failure to act risks worsening debt ceiling fights and raising interest costs. Therefore, even if a deal is reached before the June deadline, such risks will keep reoccurring until comprehensive reforms are enacted.

The sad truth is that Washington remains paralyzed by political divides that preclude fiscal reform. Successive administrations and Congresses share blame for overspending, but hyper-partisanship, rooted in what can best be considered as an era of "culture-war" within society, now poses an insurmountable barrier to effective governance and the economic stability of the United States. These will all have a bearing on the long-term ability for the dollar to remain as the global reserve currency.

U.S. President Joe Biden speaks at SUNY Westchester Community College in Valhalla, New York, the United States, on May 10, 2023. Speaking at SUNY Westchester Community College in New York on Wednesday, Biden said the U.S. economy would fall into recession with 8 million Americans losing their jobs, and its international reputation would be damaged in the extreme in the case of a debt default. (Photo by Mykyta Starychenko/Xinhua)

If the debt limit is not lifted, a U.S. default could spur recession, rate hikes, and market upheaval, the effects of which would be felt globally. Importantly, it would further increase the cost repayments the United States needs to make in its debt, leaving less finance available to cover its domestic and defense spending in the context of an aging population. Conservative government spending is critical for the United States, as its practice of having to increase its debt to cover politically driven spending by a partisan Congress means that even if the debt ceiling is raised, it has only postponed the problem.

Technological and geopolitical forces also imperil the dollar. A trend of seeing the dollar gradually displaced from dominating global transactions would politically curb America's sanctions power and its privileged position of having a global reserve currency to finance its domestic spending.

The implications of the dollar decline are far-reaching. Interest costs would spike if foreign demand for Treasuries waned; inflation may accelerate if the U.S. Federal Reserve prints money yet more freely -- all of which would have wider geostrategic implications that would undermine the globally dominant position of the United States. The world may splinter into rival "currency blocs" as a result.

These risks are particularly acute for the Middle East, where the petrodollar system and dollar-denominated assets underpin economies. If the dollar suffers a crisis, there would be little rationale for pricing oil in dollars, maintaining a dollar-peg, or holding U.S. reserves.

Of course, the threats to the dollar's position may prove to unfold slowly. But if fiscal issues worsen, faith in "fiat money" itself may waver -- with chaotic results. However gradual, the dollar's weakening would herald a global order in which U.S. hard and soft power would wane, and this would signal profound changes at a global level, which will further accelerate the existing trend towards a multipolar world order.

While all countries suffer from economic cycles, America's fiscal problems and polarized domestic politics are expediting an overreach and overextension in a way reminiscent of Britain's geopolitical decline in the early 20th century. In the face of rival economies and ambitions, the collective failure in Washington to achieve fiscal discipline threatens to undermine its overall stature on the global stage, which will be highly turbulent for the global economy.

Warning signs of American decline should not be ignored merely due to past inaccuracies or current complacency. The future of the dollar is jeopardized by debts that sap growth and by a shrinking space for well-developed long-term bipartisan policy. It is worth recalling here that the last time the United States had a major debt-ceiling crisis was in 2011, and that was under President Obama. That crisis resulted in the credit-ratings agency, Standard &Poor's, downgrading the credit rating of the United States from its triple-A credit rating.

The situation with the United States is complex with many uncertainties, but the trajectory is worrisome if the country fails to curb debts and deficits, address political divisions, and reform entitlements. At present, there is little indication that this will be the case. The current course signals a trajectory of change towards a fundamentally new world order.

Editor's note: Steven Wright is associate dean for Student Affairs and associate professor of International Relations at the College of Humanities and Social Sciences of Hamad Bin Khalifa University, Qatar.