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Debt, Inflation, U.S. Dollar Reserve, and the Canadian Dollar

By Matthew Clark


How can debt lead to inflation? How does debt threaten the United States Dollar status within the World's Reserve Currency system? How does a threatened American dollar put the Canadian dollar in peril?


Since the United States dollar is not backed by a precious metal, the American government needs to have buyers for the currency it prints (or creates via computers). More importantly it needs a lot of foreign buyers for it's dollar(s)! If too much money circulates within the 50 states, it will drive the price of products up under the principle of 'too many dollars chasing too few goods.' The more debt there is, the more foreign buyers are required to keep from having too many U.S. dollars distributed throughout continental America.


Observing the evidence of recent history suggests the United States Treasury, and the Federal Reserve, have been adept at convincing foreigners to purchase the USD (United States Dollar). In the 1990's 50% of the worlds reserve currency was held in USD. By the early 2000's that number had jumped to 70%. Today it stands at a steady 60%. (source: Forex.com) Other than the United States only the Euro, Japan, and the United Kingdom economies have qualities which could support a reserve currency. Nevertheless they do not have the depth, or money, to do so! (source: RSMUS.com).


Yet all is not bliss with the status of the United States Dollar as a global reserve currency. The tremendous increase in U.S. federal government debt (32tn+), along with that institutions (Covid era) spending, has meant more currency circulating throughout the nations economy. Throw in supply chain challenges (Lockdowns!), and the result is worrisome inflation levels, compliment by dramatic increases in the rate of interest. Foreign financial, and business, institutions cannot, and are not interested in, absorbing these increases by elevating the amount of dollars they purchase.


It has been correctly noted that the USD as a global reserve currency is not in danger of succumbing to any other currency, including a BRICS Gold backed currency. That is the good news. The bad news is that the American dollar can still be the international money of choice, and yet nevertheless face collapse!


With spending, and debt, so large, the U.S. federal government is in a position where it must increase it's sales of dollars abroad not only in terms of volume, yet in percentage as well, in order to avoid excess coin being circulated domestically. During times of plenty this circumstance might not be cause for concern. Not so currently! World Trade is slowing noticeably at present. World Trade Organization projections, according to their web page, are that 2023 will see only a 1% rise in global trade. Therefore the foreign need for American dollars will increase marginally. While SWAP deals between national governments, and the BRIC Gold backed currency will have a minimal effect on the USD Reserve Currency from a percentage viewpoint, they will eat into any higher demand for dollars, at least to some extent. This means almost certainly that more USD will circulate within the nation, perhaps more than decision making economists realize. Coupled with the fact there are already a large amount of domestic dollars in institutional (not individuals) accounts, during a time when many of those institutions are facing economic stress, and the danger of a more dramatic rise in inflation exists. Furthermore there is also the danger of overarching economic decisions being decided for political reasons. With a Presidential election year coming up in 2024, the governors of the United States Federal Reserve might want to avoid political fallout with the ruling Democratic Party, by refusing to increase interest rates, (raising interest rates is generally viewed with disapproval by both public, and business people) even though the financial situation could require a rise in interest rates.


Thus the debt, allied with a number of converging events, could dramatically threaten the strength of the USD, as well as the American economy at large. A weakened Dollar, could reduce it's percentage of reserves on the international stage. Ominously a more frail currency means a weaker military, at a time when the geopolitical situation is getting tense, to say the least. It does not take much imagination to visualize a vicious circle cycle occurring under these circumstances.


If such a scenario were to take place what might be the fate of the Canadian Dollar? The Bank Of Canada has almost no gold reserves, while the economy relies heavily on exports (27%) to produce wealth, with most exports going to the United States (73.7%). Because of this condition(s) the Canadian dollar is backed by the U.S. Dollar (source: seekingalpha.com). Purchasers of Canadian currency do so with an eye on the country's trade relation with the United States, as well as the strength of the American dollar in supporting Canada's currency. A substantive decrease in the value of the United States Dollar means a substantive decrease, perhaps even collapse, of the Canadian currency.


Debt, public and private, has become an existential danger to the, financial, social, and political, welfare of the Canadian and American populace. Both North American federal governments need to acknowledge this fact ( that is go beyond making it a political talking point), then initiate a widespread public discussion and debate, concluding with the necessary action which remedies this dire threat.

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