For decades, the dollar has been at the center of the global economy, with the USA maintaining its central position without difficulty. Now, however, its national debt stands at $36 trillion, and investors, economists, and policy makers are wondering what comes next— a question that continues to be unanswered. What will the growing national debt mean for other countries and their foreign currency reserves?
A Snapshot of the USA’s Debt: The federal debt in the USA has been consistently rising over the years due to a mix of extensive spending initiatives, tax reductions, pandemic-related assistance programmes, and escalating interest costs. By mid-2025, the debt-to-GDP ratio exceeded 120 percent, a figure that traditionally triggers worries regarding long-term fiscal viability. The Congressional Budget Office estimates that if existing policies persist, the federal debt may exceed $50 trillion by 2035. This poses significant concerns regarding not just the health of the domestic economy but also the stability of global monetary systems— given that trillions of U.S. dollars are stored overseas.
The Dollar’s Role in Global Reserves: According to the International Monetary Fund, about over half of worldwide foreign exchange reserves are held in dollars. Central banks globally— from Europe to Asia and the Middle East— maintain huge amounts of US Treasury bonds and dollar-denominated assets to cushion against economic disruptions and to bolster their own currencies. Nations such as China, Japan, and Saudi Arabia rank among the top holders of US debt. These investments are viewed as secure, easily tradable, and consistent— rendering them appealing for central banks aiming to ensure currency stability and facilitate trade. But what occurs when the core of this system— the perceived security of US debt— starts to reveal weaknesses?
The increasing US debt and its impacts on international currency reserves indicate both a challenge and a chance. Although the existing system can endure additional strain, there is an undeniable feeling of discomfort within global financial communities. By acting now to control its debt and restore trust, the USA can preserve its position of leadership in the world economy.
What If US Debt Keeps Rising?: There are several possible consequences if the U.S. continues on a path of rising debt with no significant fiscal reform:
- Erosion of Confidence in US Treasuries: With the rising US debt, investors and foreign nations might start to doubt Washington’s capacity to handle its financial affairs. Although the USA has never failed to meet its debt obligations, political stalemate concerning the debt ceiling increase and persistent deficits can create uncertainty. If trust in US Treasuries diminishes, worldwide interest in them might decrease. This would compel the U.S. government to provide elevated interest rates to draw in buyers— thus raising borrowing expenses and exacerbating the debt load.
- Depreciation of the U.S. Dollar: Elevated debt levels may diminish the dollar’s value in the long run, particularly if investors look for alternatives such as the euro, Chinese yuan, or even cryptocurrencies. A diminished dollar would raise the price of imports, drive inflation, and impact nations with substantial dollar reserves. For countries such as India, Brazil, or South Africa, where central banks rely on dollar reserves, a decline in value could lead to losses in valuation and financial instability.
- Shift in Reserve Currency Preferences: Although no currency today competes with the dollar regarding liquidity and worldwide confidence, the ongoing increase of US debt could hasten attempts to diversify. Nations might start designating a greater portion of reserves to the euro, gold, yen, or China’s renminbi. China has been particularly outspoken in advocating for a “multipolar” currency framework and has urged its trading partners to conduct transactions in yuan instead of dollars. Likewise, the BRICS countries (Brazil, Russia, India, China, and South Africa) are investigating ways to diminish their dependence on the dollar.
- Increased Geopolitical Tensions: The USA’s debt situation provides financial leverage, but also makes it susceptible to risks. If major creditors such as China or Japan decided to sell substantial quantities of Treasuries, it might disturb international markets. Though improbable, these actions might be utilized as political instruments during periods of increasing geopolitical strain. Additionally, nations might aim to form financial partnerships that completely circumvent the US-led system, illustrated by the creation of bilateral currency swap agreements and cross-border payment frameworks that sidestep the SWIFT network.
Foreign Currency Reserves: Fragile Insurance?: Foreign currency reserves serve as a buffer against economic disruptions, allowing nations to stabilize their currencies, meet foreign debt obligations, and import products in times of crisis. However, if the dollar diminishes in value or US Treasuries are seen as less appealing, these reserves could rapidly decrease in real terms. Emerging economies— many of which rely significantly on dollar-denominated reserves— may encounter balance of payments issues. To safeguard their currencies, their governments might need to tighten monetary policy or increase interest rates, which could lead to slower growth and social unrest.
What Could Prevent a Crisis?: Many economists, despite the risks, think that a major crisis is improbable in the near future. The US economy continues to be the largest and most dynamic globally. Its financial markets are robust and reliable. Crucially, there remains no genuine substitute for the dollar in the international arena. With that in mind, the subsequent actions might assist in averting future instability:
- Fiscal Reform: Steady decline in deficits via strategic expenditure cuts and tax changes.
- Debt Management: Transitioning to long-term debt tools and decreasing dependence on short-term financing. Global Collaboration: Enhanced partnership with international allies to stabilize currency markets and align macroeconomic strategies.
A Tipping Point or a Wake-Up Call?: The increasing US debt and its impacts on international currency reserves indicate both a challenge and a chance. Although the existing system can endure additional strain, there is an undeniable feeling of discomfort within global financial communities. By acting now to control its debt and restore trust, the USA can preserve its position of leadership in the world economy. Otherwise, the world might have to adjust to a future in which the dollar is no longer the uncontested foundation of global finance— and that future could come sooner than most anticipate.
