Robert M. La Follette School of Public Affairs
Monday, October 21, 2013

Potential debt default threatens status of U.S. dollar

Menzie Chinn

Avoidable crises such as the potential default by the United States on its debt last week could cost the U.S. dollar its privileged position as the world's main reserve currency, La Follette School economist Menzie Chinn argues in an op-ed published by the International New York Times on October 20.

Last week's threatened default drew several warnings from officials in China, which holds many U.S. Treasury securities. "Of China's $3.6 trillion in foreign exchange reserves, about 60 percent is estimated to be held in U.S. government securities," Chinn writes. "As foreign exchange reserves have soared over the last decade, Chinese monetary authorities have attempted to diversify away from dollar-denominated assets, with limited success."

Chinn notes that although China has little room to change its policy on foreign exchange reserves, it can reduce its reliance on the U.S. dollar by de-emphasizing exports, promoting domestic consumption and by using its renminbi instead of the U.S. dollar in international trade transactions.

American Debt, Chinese Anxiety, October 20, 2013, International New York Times