US debt hardly looks like a bargain right now, even without the sinking dollar.

The dollar s slide after 1985 made the real burden of Latin America s dollar debt much lighter.

But, already before the recent debt ceiling imbroglio, the dollar had begun to lose its luster.

The major risk to the sustained role of the dollar is the large and growing US national debt.

In a highly innovative move, Argentina exchanged old debt for new debt at about 30 cents on the dollar or a little more plus a GDP indexed bond.

With US government debt repayment now in play, the very concept of dollar based riskless assets is in doubt.

Such developments would cause US debt yields to spike, disrupting growth. The dollar would become weaker, leaving investors wrong footed.

There is also the risk of a disruptive decline in the dollar, which could prompt investors to flee US debt.

In November 2001, the authorities again restructured the public debt, this time exchanging dollar denominated bonds for domestic guaranteed loans.

With the Lebanese pound (LL) pegged to the United States dollar, the prevailing very high debt to GDP and debt to export ratios make that economy extremely vulnerable to adverse shocks.

In the two decades that followed, America s debt usually was around 3 trillion, rising or falling with the exchange rate of the dollar.

(We will see how investors judge the dollar once the smoke clears and the huge expansion of US money and debt becomes evident.)

In 1994, Mexico shook the global economy when the extent of its domestic (but dollar denominated) debt in the so called tessobonos became apparent.

The issuance of dollar bonds was a major source of abuse, with speculators buying dollar debt at the official exchange rate, selling it for greenbacks, and then exchanging them for bolivars at a much higher rate on the black market.

With the huge debt left behind by the Bush administration, the US should be especially motivated to get the largest possible stimulation from each dollar spent.

Second, the costs of the insurance premium the outsize, largely dollar denominated reservoir of China s foreign exchange reserves have been magnified by political risk. With US government debt repayment now in play, the very concept of dollar based riskless assets is in doubt.

In plain English, a supposedly well capitalized bank in the UK can have 97 cents of debt per one dollar of assets (and just three cents of equity).

Moreover, as Bilmes and I argued in our book The Three Trillion Dollar War, the wars contributed to America s macroeconomic weaknesses, which exacerbated its deficits and debt burden.

Back in China, the dollar peg has led to large and growing foreign exchange reserves, which are fueling domestic inflationary pressures and causing public sector debt to balloon.

As such, the Spanish dollar was worth slightly more than the U.S. dollar, and likewise, the Newfoundland dollar, until 1895, was worth slightly more than the Canadian colonial dollar.

How did we get here? Once upon a time, conventional wisdom maintained that curbing governments appetite for debt would put an end to over borrowing, because private agents would know to act prudently and weigh the costs and benefits of one more dollar of debt.

ECA data indicates that 80 cents of every dollar that flowed into Africa from foreign sources for economic development flowed back out, suggesting widespread capital flight primarily fuelled by debt.

Bottom Dollar

The Dollar

The principal risk I see today is that being borne by investors in dollar denominated debt and I don t believe they are charging a fair price for what they are doing.

What started with subprime mortgages spread to all collateralized debt obligations, endangered municipal and mortgage insurance and reinsurance companies and threatened to unravel the multi trillion dollar credit default swap market.

With the US government now borrowing around 40 of every dollar it spends, a truly binding debt ceiling would immediately force the government to reduce spending radically and in a disorderly fashion.

After the Dollar

China s Dollar Problem

The Falling Dollar

Two Dollar Fallacies

Liberia used the United States dollar as its currency from 1943 until 1982 and continues to use the U.S. dollar alongside the Liberian dollar.

Asian central banks are still nervously clinging to the dollar. But with the US printing debt and money like it is going out of style, it would appear the euro is set to appreciate against the dollar two or three years down the road, if the euro is still around, that is.

Foreigners now hold roughly half of all US federal government debt, and they are willing to hold it when it yields a very low return in dollars (and even when the dollar depreciates).

Many developing countries have made progress since the 1990 s in shifting from dollar denominated debt toward foreign direct investment and other types of capital inflows, or in paying down their liabilities altogether.

The value of China s assets as future claims on real resources has already been diluted by dollar depreciation, and calls in the US for inflating away America s debt burden portend a further decline.

Instead, they focused exclusively on US foreign debt, ignoring household debt (mortgage and consumer debt), public debt, business debt, and financial debt.

The Fed s Dollar Distraction

But not the dollar.

Doomsday for the Dollar?

Goodbye to the Dollar?

The Death Defying Dollar

The Unloved Dollar Standard

D Estaing was incensed that the US seemed to be able to flood the world with dollar currency and debt without ever seeming to pay a price in terms of higher inflation or interest rates.

When was the last time that happened? Chronic debt crisis countries from Mexico to Russia to South Korea are all fighting off capital inflows from investors looking for an exit as the dollar collapses.