Publication

The United States’ debts—both domestic and external—are still largely denominated in the U.S. dollar. This limits the United States’ vulnerability to a sell-off in the dollar. A sharp dollar depreciation would be a blow to American pride, but wouldn’t increase the real burden of U.S. debts. The risk to the United States stems from the possibility that a dollar crisis would be correlated with a bond market crisis, and thus linked to a sell-off in the Treasury market: think "Treasury crisis" as much as "dollar crisis." Such a sell-off would reverberate through a host of other markets, including the mortgage market. It could also trigger—or in the current environment, amplify—a credit crisis, as the second-order effects of the crisis would reverberate through a capital-constrained financial sector.