Balanced budget or Global Dominance

'Why the United States Can’t Fix Its Budget Deficit Without Giving Up the Power of the Dollar'

The United States has been spending more money than it collects in taxes for decades, creating what’s known as a budget deficit. Most countries can’t afford to do this for long without facing serious financial trouble. When governments spend too much, their money often loses value, prices go up, and borrowing becomes expensive. But the United States has managed to avoid these problems, and the reason is simple: the U.S. dollar is the world’s favorite currency.

The dollar is used everywhere, not just in the U.S. People in other countries need it to buy oil, trade goods, or save their wealth in a safe way. Because of this, the U.S. has a special advantage. It can borrow money cheaply by selling bonds, which are basically IOUs that promise to pay back what was borrowed with a little interest. Foreign governments, businesses, and even regular people all want these U.S. bonds because they trust the dollar. This setup allows the U.S. to spend much more than it earns without running into the same problems other countries would face.

But this advantage, while helpful, also creates a problem. The U.S. needs to keep spending and borrowing a lot to provide the rest of the world with the dollars they need. If it ever stopped or tried to fix its budget by spending less, it could lose the very system that keeps the dollar so powerful.

The Dollar: The World’s Favorite Currency

The U.S. dollar isn’t just used in America—it’s used everywhere. When countries trade with each other, especially for things like oil, they often use dollars. If a country like China or Saudi Arabia sells something to another country, they might get paid in dollars, even if neither country is in the U.S. This makes the dollar incredibly important worldwide. It’s seen as reliable and stable, which is why central banks in many countries keep dollars in reserve, kind of like a savings account.

Because everyone wants dollars, the U.S. government can sell bonds to people and governments all over the world. When people buy these bonds, they’re essentially lending money to the U.S., trusting that they’ll get it back with interest. This demand for U.S. bonds keeps the dollar strong and allows the U.S. to borrow at very low costs.

How the Dollar System Works

The way the dollar is used around the world creates a kind of loop. Here’s how it works:

First, Americans buy goods and services from other countries. Whether it’s electronics from China, cars from Japan, or oil from the Middle East, the payments are made in dollars. This means dollars flow out of the U.S. and into the hands of foreign businesses and governments.

But those dollars don’t stay idle. Foreign countries need to do something with the dollars they earn. Many of them buy U.S. government bonds because they are considered one of the safest ways to save money. By purchasing these bonds, foreign governments and businesses lend their dollars back to the U.S.

This creates a system where the U.S. can keep borrowing, foreign countries get a safe place to store their wealth, and the world continues to rely on the dollar for trade and savings. However, this system only works as long as the U.S. keeps running deficits—spending more than it earns—because that’s how more dollars are put into circulation globally.

Why Fixing the Budget Could Break the Dollar’s Power

If the U.S. decided to fix its budget deficit, it would mean spending less money, borrowing less, or raising taxes to collect more. While this might sound like a good idea, it could create big problems for the global dollar system.

Here’s why: If the U.S. spends less or borrows less, fewer dollars would flow out into the world. This would mean fewer dollars for foreign countries to use in trade or to buy U.S. bonds. Over time, this could lead other countries to look for alternatives to the dollar, like using their own currencies or creating new ones. If that happened, the U.S. would lose the ability to borrow cheaply and might even see its currency lose value as demand for it declines.

This is why the U.S. is stuck in a tricky situation. To keep the dollar as the world’s favorite currency, it needs to run deficits and borrow a lot. But to fix its budget deficit, it would need to stop spending so much and borrowing so much, which could weaken the dollar’s global dominance.

What Happens If the U.S. Gives Up the Dollar’s Power?

If the U.S. decided to stop running deficits and gave up the dollar’s special role in the world, there would be serious consequences. Borrowing money would become much more expensive for the U.S. government because fewer people would want to buy U.S. bonds. This would make it harder to fund things like infrastructure, defense, or social programs without raising taxes or cutting spending.

The U.S. would also lose a lot of its global influence. Right now, the dollar’s dominance gives the U.S. a powerful tool to enforce sanctions, control financial markets, and shape international trade. Without that, its ability to influence other countries would shrink.

Finally, ordinary Americans would feel the impact. If the dollar became less valuable compared to other currencies, imported goods would become more expensive, and Americans’ money wouldn’t go as far when traveling or buying foreign products.

Do you really want a balanced budget?

The United States has a unique advantage because the dollar is the world’s most important currency. This allows the U.S. to run budget deficits without facing the same consequences other countries would. However, it also creates a trap. To keep the dollar strong, the U.S. must keep running deficits and borrowing heavily. If it tries to fix its budget by spending less or borrowing less, it risks losing the dollar’s global dominance, which would make borrowing more expensive and weaken the U.S. economy.

This system, where the world relies on the dollar and the U.S. relies on the world’s demand for dollars, creates a delicate balance. It explains why the U.S. can’t easily fix its budget deficit without giving up the special role of the dollar, and why doing so would fundamentally change the global economy.