Since the end of World War II, the U.S. dollar has functioned as the world's reserve currency. International transactions are valued in dollar terms. Many commodities, like oil, are priced in dollars. U.S. Treasury bonds are a safe haven for other countries' reserves; China owns $1.15 trillion of them. Dollars are almost universally accepted, and more of them circulate outside the U.S. than inside the country.
In short, the world has a high degree of confidence in the U.S. dollar. House Republican backbenchers are threatening to oppose a necessary increase in the federal debt ceiling to force spending cuts denied them in this past week's agreement on the 2011 budget. With respect to the U.S. dollar, it is a risky strategy.
Around May 16, the U.S. government will hit its statutory borrowing limit of $14.3 trillion. The Treasury can buy some time by juggling accounts, but unless Congress raises that ceiling, the U.S. goes into technical default and then actual default.
The House firebrands might want to take note of the meeting this week in China of the BRICS group. The acronym refers to Brazil, Russia, India, China and its newest member, South Africa, five of the world's fastest-rising economies that, taken together, should surpass the U.S. around 2020.
The BRICS nations are demanding a restructuring of the world economy to give them a greater say, and with it, according to The Washington Post reporter who covered the conference, "an eventual end to the long reign of the U.S. dollar as the world's reserve currency."
Calls to dethrone the dollar are nothing new. Russia does it regularly, offering, to no takers, the ruble in its place. China frequently suggests that there should be alternatives to the dollar as the world standard. Mostly it's just talk because all of the alternatives have drawbacks.
Russia defaulted once, in 1998, and its economic system is opaque and corrupt. China has the world's second-largest economy, but its currency, the renminbi, has convertibility issues and is widely held to be artificially undervalued. The euro is a possibility, but the debt crises of some of its members raised questions about the stability of the eurozone. A "market basket" of currencies as a reserve poses a host of technical problems.
A default by the U.S., however, might be the incentive these countries need to stop talking and start acting. Congress should take great care that one of the casualties of a standoff over the debt ceiling is not the venerable status of the U.S. dollar.
Dale McFeatters is a political analyst, his regular columns feature in the Analyst e-edition and monthly