Are the USA currently driving the dollar into the ground?

The ongoing dispute surrounding the US debt ceiling is causing irreparable damage to trust. In just two weeks, the US could face default. Republicans are willingly accepting this risk, primarily to advance their election campaign by adhering to the old ceiling for as long as possible. Consequently, last Friday, JP Morgan bank established a designated “War Room” where employees regularly convene for crisis meetings to simulate the worst-case scenario: a government default on June 1.

If the US does not raise the debt ceiling, it will be unable to borrow money to pay its bills. This would be catastrophic, as funds for social programs, pension payments, and civil servant salaries would be unavailable. Furthermore, US Treasury bonds are the foundation of the global financial system, with a volume of $24 trillion. The crisis of Silicon Valley Bank, triggered by rising interest rates on such bonds, demonstrates the vulnerability of the international financial economy at this point. The crisis quickly spread, leading many to fear a domino effect.

US Treasury bonds are frequently used as collateral for loans. In the event of a US default, financial institutions could demand that their business partners immediately replace affected bonds. The resulting disruptions in the bond market could quickly spread to other markets.

Currently, no one seems to truly believe that Republicans and Democrats will fail to reach an agreement this time. Discussions about the debt ceiling are not new, and a solution has always been found in the past. Nevertheless, insurance premiums against a default on US Treasury bonds are rising. Banks, brokers, and trading platforms are running through all possible scenarios and preparing for the worst. The rating agency Fitch has also taken notice of the dispute and is considering a downgrade for the US. Should the country lose its current AAA rating due to an impending default, it would certainly lead to further market disruptions and associated sell-offs.

The longer the conflict drags on, the more damage is inflicted on the international reputation of the dollar as the leading currency. Many countries are already planning to replace the dollar with another currency as the primary means of payment for oil. If, against this backdrop, the solvency of the issuing country is also called into question, it is only a matter of time before the dollar is replaced.

In such a situation, only commodities offer true security. Technology metals and rare earths are a pure commodity business, operating outside the financial market and its disruptions, and furthermore offer the prospect of attractive tax-free returns.