Debt-ridden U.S. remains the best of the bad; dollar's status as reserve currency intact

The U.S. will spend about $1.8 trillion more than it gets in revenue this year. Next year, it will add an estimated $1.2 trillion to the debt.

Expenses in the billions may not attract much attention these days, but when it gets to the trillions, people sit up and take notice. In a CNN/Opinion Research poll conducted in January, 83% of those polled thought the federal budget deficit was extremely important or very important. The debt and the deficit are enormous political issues and will likely play a big role in the 2012 elections.

But there's one big group that's singularly unimpressed by the size of the deficit: the world financial markets.

As big as the U.S. debt is, it's not as bad as many other countries' debt, relative to gross domestic product. No other country has a currency as strong or as well-regarded as the U.S. has, even with its current fiscal woes.

Could the debt eventually push the U.S. away from its status as a reserve currency and into second-tier status?

"It's very difficult for a reserve currency to lose that status," says Kristin Lindow, vice president at Moody's Investors Service. "It takes another nation to take its place, and right now, there isn't one."

Chattering about demoting the dollar is one thing; finding a substitute world currency is another

It is one thing to want to replace the dollar, quite another to find a suitable substitute. The renminbi cannot be the chosen currency so long as it is pegged to the dollar, for its value will move with the dollar. The rouble is not a candidate, since there is not enough of the currency around to handle the volume of world trade and, besides, it is not the sort of money on which you can rely to hold its value, especially if oil prices collapse. Which brings us to the euro.
As has been pointed out by Jean Pisani-Ferry, director of the Brussels-based Bruegel think tank, and Adam Posen, a fellow at the Peterson Institute for International Economics in Washington: “There is no sign of a move to the euro as a global currency. The share of dollars in global reserves remains almost three times that of the euro.”