The scale of financing needed to support the U.S. fiscal deficit—together with the Federal Reserve’s policy of keeping U.S. interest rates low to ward off deflation—has revived concerns about a sudden and sharp depreciation of the U.S. dollar. This Center for Preventive Action Contingency Planning Memorandum by Brad W. Setser examines potential triggers and indicators of such a crisis and posits concrete policy options to limit U.S. vulnerability to the possibility of a plummeting dollar. It argues that the obvious long-term response to the risk of a dollar crisis is to limit buildup of the United States’ external debt, and recommends that larger reserves—and well-understood mechanisms for borrowing foreign exchange reserves from major foreign central banks—would help to reduce the United States’ vulnerability to such a crisis.
The Center for Preventive Action (CPA) Contingency Roundtable series seeks to organize focused discussions on plausible short to medium term contingencies that could seriously threaten U.S. interests. Contingency meeting topics range from specific states or regions of concern to more thematic issues and draw on the expertise of government and nongovernment experts. The goal of the meeting series is not only to raise awareness among U.S. government officials and the expert community of potential crises but also to generate practical policy options to lessen the likelihood of the contingency and to reduce the negative consequences should it occur. A summary memo of the resulting recommendations is distributed to participants and important policymakers.