The US dollar is best, cleanest dirty shirt in the world’s dirty clothes hamper. Our capitalism makes the tax base stronger than that of other countries and this taxable income can be used to service government debt. If domestic debt increases too much, possibly the outcome of excessive debt will be a situation where the government gets all of its needs met first, crowding out most of the private sector, so excess debt might not be a problem for government which pays interest-only. The risk is that private sector would undergo a wave of bankruptcies that would clear out debt and ironically induce more desire to own safe government debt, resulting in a further increase in spread between government debt and private sector. As the spread widens more companies will be forced to trim debt to save on interest or more companies will fail, thus reducing demand for borrowed funds. The resulting depressed conditions would act to dampen inflation.

    The huge increase in global debt since 2008 was mainly in foreign countries and in the US government, instead of the private sector or Municipal sector, but our federal government with its “print and pay” capability and interest-only amortization of its debt can handle the increased balance, especially if Treasury yields stay low. Based on the experience of 19th century UK sovereign debt which was forced to have an artificially low rate for 85 years after the 1815 war, it is possible a powerful nation’s government debt can have an artificially low rate for a very long time. The British have continuously had too much war-related government debt since the 1815 Napoleonic war for two centuries and they have managed to do better than most countries. Regarding Muni debt, their balances have not expanded since 2008; if adjusted for inflation that means they were reduced 20%!
There is a new era that started with Bretton Woods in 1944 and continues despite the 1971 closure of gold window by Nixon. I am referring the fact that the world uses Treasuries as a form of money and there seems to be no credible alternative to this as the UK, EU, Japan all seem to have serious problems, and China is being exposed as a red Ponzi, so there is no alternative to US Treasuries, unless someone decides to buy gold (which exists in a very small quantities) or US equities. US Equities were selling at double fair value when at the recent top, so they hardly qualify as a type of money, since they could easily drop 50% from the top and stay that low for a decade. The dollar index DXY has fluctuated between 70 and 140 over 47 years but, excluding outliers, has usually ranged from 80 to 100, changing gradually, averaging a change of roughly 0.5% a year over 47 years or 1% to 2% a year during some decade-long periods. If one averages over a decade the dollar’s change per year is quite modest, less than CPI. From 1997 to 2008 the Dollar Index (the Fed’s TWDI trade weighted index) went from 100 (going higher during the dotcom craze of 2000) before going down to 95 in 2008. That’s a decline of 5 points/11 years or 0.45% a year, hardly a significant change.

In markets there are basically 3 dollar indexes, the Fed’s trade-weighted dollar (TWDI), the DXY dollar index, and “flow-based” dollar indexes such as the Dow Jones FXCM Dollar Index.
See https://fred.stlouisfed.org/series/TWEXB

Private sector debt increased from $25Trillion in Oct., 2008 to $29.6Trillion in 1Q2018, an increase of 18% or 1.8% a year, about the same as inflation and thus didn’t increase at the same pace as nominal GDP.  Federal government debt increased from $10.7T in 4Q2008 to 21.5T in 3Q2018. Total debt increased from $54.7T in 1Q2009 to $68.6T 4Q2017, that’s 26% or 2.7% a year, less than the increase in nominal GDP of 34%. Source: FRED https://fred.stlouisfed.org/series/GDPA.

  Thus the idea that the US is a banana republic with excessive debt is incorrect. What is likely is that the poor quality BBB rated corporate debt that increased too much is overrated and in need of becoming re-rated as junk. When that happens that will result in bankruptcies that will cut the debt balance of corporations. If that future loss is included in the above statistics then people will be complaining that money is too tight and that the economy is shrinking, on an inflation-adjusted basis, etc.
Never in history have so many countries had such bad finances such as the EU, China and Japan, thus the US’s faults, since they are less than that of other regions, make the US’s financial health better on a relative and on an absolute basis. Of course anything can happen. There is no guarantee that future Congresses won’t ramp up deficit spending, etc. Assuming that Federal Reserve rate cuts won’t help in the next recession, then further deficit spending would be likely. Our capacity to do that is better than the over-indebted other regions of the world. Can you imagine Italy or Japan cutting taxes and increasing deficit spending? Impossible with their huge debt loads, yet their ultra-low yields didn’t solve their problems.

    The Great Recession of 2008 was scary because banks were hyper-leveraged and can’t afford a wave of defaults, yet they foolishly bought bad Mortgage Backed Securities. This created a lot of emotional pain for the general public who became unduly afraid of the risk of a debt crisis. Thus some people have leapt to the conclusion that the next recession will also involve 2008-style huge bailouts and debt defaults. Instead it may be more of a traditional, less scary recession where private parties meet and amend contracts to allow a debt haircut, instead of getting a government bailout. The potential scary feature of the next global recession may be a steep decline in demand from and in economic health of EM countries, but this would have a slighted muted impact on the US since we have large domestic markets.

   My concern is simply that stocks are overpriced, a sort of bubble, but not a truly insane 1634 Dutch Tulip Bulb mania. While fearing a stock crash, I don’t fear a debt collapse since the current issue of potentially bad debt is in the form of bonds owned by individuals and pensions, rather than in assets owned by banks. When stocks crash 50% and stay down that is a different type of concern from a collapsing debt bubble. So while I expect a lot of pain from a crashed US stock market, I don’t expect a massive wave of hyperinflation and devaluation caused by a new issue of excessive debt done as a response to a recession occurring in 2019 or 2020 in the US. Instead, the rest of the world may be busy devaluing their currencies and attempting to inflate during the next recession.

   The way to attempt to protect yourself from these risks is to insist on high quality assets, not borderline assets that border on falling into junk quality. Limit duration risk of a bond portfolio to 5 or less just in case (unlikely) that inflation somehow does return. Avoid owning stocks with high PE ratios, unless you have thoroughly researched future growth prospects and feel the stock has exceptional quality such as a moat, low debts, honest accounting systems, and consistently rising profit margins. Even then it is best to refuse to own anything with a high PE ratio.

  Investors need independent financial advice about the risks of being incorrectly afraid of a domestic debt crisis.