Financial markets are ruthlessly efficient. No one should underestimate the ability of
arbitragers to rapidly snuff out any imbalances in the system. Bubbles do occur like the recent real estate bubble and the previous high tech and tulip bubbles, but even then, the market only allows these to exist because *short term* profits are still available to be exploited.
A country's debt is most certainly taken into account when valuing its currency, but in spite of what you've been told, *debt is not inherently bad*. It can be risky to be sure, but taken in moderation, it is a sure way to increase *wealth* as measured by the growth in output of an economy. *That's* why the dollar does not crash in spite of that mind-bogglingly large amount of debt: people see the American economy as the largest (and therefore unlikely to crash), most consistent in steady and above average growth, having tremendous resources both in physical as well as intellectual property, and thus a "safe" bet to take all that leverage (a fancy euphemism for debt) and turn it into more of the same unstoppable economic juggernaut that its been for the last century.
In other words, for arbitragers, betting *against* the dollar is suicide in the long run.
In the last 4 years though, the Bush administration has been guilty of "talking down the dollar" in an effort to increase trade, but this has angered many of our key international economic (although certainly not *political*) partners who thankfully peg their commodities or currencies to the dollar, like the Petroleum Exporting countries and the Chinese. When the real estate bubble burst at the same time that the oil market went nuts, we got slammed because the government should have long ago started the effort to strengthen the dollar by raising interest rates (if we pay more for those loans, more people buy dollars!), and working to deflate the real estate bubble (also in need of higher interest rates and regulatory pressure).
Ooops!
So to reiterate: you can't call debt "bad": it has an essential role in creating growing economies. But when you start saying royally stupid things like "Deficits don't matter," then all heck breaks loose...
Like they say, "moderation in all things"....
The Middle East, with two-thirds of the world’s oil and lowest cost, is still where the prize ultimately lies,
Buffy
