Pictet Research Institute: Debt dilemma

With the US debt to GDP ratio at historic heights, the study examines why the Rest of the World (ROW) is addicted to US debt and the likelihood of a resulting crisis.

According to Maria Vassalou, Head of the Pictet Research Institute: «Foreigners have much to lose from a US debt crisis. The ROW has been financing the US deficits by loading up on US dollars, US Treasuries, and US equities, all of which will greatly lose in value in case of a US debt crisis. Major central banks and the official sector have every incentive to intervene and put a floor on US assets in times of market turmoil—with a caveat. The US has to maintain its geopolitical dominance and remain the world's primary engine of innovation and attractive equity returns.

A major risk to US debt sustainability is, in fact, geopolitical in nature. For instance, in the medium-term, the evolving BRICS+ coalition could prove to be a disruptor to the existing global financial architecture and US dominance. In the short run, though, a major US debt crisis is an unlikely outcome.»

Topics of the study:

• The fiscal state of the United States
• Why is the United States the world’s financial hegemon?
• The benefits and risks of the current equilibrium: US vs the ROW
• The forces that keep the world entrenched in the current equilibrium
• Maintaining the existing financial architecture
• Scenarios that can lead to a US debt crisis
• Investment implications and conclusions