Pictet Group
The critical role of US debt sustainability in the world financial architecture
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.
US public debt grows by USD 1 trillion about every 100 days.
According to Maria Vassalou: “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.”
The critical role of US debt sustainability in the world financial architecture
Maria Vassalou, PhD
Pictet Research Institute
John Donaldson, PhD
Columbia University
September 2024
Table of contents
- Executive summary
- Introduction: 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
Maria Vassalou, PhD
Head of the Pictet Research Institute
Dr. Maria Vassalou joined the Pictet Group in January 2024 to build and head the Pictet Research Institute, a new resource for Pictet Group focused on long-term strategic research topics ranging from macro and geopolitics to portfolio implementation issues. Prior to joining Pictet, Dr Vassalou was the co-Chief Investment Officer of Multi-Asset Solutions (MAS) within Goldman Sachs Asset Management and a member of the MAS Investing Core, where she managed group-wide investment policies, research, and investment resources.
Dr Vassalou was a partner and portfolio manager at Perella Weinberg Partners, where she ran the global macro business based on her own quantitative global macro strategies. Previously, Dr Vassalou was a global macro portfolio manager at SAC Capital and Head of Global Macro Investment Strategies at Soros Fund Management.
Before her career in asset management, Dr Vassalou was an associate professor of finance at Columbia Business School. She also served as President of the European Finance Association and was a research affiliate of CEPR. Dr Vassalou served on the Board of Directors of Tsakos Energy Navigation and Titan Cement International. She is a member of the Board of Overseers of the Gennadius Library at the American School of Classical Studies at Athens.
Maria Vassalou earned a BS in Economics from the University of Athens and a PhD in Financial Economics from London Business School.