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 US fiscal situation represents the ultimate case of “too big to fail” for the Rest of the World (ROW). The ROW has a lot to lose from a potential unravelling of US debt sustainability and therefore a substantial economic incentive to avoid triggering such an unravelling.
