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$40 Trillion!

Seyf Allah Hussein Al-Rawashdeh

3 min read

The US economy, in general, is a global affair; the dollar and US Treasury bonds are the infrastructure of the global economy. Therefore, a rise in debt or interest rates means a change in the price of money itself. The impact of this change will move from the center to the periphery very quickly, making any local US economic event necessarily a global one.

A change in the price of money occurred previously in the 1980s, when the Federal Reserve decided to raise interest rates to record levels to combat rising domestic inflation. This led to a severe debt crisis in Latin American countries known as the "Lost Decade," when Mexico was unable to service its debt, which amounted to about $80 billion at the time, with the crisis subsequently spreading to the rest of the continent's countries.

US bonds represent nearly 60% of global foreign exchange reserves, and foreigners own about a third of them. The US market also enjoys a unique position and great attractiveness, with high demand due to its financial depth, the large volume of liquidity available in it, and the historical confidence in the dollar. This brings us to what economic literature calls the "exorbitant privilege," meaning Washington's ability to borrow on better terms due to the increasing global desire to own its safe assets, which reduces the cost of debt for Washington. But what will happen if the world gradually begins to demand higher interest from Washington in exchange for holding its debts and bonds, or shifts to investing its money in other assets, such as central banks partially shifting toward buying more gold?

At that point, Washington will not pay the bill alone; investors, emerging markets, governments in need of borrowing, and companies seeking financing will share it. Furthermore, consumers will face inflation, higher taxes, and rising prices as a result of the change in the price of money and the rise in global debt service.

The shadow of US debt extends over the entire world, and everyone shares in paying its bills as the price for the stability of the global financial system, which relies on confidence in the dollar and American power. But the question awaiting an answer is: are we on the threshold of a new global financial crisis, or will financial tools and artificial intelligence, which have changed the definitions of production, enable us to coexist with this new reality?

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