While headlines often warn that the United States might “go broke,” the reality is more complex. As the issuer of its own currency, the US can always meet dollar-denominated obligations. Yet beneath this apparent strength lies a policy trilemma with no painless exit—and the stakes extend far beyond Washington.
US Fiscal Fragility: A Three-Way Trap
The US faces three paths, each with hefty downsides:
- Austerity: Cutting spending may calm bond markets but risks stalling growth, widening inequality and eroding trust in institutions.
- Endless Expansion: Maintaining the bond-deficit link fuels the financial sector and rewards bondholders, yet inflates risks around the dollar’s role as a global safe asset.
- Decoupling Bonds from Debt: Regaining fiscal freedom would challenge the dollar’s credibility, sparking capital flight and weakening reserve status.
Ripple Effects on the Global South
Emerging economies depend heavily on dollar-based trade and reserves. Any shock to US Treasuries can drive currency swings, fuel capital outflows and squeeze budgets—deepening development gaps and social strains.
A New Chapter: Moving Beyond the Dollar
In response, governments and investors across the Global South are exploring alternatives:
- Local-Currency Swap Lines: Partnering to trade directly without converting to dollars.
- Digital Trade Platforms: Leveraging blockchain and fintech for faster, lower-cost settlement.
- Regional Reserve Pools: Creating shared safety nets to reduce dependence on US Treasuries.
These strategies signal a shift toward fiscal sovereignty and resilience—reshaping trade patterns, stimulating fintech innovation and redefining global financial power. As the era of dollar dominance evolves, the Global South’s journey beyond US fragility will be a story to watch.
Reference(s):
Beyond the dollar: The Global South's exit from US fiscal fragility
cgtn.com
