An overwhelming percentage of global financial professionals believe the United States’ national debt level is unsustainable, according to a survey released today.
The debt level and the ratio of debt to GDP could affect the dollar’s standing as the leading global reserve currency—the currency held by central banks and major financial institutions around the world for international transactions. If it loses that status, confidence in the dollar and in the U.S.’s ability to repay its debts would be questioned.
The survey, “The Dollar’s Exorbitant Privilege,” was compiled by the CFA Institute, a global association of investment professionals. It included input from 4,243 financial professionals around the world.
Nearly 80% of the financial professionals surveyed for the report expressed serious concerns about the sustainability of U.S. government finances and the reliance on unfunded spending. Nearly two-thirds believed the U.S. dollar would lose its reserve currency status over the next five to 15 years.
“The survey results are unequivocal. They signal great concern about the lack of fiscal discipline in the world’s largest economy and the potential implications for the role of the U.S. dollar as the pre-eminent reserve currency, on which global financial stability is still dependent,” said Olivier Fines, the institute’s head of advocacy for Europe, the Middle East and Asia, in a statement.
“The United States enjoys unparalleled financial advantages from the dollar’s reserve currency status, including lower borrowing costs and larger deficits without immediate repercussions,” Fines said. “Higher borrowing costs, difficulty financing government deficits, and reduced investment in the U.S. economy are just some of the potential consequences if reserve currency status is lost.”
As of September, the U.S. national debt was more than $35.27 trillion. In the second quarter of this year, the real gross domestic product of the United States was $20.92 trillion. Those figures place the national debt at approximately 166% of GDP.
“If global investors lose trust in the U.S. government’s ability to manage its debt and fiscal policies, the demand for U.S. Treasurys could decline, causing a ripple effect on global markets,” the CFA Institute said in the report.
“Today’s national debt exceeds even the lofty levels we attained at the end of World War II, when it stood at 119% of GDP,” the report said. “After the war, our Greatest Generation of political leadership steadily restored our nation’s finances to sustainable levels, bringing it down to about 31% of GDP in 1981.”
Sheila Bair, former chair of the Federal Deposit Insurance Corporation and founding chair of the CFA Institute’s Systemic Risk Council, said in the foreword to the report, “Unfortunately, in the 21st century, the U.S. political leadership has concluded that deficits don’t matter. Both Republicans and Democrats have settled on deficits as the easiest way to pay for politically popular initiatives.
“While investment professionals currently still trust the U.S. government to repay its debts, our survey findings suggest that trust may be running out. Something will have to give if U.S. government debt is to be brought back to historically moderate levels,” she added.
The survey revealed a disconnect between the majority of respondents who said the current debt level is unsustainable and the 59% who said investors are still confident in the United States’ ability to freely borrow to fund government operations and interest obligations.
If the U.S. loses its reserve currency status, several options are vying for replacements, including a digital currency or a hard currency such as gold.
Despite historically high debt levels and poor budget control, “U.S. government-backed Treasury securities remain the preferred safe haven for liquidity, repayment, and vast cash reserves in global commerce. This is quite a privilege,” said Paul Andrews, managing director for research, advocacy and standards at the CFA Institute, in a statement.
“While its reserve currency status grants the United States distinct advantages, it also imposes the responsibility to act judiciously to preserve economic resilience and trust across the international markets,” he added.