Investment experts say the US debt-to-GDP ratio is unsustainable and unaddressed. Both presidential candidates lack policy proposals to reduce the budget deficit. The dollar’s status as the world’s reserve currency may be called into question.
A new research report released today by the CFA Institute Research Policy Center highlights significant concerns among investment professionals about the sustainability of U.S. government finances and its reliance on unfunded deficits. are.
The study, “The Dollar’s Exorbitant Privilege – A CFA Institute Global Study on U.S. Debt and the Role of the U.S. Dollar,” reveals insights from more than 4,000 investment professionals around the world on the U.S.’s high debt-to-GDP ratio, budget It has become. Budget deficits and the continued outlook for the US dollar as the world’s major reserve currency.
Sheila Baer, former chair of the Federal Deposit Insurance Corporation and founding chair of the CFA Institute’s Systemic Risk Council, said in the study’s foreword:
“Unfortunately, in the 21st century, America’s political leadership has concluded that budget deficits don’t matter. Republicans and Democrats alike have no choice but to make politically popular decisions, whether it’s cutting taxes (Republicans) or increasing spending (Democrats). They settle for budget deficits as the easiest way to finance their efforts, knowing their successors could easily squander their hard-fought efforts with further deficit spending and tax cuts. , cautious about confronting the political pain of reducing the budget deficit.”
Nearly 80 percent of investment professionals surveyed for this report expressed serious concerns about the sustainability of the U.S. government’s finances and its reliance on unfunded spending. Nearly two-thirds believe the US dollar will lose its reserve currency status in the next 5 to 15 years.
Olivier Fiennes, CFA, Head of EMEA Advocacy at CFA Institute, said:
“The findings are clear. They raise great concerns about the lack of fiscal discipline in the world’s largest economy and its potential impact on the US dollar’s role as the pre-eminent reserve currency on which global financial stability still depends. It shows.”
“The United States enjoys unparalleled fiscal advantages from the dollar’s reserve currency status, including lower borrowing costs and the ability to widen deficits without immediate consequences. Difficulties raising funds and reduced investment in the U.S. economy are just some of the possible consequences of losing reserve currency status.
“Investment professionals still trust the U.S. government to repay its debt, but our findings suggest that trust may be eroding. Something will have to be done to get it back to that level.”
Key findings:
A super majority of respondents (77%) believe that the U.S. government’s finances are not sustainable, and 59% of respondents are invested in the U.S.’s ability to freely borrow money to fund government operations and pay interest. The family still believes in confidence. This is the main dichotomy identified in the report. More developed market respondents (79% do not think it is sustainable) are pessimistic about the sustainability of U.S. finances than respondents in developed markets (65%). 63% of respondents believe the US dollar will lose its reserve currency status either slightly (51%) or significantly (12%) over the next 5 to 15 years. For respondents from BRICS countries, this total statistic reaches 72 percent (84 percent in India alone). Respondents said a multipolar monetary system would most likely replace the US dollar as the world’s dominant reserve currency (38%), followed by digital currencies (12%) and hard currencies such as gold (12%). %) followed. 6% of respondents chose Chinese Yuan. A significant majority of respondents (61%) believe that the United States will be unable to reduce its debt-to-GDP ratio to more moderate levels or otherwise rein in deficit spending. To reduce the current record level debt/GDP ratio, 69 percent of respondents believe the U.S. government should reduce non-mandatory spending (discretionary programs such as defense), followed by mandatory spending such as Social Security. respondents (52 percent) believe that spending should be reduced. Insurance and medical expenses.
Paul Andrews, Managing Director of Research, Advocacy and Standards at CFA Institute, commented:
“Despite historically high leverage and poor budgetary controls, U.S. government-backed Treasury securities have become the preferred security for liquidity, repayments, and vast cash reserves in global commerce. It continues to be an asset, which is quite a privilege.”
“While reserve currency status gives the United States a clear advantage, it also imposes a responsibility to act wisely to maintain economic resilience and confidence across international markets. It is unfortunate that there is a lack of policy proposals to reduce the fiscal deficit.
“Investment experts fear that confidence is just a few misguided policy moves and geopolitical missteps to avoid widespread and lasting disruption across the financial world.” Geopolitical tensions, lower demand for U.S. debt, and the possibility of an actual default as Congress grapples with the debt ceiling could all reduce global confidence in the U.S. dollar.
Research Report: “The Dollar’s Exorbitant Privileges – A CFA Institute Global Study on U.S. Debt and its Role”
