The US Debt Trap

The US government relies in large part on international investors to fund its deficits by selling US treasuries. The attractiveness of these treasuries in the global market depends to a large extent on the dollar’s dominance as the world’s reserve currency and the most important factor that determines that dominance is trust. Trust that the US will honour its debts, manage its economy responsibly and keep inflation under control. Successfully achieving the latter two elements makes it easier to fulfil the first.

Over the past fifteen years global investors, including foreign governments, have been questioning how responsible America has been at managing its economy because of the surging US debt level. As a result investors have become more cautious on their exposure to US debt and have been gradually reducing their treasuries holdings. In 2008, foreign investors held around 50% of America’s public debt. By 2025, that share has fallen to around 30%. This has made it more difficult for the US government to borrow money resulting in a vicious circle of high interest rates and increasing debt.