FERI Analysis: The “Dollar Dilemma” as a Risk to the Global Financial System

Pressure on U.S. public finances is mounting: The national debt has surpassed the $40 trillion mark, and nearly one-fifth of total government revenue must be spent on interest payments on an ongoing basis. By 2036, the debt-to-GDP ratio is expected to rise to 120 percent. In a recent analysis, the FERI Cognitive Finance Institute examines the implications this has for the role of the U.S. dollar and the global financial system. 

“The unchecked rise in government debt is severely limiting the United States’ economic and fiscal policy flexibility,” says Dr. Heinz-Werner Rapp, founder and director of the FERI Cognitive Finance Institute. “The U.S. is already subject to a regime of fiscal dominance. The Federal Reserve is losing its independence because it must consider the consequences for public finances before every interest rate move.” According to Rapp, the more monetary policy is shaped by fiscal constraints, the greater the risks for professional investors worldwide. Recent interventions by Treasury Secretary Scott Bessent in the U.S. Treasury bond markets have already shown a clear tendency toward manipulative market interventions. 

In addition, the U.S. government is becoming increasingly willing to simply pass on pressing problems and interest burdens to third parties by law. Particularly controversial are government-backed proposals such as the so-called “Mar-a-Lago Accord.” This plan calls for aggressive devaluations of the U.S. dollar, compulsory levies on foreign investments, and the forced conversion of U.S. Treasury bonds into 100-year “Century Bonds” with minimal interest rates. “This would effectively shift the U.S.’s fiscal predicament—which arose from its own recklessness—onto foreign investors,” Rapp emphasizes. “Such proposals would represent a clear breach of the fundamental rules of international capital markets—all of which signals a sharp paradigm shift in the U.S.”

The U.S. Dollar Caught in the Crossfire

In addition, the analysis points to profound geopolitical and technological changes. Due to the U.S.’s aggressive sanctions policy (“weaponization”), many countries are reducing their dependence on the U.S. dollar. For example, China—once a major investor—has more than halved its holdings of U.S. Treasury bonds in recent years. “The share of the U.S. dollar in global central bank reserves, including gold, currently stands at only 40 percent,” Rapp warns. While this trend tends to weaken the U.S. currency, new digital financial instruments could strengthen the dollar’s position: “Stablecoins now have a market capitalization of around $300 billion and are rapidly becoming an important bridge between the traditional financial system and the digital economy,” Rapp explains. Stablecoins primarily hold reserves in short-term U.S. debt securities, thereby creating additional demand for U.S. dollar-denominated assets. “This could broaden the global reach of the U.S. dollar and partially counteract the withdrawal of many investors from the U.S. financial system,” explains Rapp. 

According to Rapp, this presents a paradoxical tension: “On the one hand, the U.S.’s debt problems and geopolitical fault lines are weakening the dominance of the U.S. currency; on the other hand, technological innovations could ultimately bolster the dollar’s position.” Nevertheless, a clear process of transformation is emerging. “Starting with the U.S., the existing financial order is clearly losing stability. Tensions within the U.S. financial system, increasing geopolitical fractures, and technological change will play a central role in this.” With regard to the U.S., an environment of targeted financial repression is to be expected in the future, which will present entirely new challenges for global investors. For professional investors, it is crucial to recognize the new undercurrents in the global financial system early on and to position themselves accordingly. 

The new Cognitive Comment, „Das Dollar-Dilemma: Schuldenfalle, Finanzrepression und digitales Geld – Powerplay um die Zukunft des US-Finanzsystems“, is available for download (in German) on this page.