The largest asset manager in the world says the risk of a de-dollarization of the global economy has edged higher due to rising US debt levels.
In a third-quarter fixed income outlook note seen by Reuters, BlackRock analysts say that growing government debt is weakening demand for key US assets like the dollar and long-dated Treasuries.
While de-dollarization may be far-fetched, the analysts say the government’s fiscal situation is increasing that risk, especially following the passage of President Trump’s tax and spending bill, which is expected to add up to $5 trillion to the national debt over the next five years.
Says BlackRock,
“We’ve been highlighting the precarious position of the US government’s indebtedness for some time now, and, if left unchecked, we view debt as the single greatest risk to the ‘special status’ of the US in financial markets.”
The firm’s investment managers also warn that an increasing amount of government spending is being allocated to paying off interest on the debt.
According to the Committee for a Responsible Federal Budget (CRFB), the US is projected to spend 5.3% of its GDP – about 29% of all its revenue – on interest on the national debt by 2034.
BlackRock says there may not be enough natural demand to scoop up the amount of debt the US is trying to sell, which could prop up yields and make its debt burden even worse.
“Despite proposed spending cuts, deficits are still climbing – and more of that spending is now going toward interest payments…
With foreign investors stepping back and the government issuing more than half a trillion dollars of debt weekly, the risk of private markets being unable to absorb this debt and consequently pushing government borrowing costs higher, is tangible.”
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