Is US External Sustainability at Risk: Will Foreign Investors Keep Buying Treasuries?

Spread the love

Is US External Sustainability at Risk? As concerns over America’s fiscal health grow, an equally pressing yet often overlooked issue is the country’s external sustainability. With net foreign debt surging to nearly 70% of GDP and projected to reach 100%, the ability of the US to attract foreign capital is becoming increasingly uncertain.

The decline in foreign investors’ appetite for US Treasuries, combined with record-high government debt and shifting global economic dynamics, raises serious questions about future financial stability. If foreign capital inflows dwindle, could the US face a balance-of-payments crisis? Understanding these risks is crucial as the global economy navigates a period of heightened uncertainty.

US External Sustainability at Risk

The United States has long been seen as an economic powerhouse, with its financial markets and dollar reserves forming the backbone of the global economy. However, growing concerns about US external sustainability—its ability to manage its foreign debt and attract sufficient capital inflows—are now raising alarms. With rising foreign debt levels, declining foreign investor confidence, and shifting global economic trends, America’s financial stability appears increasingly precarious. This article explores six key factors that indicate the US external sustainability is at risk.

Read More: Is DeepSeek Really a Threat?

1. Rising Current-Account Deficit

One of the primary measures of a country’s external sustainability is its current-account deficit as a share of GDP. In recent years, the US current-account deficit has mostly fluctuated between 2-4% of GDP, but projections suggest that this gap will widen.

Historically, a high current-account deficit raises concerns about the country’s ability to attract foreign investment. For instance, in 2006, when the US deficit reached 6.3% of GDP, many economists feared a balance-of-payments crisis and a sharp dollar depreciation. While such an outcome did not materialize at the time, the current scenario is different due to increasing debt and a changing global financial landscape.

2. Surging Net Foreign Debt

A crucial indicator of external sustainability is the net foreign-debt-to-GDP ratio, which has been rising at an alarming rate. By the end of 2023, the US net foreign debt had reached approximately 70% of GDP, translating to a staggering $23 trillion. This marks a sharp contrast to 2006 when the foreign debt was only $1.8 trillion or 13% of GDP.

Given current trends, projections suggest that the US foreign debt burden could approach 100% of GDP in the near future. Such a high level of debt raises concerns about America’s ability to service its obligations without causing financial instability.

3. Declining Foreign Investment in US Treasuries

The sustainability of US external accounts depends heavily on continued foreign investment in American financial assets, particularly US Treasuries. However, foreign investors have been steadily reducing their holdings of US government debt. In 2015, official foreign investors accounted for nearly 70% of foreign-held US Treasury securities; by 2023, their share had dropped to 53.4%. This decline signals growing concerns among foreign governments and investors about America’s fiscal health.

One major factor contributing to this decline is the rising US gross debt, which reached 122.3% of GDP in 2023—surpassing the previous record set in 1946. Moreover, global bond investors like PIMCO have started cutting back on their exposure to long-term US Treasuries, citing concerns over soaring government debt and widening fiscal deficits. As demand for Treasuries weakens, the US may struggle to finance its borrowing needs without pushing interest rates higher, potentially leading to economic instability.

4. Eroding Confidence in US Financial Stability

Foreign investors’ confidence in the US economy has also been shaken by geopolitical developments and policy decisions. Following the war in Ukraine, the US and its Western allies froze Russia’s foreign-exchange reserves, a move that alarmed many nations. This action has led to fears that similar measures could be taken against other countries, reducing trust in the US financial system. As a result, some nations, particularly China, have started diversifying their holdings away from US Treasuries and increasing their gold reserves and alternative assets.

In addition to geopolitical risks, domestic political uncertainty—such as debates over the US debt ceiling and concerns about fiscal mismanagement—further weakens foreign confidence in the US economy. If this trend continues, it could lead to reduced capital inflows, putting further pressure on America’s external balance.

5. Risks in US Equity Markets

Foreign investment in US equities has surged in recent years, driven largely by soaring stock prices. Since 2009, foreign holdings of US equities have increased sixfold, with much of this growth fueled by the rise of the “Magnificent Seven” tech giants. However, this heavy concentration in a handful of high-growth companies exposes the US market to heightened volatility.

A case in point is the recent market shock triggered by Chinese startup DeepSeek’s launch of an AI model that rivaled OpenAI’s ChatGPT. This event caused a temporary selloff in US tech stocks, highlighting the vulnerability of the equity market to sudden disruptions. If foreign investors lose confidence in the sustainability of US stock market gains, they could start withdrawing their capital, exacerbating financial instability.

6. The Trump Factor and Geopolitical Uncertainty

The potential return of Donald Trump to the White House in 2025 adds another layer of unpredictability to America’s external sustainability. Trump’s first term saw a shift toward protectionist economic policies, including trade wars with China and the European Union, as well as a more confrontational approach to international financial institutions. A second Trump administration could further disrupt global financial stability, as foreign investors might become more hesitant to commit capital to US markets.

Additionally, China—one of the largest foreign holders of US Treasuries—must carefully consider its position. With over $3 trillion in net foreign assets, primarily denominated in US dollars, China’s strategic decisions regarding its holdings could have a significant impact on global markets. If China decides to offload a substantial portion of its US debt holdings, it could lead to a sharp rise in interest rates and financial turbulence in the US economy.

Bottom Line

The warning signs for America’s external sustainability are clear: a widening current-account deficit, surging foreign debt, declining foreign investment in Treasuries, eroding trust in US financial stability, risks in the equity markets, and political uncertainty. While the US has long benefited from the dollar’s status as the world’s primary reserve currency, these trends indicate that reliance on foreign capital may no longer be as secure as it once was.

To mitigate these risks, policymakers must focus on restoring confidence in the US economy by addressing fiscal imbalances, maintaining stable and predictable economic policies, and ensuring that foreign investors continue to view US assets as safe and attractive. Failure to do so could lead to financial instability, higher borrowing costs, and potential long-term damage to America’s global economic standing.

The question remains: will the US take proactive steps to secure its external sustainability, or will it continue to increase financial vulnerability? The coming years will be crucial in determining whether America can maintain its dominant economic position in an increasingly uncertain world.

Spread the love