A Fascinating Glimpse Into International Economics

This past semester I had the privilege of attending an event held by ISSA, titled appropriately enough, “The End of Exorbitant Privilege: Changing Appetites in the Treasury Market and the Repricing of Hegemony” It was a really fascinating look into the international credit rating system/debt market through the lens of economics, which I appreciated being an econ major myself. Thus I thought I would summarize some of the key points/add some reflections in this post. Credit where credit is due to the ISSA team for the thumbnail on this post as well, the flyer was so well produced I couldn’t resist.

The World of U.S Privilege

Summary/Key Points

The U.S has run a deficit w/their national debt pretty much every year since the 70s

As counterintuitive as this seems, the U.S gained a lot of power from doing this. Running a deficit allowed us to become a “safe asset” in the global treasury market. What this means is that our debt was pretty valuable since we’ve never defaulted on it

Advantages to being the Safest Treasury Asset

• The U.S got to borrow cheap
• We could run deficits without crises —-> No one else (except Japan) can do this without dire consequences
• Allows the U.S to project international power

Why Hold U.S Treasuries?

They were safe, very liquid, and convenient. Regarded as “absolutely safe”, despite their low yields, which I am told countries love when they are building their international portfolio

“Mars Factor”

Also 50-60% of U.S assets were bought by U.S military allies, the deal was we protect them and they soak up our debt

The End of That World/ Why the U.S is Losing that Privilege

2022 Watershed – Russia’s Invasion of Ukraine

My understanding of how asset freezes work is that when the U.S sells people treasuries they maintain the ability to freeze them at any time. Previously, asset freezes were only used against small countries, but in 2022 with Russia’s invasion of Ukraine, we saw asset freezes being used by the U.S against Russia, on a scale larger than anyone had ever seen before. This introduced the idea of “custodial risk” when buying U.S treasuries. If you’re a country that might end up opposed to the U.S buying treasuries could be a bad move because you leave yourself open to sanctions/asset freezes.

Increasing U.S Debt to GDP Ratio

Our national debt is out of control and it is starting to also affect our international credit rating, which doesn’t help things on top of the new “custodial risk” to buying U.S treasuries.

“The U.S spends 970 billion dollars just to on the interest for previous debt, not even including the debt itself. The defense budget, famously huge, is sitting at 900 billion.”

Paraphrase of ISSA’s presentation based on my notes

Signs of the U.S Losing this Market Dominance

The U.S has been downgraded by several international credit rating organizations. For names of these credit agencies, S&P, Fitch, and Moody’s specifically have downgraded the U.S, spanning from 2011-2025. For an idea of the type of downgrade, S&P moved the U.S from AAA to AA+, which is still good, just not where the U.S probably needs to be to continue tanking its increasing national debt with no ill effects.

Optimistic Caveats

Whether you think that the end of the U.S’s economic hegemony is a good or bad thing, the fact remains that it will happen slowly. These are just the warning signs. The U.S still does have a lot of institutional momentum. Given the dominance of the dollar in the global economy, it is a lot harder to pivot to things like gold or crypto than one might think, and those come with their own problems.

Credits/Attributions

Shoutout to whoever at ISSA designed the flyer for this event, used as a thumbnail for this post

Credit to Alibek Chekirov and Aiden Clarbour for putting together this presentation