Andrew Sheng

Opinion | How America’s national debt has become the world’s liability

While the risk of America’s debt is shared by global lenders and investors, US leverage makes the burden far from fair

Reading Time:4 minutes

Why you can trust SCMP

A jogger runs past the Federal Reserve building in Washington on August 22, 2018. American financial dominance not only rests on the US dollar as an invoicing currency for payment, but also as a store of value. Photo: Reuters

Andrew Sheng

Published: 4:30pm, 26 Jul 2024

To paraphrase prose written by American poet Carl Sandburg, money is power, freedom, a cushion and the root of all evil. Since the pseudonymous Satoshi Nakamoto created bitcoin cryptocurrency in 2009, techies today can create money, somewhat eroding the legal power of central banks to create fiat money.

Few doubt that the mighty American empire is founded on the power of the United States dollar. Not only is the US able to create that currency, it has the power to sanction anyone using it, without much accountability.

Money is a tool of power, and creating it requires a lot of energy, which is why mining cryptocurrency is highly energy-intensive. The estimated power used to produce cyber-assets ranges from 0.4 per cent to 0.9 per cent of the electricity generated annually worldwide. The market capitalisation of cryptocurrency was valued at around US2.4 trillion as of March.

Put in perspective, the size of the global financial system per the Financial Stability Board at the end of 2022 was US$461 trillion, more than four times world gross domestic product (GDP). Banks accounted for 39.7 per cent of total financial assets, nonbank financial intermediaries for 47.2 per cent, central banks for 8.5 per cent and public financial institutions 4.6 per cent.

Monetary expansion can occur through governments running fiscal deficits, banks expanding credit or central banks buying government securities in a process called quantitative easing. Financial derivatives are innovative expansion through leverage of underlying assets through new types of contracts.

These used to scare financial regulators, as their notional value was as large as US$618 trillion, about a third larger than global total financial assets in 2022. However, the gross market value of over-the-counter derivatives, summing contracts with positive and negative values, was only US$20.7 trillion that year, according to data from the Bank for International Settlements.