More warnings on the state of the US and global financial system
Warnings are growing about the US and global financial system, highlighting a stock market boom concentrated in AI companies while real wages fall and debt levels surge, with military spending and interest costs driving government debt to record highs. The *Financial Times* reports foreign investors are reducing holdings of US Treasuries due to debt concerns, Fed independence threats, and political instability, while central banks shift reserves toward gold and nonbank financial intermediation risks rise globally.
Analysts are sounding alarms over the fragility of the US and global financial system amid a stock market rally driven by AI companies like SpaceX, Anthropic, and OpenAI, while the broader economy slows. Profits as a share of GDP are rising, but real wages are declining, and high-income groups are propping up consumption as inflation—particularly in necessities—hits lower-income families hardest. The *Financial Times* highlighted the role of military spending in pushing US government debt to record levels, citing Brown University research estimating $8 trillion in war costs since 9/11, excluding $1 trillion in annual interest payments. The Treasury’s interest burden has risen from 1.5% of GDP in 2021 to over 3% today, straining finances as the dollar’s dominance weakens. Foreign investors are increasingly divesting from US Treasuries, citing debt concerns, threats to the Federal Reserve’s independence, and the weaponization of the dollar through sanctions. Data from the European Central Bank shows holdings of US Treasuries by global central banks dropped from 25% to 22% in a year, while gold reserves surged from 20% to 27%. Post-2008, central banks absorbed 63% of G7 debt issuance, with state entities issuing debt primarily bought by other state arms—a dynamic now under stress. A Group of Thirty report led by former central bank officials warned of growing risks from nonbank financial intermediation (NBFI), which now holds $260 trillion in assets globally, accounting for over half of financial intermediation. While many NBFI entities pose limited systemic risks, their expansion since the 2008 crisis raises concerns about stability. The report underscores how debt reliance and shifting investor behavior could destabilize markets, particularly if confidence in US fiscal sustainability erodes further.
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