In a significant change to the global financial landscape, the decoupling of the US dollar from oil earlier this year has dismantled the long-standing hegemony of the dollarThis monumental shift has caused investors, including those on the bustling floors of Wall Street, to view US Treasury bonds with skepticism, considering them a potential liability, instead of a safe haven.

Historically, the US has relied on fiscal deficits as a driving force for economic growthIf Treasury bonds can no longer be easily sold beyond the borders of the United States, the prospects for economic expansion may be akin to mirages—illusions that cannot be graspedWithout the global appetite for US debt, the future of American economic growth looks precarious.

The Federal Reserve's actions are now questioned—whether they truly represent the interests of American investors or merely cater to the government’s pressing needsWe are witnessing a complex restructuring within the American governance system, where significant divergences among various economic factions have surfaced.

Are US Treasuries still worth anything?

Last month, a coalition of banks took an unprecedented step and filed a lawsuit against the Federal Reserve in the Supreme CourtAt the heart of this legal action is the precarious situation faced by bankers who have accumulated massive quantities of US Treasury bonds, now laden with considerable market risks and mounting losses.

In an effort to reassure the world of the dollar's supremacy, the Federal Reserve initiated stress tests intended to prove that American banks would not succumb to insolvency crises akin to those projected for mid-2024. However, recent evidence suggests that American banks are indeed at risk, with the potential for severe repercussions should the yield on ten-year Treasury bonds slip below 5%.

On January 4, fresh reports indicated that the reserves across the entire banking system had, for the first time in four years, plunged below the threshold of $30 trillion

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On Wall Street, a palpable sense of panic permeates the atmosphere as fears mount that the Federal Reserve's tightening measures could trigger a liquidity crisis for the dollar.

Moreover, there’s a realistic possibility that the US might eliminate its debt ceiling, allowing the government to issue Treasury securities without limitsShould interest rates rise further and the Federal Reserve persist in not accommodating the government's fiscal demands through new rounds of quantitative easing (QE), the liquidity of the dollar will inevitably be strained.

Current Treasury Secretary Janet Yellen has already warned Congress that extraordinary measures may be required as soon as January to avert a default on US debt until lawmakers finalize the resolution on the debt ceiling.

In essence, the American financial system now faces two stark choices:

First, the potential for an immediate default on US Treasuries could materialize, bypassing congressional votes on the debt ceiling, allowing the Treasury to default directly.

Second, Congress could approve an unlimited issuance of Treasury bonds, which would overwhelm the international debt market and drive interest rates on US debt to unprecedented heights.

To avert such scenarios, the Federal Reserve would likely need to collaborate with the government to launch another round of QE, flooding the economy with new dollarsHowever, this approach would risk significant devaluation of the dollar and plunge the US back into inflationary conditions.

Given these developments, how will prices for various financial assets respond?

Massive Money Printing Will Lead to Price Surges

It is increasingly assured that once the Federal Reserve opens the floodgates for money supply, vast amounts of dollars will inundate global assets, inflating the prices of commodities like gold and equities alikeYet, there’s a critical distinction between current dollars and those of yesteryears.

In times of relative peace and stability, the dollar was unequivocally the currency of choice for international trade settlements

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However, post-2022, the US has employed unconventional methods to destabilize asset prices in other countries, such as leveraging the SWIFT payment system to impose sanctions on Russia, breeding a crisis of confidence among numerous nations towards the dollar.

Furthermore, Saudi Arabia's decision to forgo renewing the petrodollar agreement has diminished the dollar’s circulation within the Middle East, compounded by the geopolitical turmoil instigated by Israel's actions, which has limited the dollar's global reach.

Therefore, should the Federal Reserve embark on a new round of QE in 2025, the restrictions on the dollar’s availability might spark far worse inflation than previously experienced.

According to data from the US Treasury, disposable fiscal funds are currently holding steady at high levels not seen in three years, suggesting we have not yet hit the exhaustion pointHowever, the issue surrounding the debt ceiling has reached a critical legal timeline.

Goldman Sachs analysts contend that the American treasury still has the capacity to sustain government expenditures through early 2025, but the looming debt crisis presents two major challenges.

Firstly, there is a mismatch between short-term and long-term Treasury billsMost debt issued by the government over the past two years has been for bills set to mature within three years, which means significant repayment pressures will surface in the next one to two years.

Secondly, the high interest rates associated with these Treasury securities are placing substantial burdens on fiscal expendituresIf left unchecked, this could create discrepancies in the federal budget.

As fiscal year 2025 approaches, the Treasury is projected to withdraw approximately $750 billion from the market to refinance old debtsSuch a substantial drain on liquidity poses a risk of a debt crisis should the Federal Reserve refrain from initiating a new QE cycle.

However, engaging in QE risks igniting fresh waves of inflation, a cycle that many economists warn could destabilize the entire economy.

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