By virtue of the global role of the U.S. dollar and the U.S. leadership of the global financial system, the U.S. government has been able to borrow large amounts, on generous terms. The United States has therefore avoided politically fraught decisions related to taxation and spending, while exercising political leverage globally. Now, U.S. government actions generate uncertainty and instability; they undermine the rules-based liberal international order from which the U.S. benefitted greatly. Eroding rule of law, accountability and transparency raise the specter of political risk in U.S. sovereign bond markets. As a result, servicing the large U.S. federal government debt and maintaining dollar dominance will become more difficult.

I. U.S. Fiscal Policy Exceptionalism

The United States has long benefitted from its leadership position in the global economy. The post-World War II “liberal international order” offered a set of rules-based arrangements that facilitated the globalization of trade and finance, while also offering specific benefits to the United States. The United States had tremendous influence over the crafting of global trade rules and the functioning of international financial institutions, including the International Monetary Fund and the World Bank.

The dollar’s role was cemented by the rules of the liberal international order — especially the reserve currency status afforded to the dollar in the International Monetary Fund’s Articles of Agreement. This status generated demand from foreign central banks for dollar-denominated assets, allowing the United States to run persistent balance of payments deficits during the era of fixed exchange rates, provoking complaints from other countries. In 1965, France’s Minister of Finance, Valéry Giscard d'Estaing, labeled this an “exorbitant privilege,” allowing the United States to pursue policies that otherwise would have been unsustainable.

Adding to the U.S. privilege was the "democratic advantage" — the long-established pattern in which investors view countries with democratic political regimes as more accountable, transparent and committed to stable rule of law than their non-democratic counterparts. These advantages translate into lower perceived risk and greater inflows of both short- and long-term investment. Many democracies benefit from the advantages conferred by their political institutions; the United States benefitted doubly from the dollar’s reserve currency role and from this advantage. U.S. Treasury securities emerged as the preferred low- (or no-) risk asset, attractive to private investors as well as foreign central banks.

The benefits to the United States of the dollar’s global role went beyond easy access to sovereign credit. The United States also became central to the global banking, financial and payments systems. This gave the United States government leverage: it could threaten to exclude countries from these systems for political reasons, and it could collect detailed information about cross-border transactions. Most international transactions were denominated in dollars, protecting U.S.-based firms from currency risk in markets for oil and other commodities. And cheap access to credit contributed to U.S. military power: high levels of defense spending could be achieved without high tax burdens. Hence, geopolitical and financial leverage reinforced one another.

The unique U.S. position in the global financial system had specific consequences for fiscal policy. Faced with the choices among reducing spending, increasing taxes or issuing debt, governments — including the United States — often prefer the latter. This may be especially true during economic downturns, but it holds more generally. Economists have long theorized that debt-funded government stimulus does not work, however, because citizens will anticipate that this debt ultimately must be repaid, via future tax increases. Whether this theory — what economists now call “Ricardian equivalence” — holds in practice depends on assumptions about how individuals and firms behave.

What certainly does hold in practice is that political leaders are interested in their political survival: they want to remain in office, so they focus on garnering political support from core constituencies, such as voters and businesses. They allocate spending based, in part, on this political logic; a large “political business cycle” literature documents the tendency of governments to use fiscal policy to boost their political fortunes, especially with core constituencies, as elections approach.

Political survival also leads governments to avoid tax increases — and sometimes, to instead offer tax cuts, without offsetting changes to expenditures. While a long academic literature suggests that taxation can improve government accountability and strengthen democratic institutions, tax increases are costly politically. Working- and middle-class voters may have consistent appetites for taxing the wealthy, but given the privileged political position of the top wealth owners, as well as the ability of the largest firms to credibly threaten to relocate, governments are loathe to tax the richest and the most mobile.

If credit is plentiful, governments can make a politically easier choice: they consistently run fiscal deficits, spending more than they yield in tax revenues and borrowing to cover the rest. This avoids fiscal adjustment, which can be painful electorally and difficult to achieve when political parties have increasingly divergent views. Successive U.S. governments have made this choice. The United States historically has had some of the lowest sovereign borrowing costs in the world, again reflecting both the global demand for dollar assets and a very low (or even zero) perceived risk of debt default.

The U.S. government’s debt-to-GDP ratio — a widely-used indicator — was 55 percent of GDP in 2000 and has grown steadily since then, most dramatically in the years following the Great Recession of 2008, as well as during the COVID-19 pandemic. It stood at 119 percent in mid-2025. This was down from a peak of 133 percent at the height of the pandemic, but far greater than the country’s historical average. Although the U.S. debt-to-GDP ratio is not quite as high as Italy’s or Greece’s, it is higher than that of France and the United Kingdom, and nearly double that of Germany.

This large debt burden has thus far been sustainable, given the terms on which the United States borrows. Borrowing at low interest rates results in a smaller debt servicing burden. Borrowing at longer maturities, such as by selling ten- or thirty-year Treasury bonds, reduces the need to “face the market” when existing debt matures (and is replaced with new debt). And borrowing in one’s own currency — something that governments of wealthy democracies have long been able to do, contrary to many countries in the Global South — means that, at the extreme, governments can use monetary expansion to reduce the real value of the debt stock.

II. The Rise of Political Risk

Today, the U.S.’s unique privileges in access to sovereign credit are under threat. The Trump administration’s authoritarian populist turn has heightened political risk substantially. It has done so by reducing transparency and accountability, disregarding the rule of law, and undermining the liberal international order and its associated economic benefits. Each of these generates greater uncertainty, threatening to lower growth rates and increase the cost of sovereign borrowing.

First, around the world, greater transparency is a strong predictor of longer-term investment inflows. When governments are more transparent about economic performance, investors and businesses are better able to form stable expectations about the future and about the likely actions of other investors. In situations of opacity, investment falls, sometimes even resulting in a “rush to the exits” and a financial crisis. Transparency also allows civil society groups, opposition parties and mass publics to hold their governments accountable for economic policy choices.

Governments that are more transparent in their provision of economic information also have better access to sovereign borrowing. This is part of a long-established “democratic advantage,” in which bondholders assume that democratically elected governments will feature greater policy and outcome transparency, as well as stronger constraints on the executive’s fiscal policy behavior.

In the current climate, the transparency and quality of U.S. economic information is under threat. In non-democracies such as China or Türkiye, leaders worried about their political survival block the release of economic information, or they interfere with its accuracy. President Trump’s August 1 firing of Erika McEntarfer, director of the Bureau of Labor Statistics (BLS), suggests that the United States may be headed down this path. The President complained that he did not like the jobs data released by the BLS, accusing its director of being politically motivated. More broadly, federal government resources dedicated to data collection have been reduced, making the accuracy of statistics on jobs, inflation and the like harder to ensure. Further reductions in data availability and quality add uncertainty to the economic environment, reducing investment and growth.

Evidence from other countries points to a strong connection between the overall level of respect for democratic processes and institutions, and the extent to which governments disclose information about economic and financial performance. An autocratizing United States will be a less transparent place, reducing sovereign debt investors’ confidence.

Second, respect for the rule of law also encourages investment and eases access to sovereign finance. Political scientists have long documented a relationship between respect for the rule of law and levels of investment. We are witnessing an intensifying willingness on the part of the Trump administration to violate the rule of law — including the impoundment of funds allocated by Congress for foreign aid and the use of the Justice Department to target perceived political enemies — and a willingness of the Supreme Court to support these violations. Undermining legislative authority in the budget process suggests a loosening of constraints on executive behavior — and renders somewhat moot any future bipartisan efforts to reduce the fiscal deficit (something that admittedly seems a very distant possibility).

In the realm of U.S. government borrowing, the most relevant rule of law threat concerns the independence of the U.S. Federal Reserve. Why is an independent monetary authority so important? As a general principle, governments might commit to keeping inflation low. But they are often tempted to reverse this commitment, especially as elections approach (part of the “political business cycle” dynamic) and as fiscal deficits grow. When interest rates begin to rise, government borrowing costs increase. Governments may hope for cuts in central bank rates, trading off higher rates of inflation for lower financing costs. This can reduce borrowing costs as well as the real (versus nominal) stock of debt. But this “fiscal dominance” also puts the credibility of monetary institutions at risk.

The institutional solution to this “time inconsistency” problem — the inability of governments to commit to monetary restraint across the economic and political cycle — has been to make central banks largely independent from political control. This helps to convince investors (and others) that central banks will resist the temptation to inflate away their domestic currency-denominated debt. Greater statutory and operational central bank independence has therefore been linked with lower sovereign borrowing costs.

Yet governments, especially those less committed to democratic accountability, often seek to pressure their central banks. Recent events in the United States have drawn comparisons with Argentina and Türkiye; in Türkiye, President Erdogan fired four central bank governors — and a fifth resigned — between July 2019 and February 2024. In many other instances, executives pressure central banks to change their policies, without any changes to central bank statutes or leadership: one estimate suggests that, between 2010 and 2018, approximately 10 percent of central banks faced political pressure in a given year. Another recent study, using two decades of data and covering 180 countries, finds that pressure on central banks is more likely to come from populist (versus non-populist) governments, although backlash from financial markets may reduce this tendency.

Central bank independence also can be undermined in even more subtle ways, with governments putting pressure on, or creating pressure for, private banks to hold government assets. Doing so amounts to “financial repression” or “borrowing privileges.” In Uruguay, for instance, the government mandated in 1997 that private pension funds were required to invest 30 to 60 percent of their assets in government bonds. In South Africa, regulations in place between 2010 and 2015 allowed banks to count government securities as part of their liquid asset reserve requirements. Changes to U.S. banking regulation to incentivize holding Treasury assets would therefore be another worrying sign.

The Trump administration has opted for a more overt form of pressure on the central bank. It is reminiscent of President Nixon’s pressure on the Fed, in 1972, to keep interest rates low in the run-up to the election, even as inflationary pressure mounted. But it is more extreme: in recent months, President Trump has complained vociferously about the Federal Open Market Committee’s interest rate decisions, pushing for lower rates. He has attempted to fire Lisa Cook, a member of the Federal Reserve’s Board of Governors, presumably in hopes of appointing a new member of the committee. And he has appointed Stephen Miran, now on leave from his position as chair of the White House’s Council of Economic Advisers (CEA), to fill a temporary vacancy on the Board of Governors. Miran has not resigned his CEA position (rather, he is on leave), further calling into question his independence from White House influence.

This level of direct interference with the central bank’s operations is unprecedented in recent U.S. financial history. It also is consistent with a populist worldview, in its disdain for and rejection of technical expertise. In July 2025, former Federal Reserve chairs Ben Bernanke and Janet Yellen warned in a New York Times guest column that “when central banks are forced to finance government deficits — by keeping interest rates excessively low, to cite one possibility — the result is inevitably higher inflation and economic damage.” To the extent that consumers, firms and investors come to expect more inflation, borrowing costs will increase further, for the government as well as for firms and consumers. Ultimately, such actions will not bring down government borrowing costs, and they may well undermine the long-established credibility of the U.S. Federal Reserve as an independent monetary authority.

Third, the Trump administration has rejected many of the principles of the rules-based “liberal international order,” governed by institutions such as the World Trade Organization and the International Monetary Fund, and historically offering great benefits (as well as significant voice and influence) to the United States. In the area of trade policy, this represents an intensification of the use of tariffs during the first Trump administration (which largely continued during the Biden administration). In its current iteration, tariffs and tariff threats have been applied against a broad range of trading partners and products, in ways that sow uncertainty over policy. It is not only that these tariffs raise prices for importing firms and consumers in the United States; it is also that their extensive use provokes retaliation against the U.S. and further pushes countries away from a dollar-backed order.

This is part of a broader opposition to economic integration, international organizations and immigration. It threatens to reduce U.S. economic growth and U.S. global influence.

While not every U.S. firm or sector benefited from economic openness, growth has been higher because of the country’s integration with global markets and because of the presence of immigrants in the labor market. In the United Kingdom, the 2016 Brexit vote — a populist turn in economic policy, and one that generated significant uncertainty — was associated with significantly lower levels of investment than would have occurred otherwise. Current U.S. policy will lead to lower rates of economic activity and, in turn, lower federal tax revenues and greater federal spending outlays.

This is consistent with a recent analysis drawing on data from 41 developed and emerging market economies and covering the time period from 1900 (or from independence, depending on the country) to 2020. Using sophisticated statistical methods to account for factors that might affect the election of populist governments as well as economic outcomes, the authors find that populist parties in government are associated with significantly worse economic growth and development outcomes.

This large-n statistical analysis also suggests that government debt-to-GDP levels are 10 percentage points higher during an episode of populist government, compared to a hypothetical (and otherwise similar) country. These effects persist for more than a decade after populists leave office. This suggests that, even with a change in government in 2028, the difficult fiscal position in which the U.S. finds itself is unlikely to change anytime soon.

III. Exorbitant Politics

Threats to transparency, accountability and the rule of law, along with the withdrawal of U.S. leadership in the global economy, may undermine the U.S. capacity to access credit cheaply. To the extent that the dollar becomes less attractive as a reserve asset and a means of exchange, U.S. borrowing costs will rise. The United States borrows in its own currency, so it will always be able to repay its obligations (debt ceiling fights notwithstanding), but monetizing debt in that way would heighten inflationary expectations, again depressing economic activity.

For now, the U.S. financial system remains the central hub globally. The dollar remains an important medium of exchange, the most common currency for trade invoicing, payments and international banking transactions. Its role as a reserve currency for foreign central banks persists. Yet changes are underway. Some governments and central banks are attempting to diversify away from dependence on the U.S. financial system. Others, in response to the wielding of U.S. financial power via financial sanctions, have begun to diversify away from the dollar. Some developing countries have recently turned (in a limited way) to borrowing in euros, Swiss francs or Chinese renminbi rather than in U.S. dollars.

In early 2025, the dollar accounted for 57.7 percent of central banks’ reserve holdings, down from 65.8 percent in 2015. The proportion of U.S. government debt held by foreign central banks has declined. Foreign official holdings of U.S. government debt grew quickly in the early 2000s but peaked in 2020. As of mid-2025, approximately 13 percent of outstanding U.S. Treasury securities were held by official foreign holders, with another 18 percent held by foreign private holders. Official holders are marked by their long time horizons and, as such, often are a stabilizing force in debt markets. Their reduced presence could further expose the United States to debt-related risks.

Reduced demand for dollars and heightened concern for the exorbitant politics of the contemporary era affects the terms on which the United States borrows. Since early 2022, the average interest rate on U.S. Treasury securities has crept up. The average interest rate on total marketable national debt was 3.4 percent in August 2025; five years before, it was 1.7 percent. In June 2025, the average maturity of outstanding U.S. debt was 6 years. Notably, among OECD countries, the average term to maturity of outstanding government debt was just under 8 years in 2024; among OECD governments, only Estonia, Sweden, Israel, Norway, Poland and Turkey had shorter average debt maturities than the United States.

Debt servicing — the interest payments on existing debt — is projected to take up a greater share of federal spending, exceeding 14 percent of outlays in 2027. The One Big Beautiful Bill Act (OBBBA), signed into law by President Trump in July 2025, will likely lead to further increases in debt servicing costs. The bill increases federal spending in some areas (the military, immigration enforcement), while reducing it in others (health care, food assistance and student loans). Its main impact on fiscal policy, however, comes via tax cuts, extending the 2017 Tax Cuts and Jobs Act provisions and offering additional new reductions. The Trump administration has repeatedly suggested that revenue from tariffs will help to close some of the fiscal gaps created by the OBBBA tax cuts, but this is a dubious proposition. Legal challenges to the IEEPA tariffs continue and, to the extent that tariffs aim to bring production back to the United States in the longer term, imports will fall. Fiscal deficits are projected at approximately 6 percent of GDP into the foreseeable future. With the debt stock expanding and interest rates increasing, debt servicing costs will further crowd out public spending on infrastructure, health care and perhaps even defense.

To be clear, the underlying shifts in politics described above have not yet resulted in dramatic shifts in financial markets. Even with increased borrowing costs, the U.S. government remains able to finance and refinance its debt. The yield curve — the difference between interest rates on short-term and longer-term debt — has steepened for many countries, as investors worry about the willingness of governments to carry out fiscal adjustments. While the “bond market vigilantes” recently have put pressure on governments in France, Japan and the United Kingdom, pressures from financial markets have done little to encourage fiscal adjustment — or the defense of rule of law — in the United States. The sense that “there is no alternative” to the dollar has allowed the U.S. government so far to avoid dramatic market pressures for fiscal adjustment.

IV. Crisis, Accountability and Adjustment?

As political risks and their economic consequences intensify, what paths might lead the United States to fiscal adjustment? Many countries face or have faced high debt burdens and mounting pressures for fiscal adjustment. In an era of heightened political risk, lessons from elsewhere become more relevant for the United States.

Governments often hesitate to adjust fiscally, even as their debt burdens climb and debt servicing costs grow. Many leaders hope that economic conditions will improve, allowing them to grow their way out of debt troubles — and indeed, macroeconomics suggests that, if the growth rate exceeds the interest rate on debt, debt should be sustainable. In many cases, however, debt reaches unsustainable levels.

In some countries facing high debt burdens, citizen engagement has played an important role. Civil society actors and opposition political parties may draw public addition to the budget process and budget outcomes. This requires economic policy transparency: if governments obfuscate the budget process or reduce the resources directed at accurate measurement of economic and fiscal policies, this is more difficult.

Yet even when mass publics have information about fiscal policy, they may not press directly for changes. Their worries about spending cuts or tax increases may outweigh their concerns about debt sustainability. This is especially true in countries able to borrow in their own currencies. There is some recent evidence that publics understand the difference between a government budgeting process and a household budget process. In the former, a government borrowing in domestic currency cannot run out of money — which means it is always able to repay its debt, although doing so may come at the cost of undermining its monetary policy credibility and its longer-term economic growth.

A less direct channel for public accountability runs through broader economic performance concerns. Voters may come to appreciate that debt servicing burdens are harmful for growth (by limiting public spending on infrastructure and education, for instance), or that interest rate increases and inflationary expectations reduce private investment. Here, the challenge for voters is to attribute blame: if they observe poor economic performance, how do they know that the government is responsible?

My recent research suggests that sovereign credit ratings downgrades (from agencies including Moody’s and Standard & Poor’s) may provide one source of attribution. For a large sample of countries, ratings downgrades are associated with declines in approval of the incumbent. The United States’ rating was downgraded by Moody’s in May 2025, Fitch Ratings in 2023 and Standard & Poor’s in 2011. While these downgrades had little effect in financial markets, they (or further downgrades) could have secondary effects on public opinion.

A second source of pressure for adjustment is rooted in financial markets. In many cases, a sudden shock — sometimes the result of a negative shift in external conditions, other times due to investors updating their assessments of country — forces a dramatic adjustment. Currency, banking and debt crises are a recurrent feature globally. They often happen “slowly then all at once”; fiscal deficits and debt burdens mount for a long time, then market participants suddenly shift their collective views, often in response to some new piece of information.

In emerging and frontier market countries, the result often is a currency crisis or a default on external debt, and the policy reforms that follow are prescribed as conditions of an International Monetary Fund bailout program. Such crises are less common for governments borrowing in their own currency — note that Greece, Ireland, Italy, Portugal and Spain’s debts were denominated in euros, rather than in national currencies, when they faced crises in 2009 and 2010.

Yet wealthy democracies, borrowing in their own currencies, are not entirely immune from dramatic shifts in markets, especially in the context of global risk aversion and high public debt burdens. For instance, in late September 2022, the government of former U.K. Prime Minister Liz Truss released an economic plan, which included a proposed $48 billion tax cut, targeted at wealthy individuals. This proposal arrived at a time when the United Kingdom’s public debt burden was already substantial. Inflation was high, and a recession seemed imminent. Global energy prices also were high, contributing to risk aversion in financial markets.

U.K. bond yields — which had been steadily rising throughout 2022 — skyrocketed. The yield on 30-year gilts increased by 120 basis points over three days. The pound’s exchange rate plummeted. And many of the United Kingdom’s liability-driven investment funds found themselves on the verge of collapse. On September 28, 2022, the Bank of England intervened via a two-week emergency purchase program for long-dated U.K. sovereign bonds. Financial markets continued to take a negative view of the Truss government’s economic plans; after reversing course on the “mini-budget,” Truss ultimately resigned, after a mere 44 days as prime minister.

Financial crises are more likely, but not inevitable, for countries with weak and deteriorating economic fundamentals. What propels such countries into crisis is often a shift in investors’ perceptions. Financial markets are prone to rational herd behavior: everyone remains invested (and earning returns) as long as they assume others will. Things can shift quickly, however. A collective shift in large investors’ perceptions of the United States — a consensus that political risk had hit exorbitant levels — could lead to a selloff in U.S. Treasury securities, and to a dramatic increase in the costs of financing new debts.

Thus far, financial markets have remained relatively sanguine about threats to the Fed’s independence, and to the rule of law, accountability and transparency more generally. If, however, President Trump interferes further — for instance, via further attempts to remove members of the Board of Governors, especially Chairman Jerome Powell, or by replacing Powell with a political ally when his term ends in 2026 — markets could drive up U.S. sovereign borrowing costs.

For now, the United States benefits, in terms of financial stability, from a lack of alternatives to the dollar and to U.S. Treasury securities. But there is no guarantee that this exorbitant privilege will persist, especially given U.S. government actions that erode its transparency, rule of law, accountability and global leadership. And the United States’ unique position in the global financial system also means that financial and economic crises in the U.S. affect the fortunes of other countries, making fiscal challenges in the U.S. especially relevant.