Cracks in the Foundation of the US Dollar

In recent weeks, global attention has returned to a term frequently appearing in international economic media but rarely understood by the general public: US Treasuries. These are, in essence, the primary foundation upon which the modern global financial system stands.

Simply put, US Treasuries are United States government debt instruments—a way for the US to borrow money from the world. When central banks, foreign governments, major banks, hedge funds, pension funds, and global investors purchase Treasuries, they are effectively lending money to the US government. In everyday terms, Treasury bonds are US government bonds, the Treasury market is the marketplace where these instruments are traded, and Treasury yields are the interest rates the US government must pay to lenders. For Indonesian readers, this concept is not entirely foreign, as Treasuries are roughly similar to Indonesian State Securities (SBN), such as ORI, albeit on a much larger scale that serves as the centre of the global financial system.

For decades, Treasuries have been regarded as the ‘safest asset in the world’. During wars, financial crises, global recessions, or market panics, investors typically flock to purchase Treasuries, driven by the belief that the United States will honour its debts. This trust forms the foundation of the global dollar system. The foreign exchange reserves of central banks, the international banking system, global trade, and the pricing of various financial assets all rely on the US Treasury market.

However, cracks are beginning to emerge that are increasingly difficult to ignore. Reports from The Economist have warned that the foundation of the Treasury market is under serious pressure. US government debt is approaching USD 32 trillion, with a fiscal deficit of approximately 6 per cent of GDP—a significant figure even in peacetime. Over the last decade, the volume of outstanding Treasuries has more than doubled.

The issue lies not only in the growing debt but also in the changing structure of the market itself. Previously, Treasuries were largely held by conservative players such as foreign central banks, large financial institutions, and pension funds that tended to hold bonds for the long term. Today, the market is increasingly dependent on hedge funds and leveraged investors—those who use borrowed funds to amplify their investment positions. While this system functions normally during periods of stability, these investors can become a source of significant instability during market panics.

This phenomenon was observed during the onset of the 2020 pandemic, known as the ‘dash for cash’, where investors simultaneously sold Treasuries, causing serious disruptions in what is usually the world’s most liquid market. Consequently, the Federal Reserve had to intervene with massive purchases to prevent the market from freezing entirely. This has raised concerns regarding ‘debt monetisation’—the fear that the US government is becoming increasingly dependent on its central bank to finance its debt by creating new money to purchase it.

It is important to note that this does not imply an immediate American bankruptcy. Large-scale hegemonic crises rarely occur through sudden collapse; rather, they manifest as a gradual erosion of trust. The cost of maintaining dominance is rising, interest costs are increasing, investors are demanding higher risk premiums, and other nations are beginning to diversify.

Geopolitics also plays a critical role. In recent years, the US has increasingly utilised its dominance in the dollar and financial systems as a geopolitical instrument through financial sanctions, asset freezes, and restrictions on international payment access—a phenomenon often termed the ‘weaponisation of the dollar’. While effective for Washington to pressure adversaries, it prompts other nations to ask: what happens if they become targets?

These fears are driving various countries to increase gold purchases, reduce dollar dependency, and seek alternative international payment systems. The European Central Bank has even noted that gold has surpassed US Treasuries as the most popular reserve asset globally. While there is currently no real alternative capable of replacing Treasuries as a global safe asset, the world appears to be entering a new phase: not a sudden collapse of dollar dominance, but an increasing cost to maintain it. This remains vital for Indonesia, as the US dollar continues to be the primary refuge during periods of global uncertainty or pressure on the Rupiah.