Beyond the dollar: The Global South's exit from US fiscal fragility

Editor's note: This article was written by Warwick Powell, an adjunct professor at the Queensland University of Technology and advisor to former Australian Prime Minister Kevin Rudd. It reflects the author's opinions and not necessarily the views of CGTN. 

The idea that the United States might "go broke" has long animated political theatre in Washington and framed global anxieties around US fiscal policy. But this fear is rooted in a fundamental misunderstanding. The US cannot go insolvent in the conventional sense. It is the issuer of its own currency and its obligations are denominated in that currency. It owes what it itself creates. It can always meet its dollar-denominated obligations.

But that is not cause for comfort. In fact, the situation is worse: the US faces a structural trilemma from which there is no painless exit, and the consequences for the rest of the world, especially the Global South, are profound.

Calls to "rein in government spending" or "reduce the debt before it's too late" are premised on a false analogy between the federal government and a household. Households and firms must earn or borrow money in order to spend. Governments like that of the US, which issue their own sovereign fiat currencies, do not face the same constraint. They create the currency in which their obligations are denominated. Default, in this context, can only be a political decision, not an economic necessity.

This is not a fringe view. It is an institutional fact, confirmed by the operational mechanics of Treasury-Federal Reserve coordination and the functioning of modern central banks. The US doesn't borrow to fund spending; it spends, and then issues bonds as part of liquidity management. The issuance of debt is a relic of gold-standard thinking, which means it is a policy choice, not a requirement.

While insolvency isn't the issue, the US is far from fiscally invincible. It is trapped in a policy-institutional trilemma, where all roads lead to some form of decline.

1. If the US imposes austerity to appease bond markets and global investors, it shrinks its own economy, deepens inequality, weakens the social contract, and accelerates the drift toward political and institutional entropy.

2. If the US continues fiscal expansion under existing rules, which require every dollar of net spending to be offset by bond issuance, it inflates the financial sector, transfers wealth to bondholders and risks a collapse of confidence in US Treasuries as the world's safe asset.

3. If it reforms the system by severing the bond-deficit nexus, it regains fiscal sovereignty but undermines the very foundations of the global dollar system. The perception of the US dollar and Treasuries as neutral, market-disciplined assets vanishes. This opens the door to capital flight, loss of reserve status, and economic nationalism.

Each path leads, in different ways, to a poorer and more unstable America; and, at the same time, a further destabilised world economy.

The global financial system is in large part anchored in US Treasuries. They serve not only as benchmark assets but also as global collateral. Trillions of dollars in global trade, lending and portfolio allocation decisions depend on the liquidity, safety and pricing of Treasuries. If the US stumbles into policy paralysis, via a debt ceiling crisis, runaway rates or market rebellion, the effects will not stop at its shores.

For the Global South, the risks are immediate and not inconsiderable. The upside is that there is a way forward.

As US bond yields rise or become volatile, capital flees emerging markets, currency pressures mount and balance of payments constraints return with vengeance. Countries that have borrowed in dollars, pegged to dollars, or trade primarily in dollars become hostage to a fiscal dynamic over which they have no influence. Central banks may be forced to raise rates, burn through reserves, or seek emergency swaps, all while inflation and unemployment spiral.

Much of the current institutional order is propped up by the belief that markets will "discipline" governments that overspend. But this assumes that interest rates reflect economic fundamentals, rather than herd dynamics, policy expectations, or geopolitics. In practice, market discipline is both selective and regressive. It rewards countries with deep financial markets and global currencies (like the US), and punishes those that depend on external financing. When the bond market punishes the US, the Fed can step in. When it punishes a Global South country, the IMF steps in, and with it comes austerity prescriptions and structural adjustment demands that strip nations of their public assets.

This asymmetry is built into the system. And as the US enters a new phase of fiscal distortion, whether through bond market stress or institutional breakdown, it exports that instability to others.

If the US cannot correct course, because it is politically unable to sever its reliance on bond markets or restore institutional credibility, then the global system must adapt. This means preparing, urgently, for a world beyond dollar centrality.

That transition is already underway.

The BRICS grouping, newly expanded and increasingly coordinated, is developing cross-border payment infrastructure aimed at reducing reliance on the US dollar in trade settlement. While this platform is still work in progress, the strategic intent is clear: monetary autonomy for the Global South and a buffer against externally triggered financial shocks.

In parallel, East Asia, scarred by the 1997 Asian Financial Crisis, has moved decisively toward deepening regional monetary coordination. The currency swap arrangements under the Chiang Mai Initiative, and the increasing use of local currencies in ASEAN+3 (China, Japan, Korea) trade, are part of a growing architecture to blunt the impact of dollar volatility and US policy extraterritoriality. The lesson has been learned: dependence on the dollar means exposure to someone else's fiscal and political crisis.

But more is needed. The New Development Bank, the financial arm of BRICS, must evolve from a project lender into a macro-institutional anchor that is capable of coordinating capital flows, providing liquidity support and offering an alternative to the IMF's conditionality-laden crisis management model. The Global South needs not just new money, but new rules.

Renminbi, the Chinese currency, is playing a growing role in this transition. Its inclusion in the IMF's SDR basket, and its acceptability for settling IMF obligations, signal a clear shift. China's bilateral role in helping overexposed countries manage USD-denominated liabilities, through swap lines, currency bridges and direct financing, positions it as a system stabiliser, especially when traditional US-led institutions are politically gridlocked or structurally incapacitated.

None of this means the dollar will disappear overnight. But it does mean that a multipolar monetary world is no longer optional. It is a strategic imperative for any region or nation that seeks resilience in a century shaped not by US default, but by US fragmentation and instability - fiscally, politically, and internationally.

The Global South has options. It can build new institutions, diversify reserves and gradually construct a monetary world that does not depend on Washington's internal contradictions.

But the United States, for now, does not. It is trapped in a structure of its own making, which requires it to maintain the illusion of currency scarcity (through bonds) even as it commands the power to create money. It cannot reform without undermining the global order that gives it privilege. And it cannot sustain that order without sacrificing domestic stability and social cohesion.

The real danger is not a US default. It is, instead, a slow, incoherent fiscal and geopolitical unravelling that leaves the world unmoored. The Global South must act now, not in opposition to the dollar, but in defense of its own future.

(Cover via VCG)