Is U.S. Economic Supremacy an Illusion?

Executive Summary

The United States remains the world’s largest economy by nominal GDP, but signs of long-term vulnerability are mounting. Structural headwinds — including unsustainable fiscal dynamics, weakening global trade influence, and a declining reserve currency share — suggest the U.S. may be approaching an inflection point in its economic leadership. For investors, this calls for a strategic reassessment of dollar-denominated assets, global FX positioning, and exposure to emerging markets and commodities.

I. Global Growth Outlook: U.S. Size vs Emerging Market Momentum

Diagram 1.0: Total Gross Domestic Product (GDP)  

Diagram 2.0: GDP Growth

Key Insight: The global economic power center is shifting eastward.

• While the U.S. leads in nominal GDP, growth momentum clearly favors emerging markets.
• China and India benefit from favorable demographics, policy-led industrialization, and rising middle-class consumption.
• U.S. long-term real GDP growth is decelerating, raising questions about its ability to sustain global leadership.

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II. U.S. Fiscal Fragility: Rising Debt, Declining Flexibility

Quote: “The U.S. is hooked on debt to finance its excesses.” – Ray Dalio

• Debt-to-GDP ratio exceeds 120%, the highest since WWII — structurally unsustainable.
• Annual deficits near $2 trillion, driven by aging demographics, entitlement programs, and persistent defense expenditures.
• Interest expense is rising rapidly due to elevated Treasury yields, crowding out productive investment.

Top 5 Global Debt Holders (2024):

 

Diagram 3.0: US Federal Debt Growth

Investor Perspective: Elevated fiscal risk premiums and debt monetization fears are likely to weigh on U.S. Treasuries and the dollar over the medium term.

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III. Trade War Realities: Eroding U.S. Leverage

The U.S.-China trade war has exposed systemic vulnerabilities in U.S. trade and manufacturing. Rather than reversing trade deficits or reshoring production on a scale, tariffs and restrictions have:

A. Failed to Reverse Trade Deficits

• U.S. trade deficit with China remains above $300 billion, even after years of tariffs.
• Import substitution has merely shifted sourcing from China to other low-cost Asian countries, not back to U.S. shores.

B. Spurred Retaliation and Fragmentation

• China has increased yuan-settled trade with Russia and the Global South.
• The trend toward de-dollarization is accelerating in energy and commodities.

C. Damaged Supply Chains

• The semiconductor war has prompted China to accelerate self-reliance in chip design and rare earth control.
• U.S. companies face higher input costs and capital expenditure burdens to reshore, with questionable productivity ROI.

D. Global Confidence is Waning

• Allies increasingly view U.S. trade policy as unilateral and unpredictable, reducing willingness to align with U.S. leadership.

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IV. U.S. Dollar at a Tipping Point

Long-Term Risks to Dollar Hegemony

A. Twin Deficits

• Fiscal deficit: ~6–7% of GDP
• Current account deficit: ~3–4% of GDP
• Historical precedent shows this combination weighs heavily on a nation’s currency.

B. Declining USD Reserve Share

• USD’s share of global FX reserves has dropped from over 70% (2000) to ~58% today.
• Central banks are increasingly allocating reserves toward gold, euro, and CNY.

C. Real Yield Pressure

• Sticky inflation and growing debt loads erode real yields.
• The Fed may face limits in rate hikes due to debt-servicing constraints.

D. De-dollarization Trend

• Cross-border payment systems like CIPS (China) are reducing dependence on SWIFT and USD.
• Petro-yuan contracts gaining ground in energy trade settlements.

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V. Investment Implications for Professional Investors

A. FX Strategy

• Maintain a bearish long-term view on USD.
• Attractive exposure: high-yielding emerging markets with strong fundamentals (INR, BRL, IDR).
• Watch yuan-based trading pairs: CNY-RUB, CNY-SAR energy contracts.

B. Commodities & Gold

• Gold and hard assets serve as strategic hedges against currency debasement.
• Commodities may undergo a repricing cycle as dollar settlement declines.

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Vi: Technical Analysis

Dollar_ Index, Weekly:

The Dollar Index is nearing critical support at 98.90. A clear break below this level could signal further downside toward 96.50. While fundamentals remain bearish—driven by Fed pivot expectations and softening US data—technical indicators show early signs of a potential rebound. The MACD hints at a possible bullish crossover, and RSI is stabilizing near oversold levels.

Bullish traders should watch for a rebound at 98.90, but any confirmed breakdown warrants caution and may validate a deeper correction.

Resistance Level: 102.00, 104.30

Support Level: 98.90, 96.50

Gold, Weekly:

Gold remains firmly bullish, now testing a key resistance at 3385.00. The MACD shows rising momentum, and the RSI at 76 suggests strong buying pressure, though it’s in overbought territory. A break above 3385.00 could open room toward the next resistance at 4100.00. A golden cross is forming, reinforcing long-term bullish sentiment.

Some pullback is possible due to overbought conditions, but momentum remains in favor of the bulls.

Resistance: 3385.00, 4100.00

Support: 3120.00, 2980.00

Conclusion: Beyond the Illusion of Economic Permanence

The United States still holds immense economic, military, and institutional power. But investors should not confuse short-term resilience with long-term invulnerability. Debt addiction, geopolitical fragmentation, and weakening reserve status suggest that the age of unchallenged U.S. supremacy may be fading.