Recently, US bond yields have declined again, and the dollar index has also moved lower, indicating some continued weakness in the US dollar. In this backdrop, Bank of America released a significant report stating that a major bull run has begun in emerging markets. This raises an important question — will countries like India benefit from this shift?
Indeed, signs point in that direction. Bank of America's analysis shows that emerging markets are finally breaking out of a long-standing range after many years. This signals a reallocation of global capital. In fact, the Wall Street Journal recently published an editorial discussing a new global investment trend, moving away from the "Magnificent Seven" and US-centric strategies. They introduced a new acronym — ABUSA — meaning "Anything But USA." This reflects a shift from the earlier mindset of "TINA" (There Is No Alternative) toward global diversification beyond the US.
At present, over $30 trillion is invested by global investors in the US stock and bond markets. While the US economy accounts for about 27–28% of global GDP, it holds nearly 65% of global market capitalization. This indicates a highly financialized economy, and any instability in the US tends to affect global markets. Therefore, investors are now gradually trying to shift their capital away from the US.
China offers a strong example. Over the last five to seven years, China has been withdrawing $15–20 billion monthly from US Treasuries and reallocating into non-dollar assets, including significant gold purchases. Whereas five years ago, central banks worldwide collectively bought around 200 tonnes of gold annually, they are now purchasing over 1,000 tonnes per year. This marks a clear trend of de-dollarization.
Even though 80% of global trade is still conducted in US dollars due to the lack of viable alternatives, options like the Chinese yuan are not trusted globally, except by satellite countries with limited choices. The remaining alternatives include the euro, Japanese yen, and Swiss franc. However, these too have limitations. Recently, the Swiss Central Bank expressed concern over an inflow of capital that’s pushing them toward negative interest rates — they lack the capacity to absorb such a surge.
Unless a viable global digital currency or alternative reserve asset emerges, this imbalance is likely to persist for the next decade. The primary issue is that the US continues to spend far more than it earns — generating revenues of around $4.25 trillion while spending nearly $6 trillion. The resulting $1.8 trillion annual fiscal deficit is crowding out the rest of the world.
To cover this gap, the US is either issuing new bonds or effectively printing money. For instance, out of India’s $690 billion foreign exchange reserves, $400–450 billion are likely held in US bonds. Thus, the entire world is indirectly financing America’s current budget model.
Even the IMF, through Gita Gopinath, recently emphasized the need for the US to reduce its fiscal deficit, which currently stands at 6.4% — a concerning figure for the world's largest economy. Despite discussions around cutting spending or increasing taxes, the actual measures being taken are minimal. Proposed spending cuts amount to only around $150 billion, while deeper structural reforms are not in sight.
This makes it difficult for the US Federal Reserve to implement rate cuts. Meanwhile, political challenges are growing. Trump’s tax cut plans and new acts are facing resistance not only from left-leaning groups but also from right-wing and centrist factions within the Republican Party. Right-wing voices are insisting on spending cuts first.
Attempts to reduce the balance sheet since the 2008 financial crisis have largely failed — whether under Ben Bernanke or during the 2019 attempts. Though Jerome Powell has made some progress since 2022, the pace is very slow compared to the scale of the $36 trillion US national debt.
Thus, reducing government spending or increasing revenue through tax reforms remains the only long-term solution. Tariff revenues have been insufficient, with just $7–8 billion generated last month — a drop in the ocean compared to the fiscal needs.
All these factors together are driving global investors to reconsider their reliance on US assets. Emerging markets are poised to benefit as capital seeks new destinations, and if current trends continue, countries like India could see significant inflows and long-term structural gains.
Disclaimer:
The views and information presented in this article are based on publicly available sources and personal analysis. This content is intended for informational purposes only and should not be considered financial or investment advice. Readers are encouraged to conduct their own research or consult with a financial advisor before making any investment decisions.
