For the first time since the Second World War, excluding the COVID-19 pandemic, public debt in the United States has surpassed the entire economy's GDP . As of late March, debt held by the public reached US$31.27 trillion, just ahead of the GDP of US$31.22 trillion.
This threshold is often treated as a long-term fiscal issue , but the economic costs of this debt are now moving to the forefront. The most immediate pressure comes from the possibility that major foreign holders of American assets begin pulling capital out of U.S. markets.
Gulf states - whose confidence in U.S. fiscal and military protection has been shaken by the U.S.-Israel attacks on Iran - collectively hold roughly US$2 trillion in U.S. assets through their sovereign wealth funds.
Officials across the Gulf are already reassessing their positions. In March, one Gulf official said three of the four largest economies in the Gulf Cooperation Council were reviewing their sovereign wealth fund positions to offset the impact of the Iran war.
Why the U.S. cannot simply block a selloff
The U.S. has limited options to prevent foreign investors from selling. The freedom to enter and exit what the Federal Reserve Bank calls " the deepest and most liquid fixed-income market in the world " is exactly what makes U.S. assets attractive. That same openness creates a structural vulnerability.
The U.S. economy relies heavily on stretched asset valuations - elevated prices in stocks, bonds and real estate - where market values far exceed their underlying fundamentals.
When holders lose confidence and these inflated markets correct, a run is triggered and prices fall sharply, as happened in the 2008 financial crisis. The real economy ends up paying the price .
The present situation carries similar risks. If Gulf states start selling U.S. assets amid ongoing regional instability , falling prices would reduce the value of collateral across the system.
As leveraged institutions see their balance sheets weaken, they cut borrowing and sell assets. This pushes prices down further, setting off a chain reaction that spreads financial stress internationally .
Swap lines as a stop-gap
As these pressures build, one tool has come back into focus: central bank swap lines . These are arrangements between central banks that let countries access U.S. dollars without selling their American assets . Forced selling would push prices down and spread financial stress.
During the 2008 crisis, the Fed used swap lines as an emergency backup to extend dollar liquidity to banks and governments that suddenly needed it.
U.S. Treasury Secretary Scott Bessent recently said that several American allies in the Gulf region and Asia had requested swap lines , saying the arrangements would prevent the "disorderly" sale of U.S. assets.
But where does this dollar liquidity come from? For decades, the global role of the U.S. dollar allowed it to spend more than it earned, while other countries earned dollars through trade and invested them back into U.S. markets . Gulf states were central to this, using oil revenues to buy U.S. bonds, stocks, real estate and weapons .
This was part of a broader arrangement known as the petrodollar system , which traces back to a 1974 agreement between the U.S. and Saudi Arabia . Oil was priced in U.S. dollars, money flowed into the U.S. and in return Gulf countries received political and military backing .
This allowed the Federal Reserve to expand the money supply through quantitative easing at home and by extending liquidity into the global system through swap lines .
Though this can stabilize markets in the short term, it also deepens reliance on repeated intervention , buying time rather than resolving underlying pressures.
A fracturing arrangement
The petrodollar system only works as long as Gulf states keep sending money back into U.S. markets. Swap lines reverse that condition: dollars must now flow to the Gulf instead of from it.
Iran's pressure campaign on Gulf states, including attacks on economic assets and leveraging the Strait of Hormuz, are creating uncertainty in oil markets, government budgets and regional stability .
Gulf sovereign wealth funds have responded by placing greater emphasis on liquidity and flexibility .
The United Arab Emirates' exit from OPEC on May 1 shows how far the old energy-financial bargain has fractured. Gulf states now want more control over production, revenue and liquidity than the cartel system allows . The move also likely reflects U.S. pressure to bring oil prices down in the short term .
That strategy cannot last. Lower oil prices may help the U.S. and other importers in the short run, but Gulf states still depend on strong revenues to fund budgets, sovereign wealth funds and diversification .
Gulf states are also signalling a willingness to expand the use of alternative currencies, including China's yuan , for portions of their oil trade if regional instability disrupts dollar liquidity. The shift would merely accelerate the growing trend among emerging economies to move away from U.S. dollar dependence .
Extending swap lines to Gulf states may slow that process, but it may not be enough to reverse the currency diversification already underway .
A system under pressure
The global financial system was already moving toward greater fragmentation and weaker reliance on the U.S. dollar long before the Iran war .
U.S. President Donald Trump's escalation with Iran has accelerated that process by shaking confidence in the political and military foundations that sustained the petrodollar system for decades.
Behind the scenes, policymakers are increasingly relying on swap lines, monetary expansion and emergency co-ordination measures to stabilize dollar liquidity and reassure allies. These tools were once reserved for acute crises, but are now becoming part of the normal functioning of the system and undermining U.S. asset credibility .
Underlying all of this is a global economy shaped by decades of financialization, growing dependence on inflated asset markets and mounting geopolitical rivalry, all of which are placing increasing strain on the old U.S. centred order .
Elliot Goodell Ugalde is affiliated with the Centre for International and Defence Policy.
Natalie Braun does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.
