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John Waldron, president of Goldman Sachs Group, warned that runaway spending could expose the United States to major risks in the event of a political crisis.
"My concern is that the political crisis and high leverage in the national debt system will occur at the same time," Waldron said at an event organized by Semafor. "The higher the leverage, the greater the risk. So I hope Washington can control spending."
Waldron mentioned the market turbulence caused by pension funds that will shake the UK in 2022. UK pension funds have adopted a strategy known as debt driven investment (LDI) to protect themselves from the decline in government bonds. Then, after the then British Prime Minister Liz Trass announced tax cuts without financial support and plans to increase government spending, the yield of government bonds soared, exposing a major risk at the core of the British financial system.
"Think about the LDI incident in the UK. It was actually the political crisis," Waldron said. "At that time, the Tras government budget did not have much credibility. Then there was the selling of British government bonds. Then we found that there was a leverage structure in British government bonds in this process."
Waldron said that if a political crisis occurs, the United States may also experience such turbulence, "so I think we should worry about this".
Waldron said that the United States cannot take the US dollar's reserve currency status for granted, and pointed out that because of the lack of overseas buyers like China who have been buying US government bonds in history, American families have been filling this gap. He pointed out that there is a hypothesis that more and more wealth in the United States will continue to pour into the US treasury bonds, because people are relieved that there will be no substitute for the US dollar for a long time to come.
Waldron said, "If you continue to bet like this, you are making a big bet."
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