Phase 6 — Systemic & Second‑Order Risk Analysis

This phase explores second‑ and third‑order effects of debt‑management strategies on global financial stability, the dollar’s reserve status, capital flows, political legitimacy and intergenerational trust.

Safe Asset Status & Global Capital Flows

• The U.S. dollar accounts for about 58 % of global official foreign reserves and foreign investors hold roughly 32 % of marketable Treasuries【203841385617925†L645-L687】. Near‑term challenges to this dominance appear limited【203841385617925†L1005-L1027】.
• Loss of safe‑asset status could raise long‑term interest rates and weaken the dollar. Maintaining safe‑asset status may require fiscal discipline【518734610474351†L246-L270】.
• Reducing debt too aggressively could shrink the supply of safe assets, increasing the natural rate of interest and offsetting debt reduction.

Inflation, Financial Repression & Trust

• Surprise inflation can erode debt but risks unanchoring expectations, leading to stagflation.
• Financial repression may succeed only when savers have limited alternatives and trust in institutions remains intact; otherwise capital may flee.
• Inflation that favours some groups over others can damage intergenerational trust and political legitimacy.

Reserve Currency Competition & Geopolitical Tensions

• European fiscal integration could make the euro a more attractive reserve currency, but the market remains much smaller than U.S. Treasuries【203841385617925†L1030-L1043】.
• China’s renminbi is constrained by capital controls and low investor confidence【203841385617925†L1045-L1056】.
• Digital currencies and stablecoins could both challenge and reinforce dollar dominance; about 99 % of stablecoin market capitalization is dollar‑linked【203841385617925†L1061-L1067】.

Political Economy & Social Cohesion

• High debt can become a focal point for political polarization. Narrative lock‑in (e.g., austerity vs. stimulus) may lead to policy gridlock.
• Successful debt reduction that relies on deep spending cuts can erode public services, widening inequality and undermining social cohesion—a second‑order failure mode.

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