Trump team risking US’ exorbitant privilege with short-term theatrics

It was financial markets that checked one of US President Donald Trump’s excesses: his unilateral tariffs targeting much of the world. It wasn’t just the US stock market, whose declines were expected. What probably caused Trump to blink was the rapidly climbing yield of 10-year US Treasury bonds. From around 4 per cent on April 4, it approached 4.5 per cent in a week. The US dollar has also depreciated against other currencies since its peak in January. A falling stock market usually results in declining Treasury yields as bond prices rise and the US dollar gains value, as part of investors’ flight to safety. The simultaneous fall in stock values, bond prices and the US dollar caused consternation. While some of the bond sell-offs aimed to cover positions from stock losses, something greater was at work. It is only right that the trade war thrust financial markets into the spotlight. International investment flows reflect global trade imbalances. How has the United States’ current account deficit been financed if not by the inflow of international capital? The US has enjoyed this privileged position due to the dominance of its currency in international trade and finance. The US dollar is used in about half of global trade, and 64 per cent of world debt is US dollar-denominated. The demand for US Treasury bonds has lowered borrowing costs for the US government and American consumers. As foreigners buy US assets, they push up the value of the US dollar, making imports cheaper. However, such a position is unsustainable given the US government’s ballooning debt and growing budget deficit. The US federal budget deficit grew from 2.8 per cent of gross domestic product in 2014 to 6.4 per cent in 2024. Last year, net US interest payments surpassed defence in national spending. Next year, interest on the debt is likely to exceed US$1 trillion. Nevertheless, the US dollar’s status quo looked set to continue, sustained by inertia and the lack of alternatives, until Trump’s team opened a Pandora’s Box. The Mar-a-Lago Accord – brainchild of Stephen Miran, now chair of Trump’s Council of Economic Advisers – proposes a radical solution to America’s fiscal woes: dollar devaluation by pressuring countries to sell US dollars and swap the Treasuries they hold into century-long bonds, effectively a selective default. Miran’s plan would leverage tariffs and the threat of security-protection withdrawal to coerce allies and trading partners into accepting this unprecedented financial restructuring. While the scheme is unlikely to be easily accepted, it is partly based on basic economic theory. Trade deficits can be rebalanced through currency revaluation. The currency of the country with net imports would depreciate, making imports more expensive and exports more competitive, closing the gap between imports and exports. The US dollar has defied such adjustments due to its global demand. Nonetheless, US dollar dominance is something Trump is eager to keep. Even before his inauguration, Trump threatened the Brics grouping against replacing the US dollar. As the US’ economic machinery hinges on its currency’s dominance, losing it may lead to the unravelling of the economy. After US president Richard Nixon de-pegged the US dollar from the gold standard in 1971, the fiat dollar’s value has been primarily based on trust – the strengths of the US economic system and the rule of law. Even if Trump somehow pulls off the Mar-a-Lago Accord, why would the world trust the US dollar after such a blatant default on American sovereign debt? Trump may be counting on the lack of alternatives to the US dollar. While the US dollar represents the core of most central bank reserves, its share of global foreign exchange reserves has declined from around 73 per cent at the beginning of the century to below 60 per cent today. As a reference currency for other central banks, US dollar dominance peaked a decade ago. Diversification will be accelerated by Trump’s moves. Left to natural forces, the US dollar would remain the dominant currency of trade and investment for decades to come. But the weaponisation of the dollar in sanctions has made trading partners wary. The freezing of Russian central bank assets in the West worth around US$300 billion after the country’s invasion of Ukraine was a stark reminder to China. The proposed Mar-a-Lago Accord should be a wake-up call to the entire world. Instead of pulling its own weight by reducing spending and raising taxes, US planners are mulling wiping out decades of hard work by millions of Asians and Europeans. The Plaza Accord led to decades of stagnancy in Japan. Would Japan, as the largest foreign holder of US Treasuries, succumb to the same pressure again? How might China weigh its options if faced with such demands? The pursuit of the non-starter that is the Mar-a-Lago Accord stems from an unrealistic self-conceit – an overconfidence in one’s leverage while underestimating the options and response of others. It also displays a shallow grasp of economic fundamentals: the importance of learning and trust in what in game theory is known as multi-period games. The US dollar’s dominance was earned through institutional stability under the guardianship of a trusted US Federal Reserve. The Mar-a-Lago Accord threatens to unravel this foundation, using the dollar as a weapon of coercion rather than a symbol of global confidence. The long-shot scheme is a high-stakes gamble on the world’s trust in the dollar. Once trust is lost, the situation will be irreversible. In choosing short-term theatrics over long-term responsibility, the US risks trading its exorbitant privilege for diminished influence in a multipolar world.

Trump team risking US’ exorbitant privilege with short-term theatrics

.css-1c6uqr6{color:inherit;font-weight:inherit;font-size:inherit;font-family:inherit;line-height:inherit;overflow-wrap:break-word;}A scheme to devalue the dollar proposed by one of the US president’s economic advisers should alarm both Americans and the wider world

A scheme to devalue the dollar proposed by one of the US president’s economic advisers should alarm both Americans and the wider world