The End of America’s Exorbitant Privilege by Desmond Lachman

Desmond Lachman highlights the myriad ways Donald Trump is undermining markets’ faith in the US economy and the dollar.

Since his return to office, US President Donald Trump has been systematically destroying markets’ faith in the dollar and the US economy. If he refuses to heed their warnings, as seems likely, the US should brace for a dollar and bond-market crisis in the run-up to next year’s midterm elections.

WASHINGTON, DC – When he was France’s finance minister in the 1960s, former French President Valéry Giscard d’Estaing famously complained about the “exorbitant privilege” that the dollar’s position as the world’s leading reserve currency conferred on the United States. This meant, essentially, that the US could borrow at low interest rates, run persistently large trade deficits, and print money to finance its budget deficits. He never could have imagined that the US would end up letting these advantages slip through its fingers.

Since returning to the White House in January, US President Donald Trump has been systematically destroying faith in the dollar in both global financial markets and among governments and central banks. For starters, Trump has put America’s public finances on an even more unsustainable path than they were on before he took office.

When Trump began his second term, the US budget deficit had already widened to 6.2% of GDP, with nearly full employment, while the public-debt-to-GDP ratio had risen to around 100%. But things are about to get much worse. Far from putting America’s fiscal house in order, Trump and his supporters in Congress have pushed through their “Big, Beautiful Bill,” a tax and spending bill that the non-partisan Congressional Budget Office estimates will add around $3.4 trillion to the budget deficit over the next decade.

America’s public-debt-to-GDP ratio is now on track to reach a level that, by 2030, will be far higher than at the end of World War II, when the US enjoyed far more favorable demographics. Unlike during the postwar period, the US economy today is not equipped to grow its way to a smaller debt burden. Little wonder that the major credit agencies, like Moody’s, have now stripped the US of its AAA credit rating.

Trump is further undercutting confidence in the dollar with his apparent lack of concern about keeping inflation in check.