Article originally in the Financial Times. Other articles .
Katie Martin is a member of the Financial Times Editorial Board
Trump’s government has already weakened the position of the dollar as the key carrier pillar of the world finances. If he left, she would be missing very much. It is still a crazy feeling about all this. For many years, it has been the summoning of the dollar to give up its role in the dominant reserve currency, a hobby of very specifically focused fools.
Some large investors still insist that the powerful dollar will stay here because it has no more serious alternative that could take over its status. Others point out that doubters associate the recent period of weakness of the dollar with its role of safe port and lubricant of the world trade.
Many influential economists changed your mind
However, both opponents do not perceive how much the security policy and geopolitics have changed since Donald Trump’s return to the White House. It is therefore wise to think about what the United States may lose.
It is currently estimated that they will be considering in the markets and in great power policy in a shorter horizon, they will be less resistant in every transitional crisis and much more will rely on the kindness of foreigners. Adam Posen, longtime President of the Peterson Institute for the International Economy, is one of the influential economists who have changed their minds on this matter.
In 2008, he wrote an article entitled “Why the Euro will not compete with the dollar”, stating that “the euro is at a temporary peak of influence and the dollar will continue to benefit from the geopolitical sources of its global task that the euro cannot equal or never match.”
At that time, Trump was busy by opening his last large construction project, a shiny Hotel Trump International Hotel and Tower in Chicago. Posen, like the others, can be forgiven that he could not imagine that Trump could end up again as a free world leader in 2025. But it’s here.
The dollar is not dead but is injured
Posen recently stated in a fascinating online presentation that the President’s sudden change in foreign policy now poses a direct and serious risk to the foundations of the dollar. How Trump has declined since April announced the introduction of the so -called reciprocal duties is one thing. It is an instinctively understandable reflection of the likely weaker growth of the United States that awaits us.
But the fact that the dollar fell at the same time as the value of long -term US government bonds is a completely different thing. It is not clear evidence that the dominant dollar status as a reserve currency is dead, but it is very solid proof that it is injured.
The key is that not all US government bonds are equal. When Trump detonated the markets with his announcement of above -standard business duties, the short -term government bonds with a maturity of about two years have increased sharply, a typical reflection of the expectations of a shock that may require a reduction in interest rates.
However, bonds with a longer maturity have taken a different way, which is a very unusual fad that is “in line with their safe asset function weakened”, as reported in the new analysis of Viral Acharya and the Laaritsa Laarits of the New York University Stern School of Business.
These are not normal times
In normal times, bonds and currencies move higher and lower depending on growth, inflation and interest rates. However, these are not normal times and, as we can see, it all stands on the unclear foundations of foreign policy and geopolitics. Therefore, it is difficult – not impossible, but difficult – to predict how the dollar and government bonds can recover their historical role of reliable safety valves for the fluctuated markets.
If this imbalance between short -term and long -term government bonds is not renewed, this means that the United States is likely to be much more based on cheaper short -term bond emissions. The United States is usually such a stable, safe and reliable debtor that the Ministry of Finance can afford to basically never repay its debt – it can simply issue new bonds to repay the old ones, and so on.
A tendency to longer than a short -term horizon means that they will have to do it much more often. This requires the United States to keep its creditors in good shape and try to reduce the cost of loans.
A huge privilege has a menu and a bond market that wants to own the world also means that the United States can borrow to get much easier than any other country. Even from the problems of domestic origin.
Historically, they managed to shorten the crises by using the reliable well of investment at a reasonable price and stimulating their way out of almost every difficulty much more looser than other countries who often increase loan costs when they fail. The new American government may have thought that the world is doing so easy.
It is understandable, but it cannot be taken for granted. Europe would also like to get a piece of this spell. Safe assets are safe because everyone thinks they are safe. The United States is on the best way to find out how expensive it will be when this assumption stops paying.
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