Foreigners aren’t seeing Trump’s brilliant gamesmanship and 4D chess that the MAGA crowd cheers. They’re seeing an unhinged president and it scares the hell out of them. From Alasdair Macleod at alasdairmacleod.substack.com:
Tariff-loving Trump was causing too much damage and bound to be sidelined by the Federal Government establishment. The art of the deal is dead, but the dollar is mortally wounded.
For foreign holders of dollars and its underlying financial assets, there was no doubt that Trump’s MAGA, trade policies, and his unpredictable use of the power vested in his office was not just alarming but positively frightening. Their reaction has undermined not just Trump’s and the dollar’s credibility but called in question the outlook for the US economy.
These are some of the issues arising from The Donald’s volte face:
· The plan was to replace income taxes with tariffs as the primary source of federal revenue. That’s now highly unlikely to happen, not that it was likely in the first place. But what is now going to happen to the budget deficit?
· Undoubtedly, the US is already in recession. The outlook for MAGA and tariffs is still uncertain, but it is difficult to see how positive changes to these policies are likely to haul the US economy out of the recession. What’s that going to do to the budget deficit?
· A recession increases federal debt. But if it hasn’t already, the debt begins to grow unsustainably becoming a debt trap. What will that do to T-bond yields and the budget deficit?
· The dollar’s credibility has been badly impaired, with foreign holders at heightened risk of losses on their $40 trillion of US dollar financial investments and bank deposits. Do they just heave a sigh of relief or decide to reduce their exposure significantly? And if they do decide to sell, what will that do to financing the budget deficit?
· At the geopolitical level, so long as President Trump is at the helm —albeit a helm now detached from its rudder — will these recent shenanigans over trade impact US export trade and its profitability? If so, what will be the impact on the budget deficit?
· If as part of the curtailment of Trump’s powers the Deep State takes back control, how will that affect overseas defence spending? Will NATO spring back into life from its Trumpian near-death experience and effectively stop the peace negotiations over Ukraine? And what will be the consequences for the budget deficit?
State finances in a world becoming antagonistic to dollars is the key issue.
