The end of the exorbitant privilege of the United States
WASHINGTON, DC – As France's finance minister in the 1960s, former French President Valéry Giscard d'Estaing complained about the "exorbitant privilege" conferred on the United States by the dollar's position as the world's primary reserve currency. In essence, the United States could borrow at low interest rates, run persistently large trade deficits, and finance the budget deficit by printing money. Giscard d'Estaing could never have imagined that one day the United States would be willing to lose these advantages.
Since his return to the White House in January, US President Donald Trump has systematically destroyed faith in the dollar (affecting global financial markets and governments and central banks alike). For starters, he has put US public finances on an even more unsustainable path than they were on before he took office.
At the start of his second term, Trump found a budget deficit that had already grown to 6.2% of GDP, almost at full employment, and a public debt-to-GDP ratio that had reached close to 100%. But now the situation is set to get much worse. Far from putting America's fiscal house in order, Trump and his supporters in Congress have pushed through a "big, beautiful" tax and spending bill that, according to estimates by the nonpartisan Congressional Budget Office, will add some $3.4 trillion to the budget deficit over the next ten years.
The US public debt-to-GDP ratio is on track to reach a level that, by 2030, will be much higher than at the end of World War II, when the country's demographic profile was much more favorable. Unlike in the postwar period, the current US economy is not in a position to reduce its debt burden through growth. It is no surprise that major credit agencies (including Moody's) have stripped the United States of its AAA credit rating.
Another Trump stance that also undermines confidence in the dollar is his apparent lack of interest in keeping inflation under control. It is currently above the 2% target set by the US Federal Reserve, and there is a risk that it will rise further as a result of Trump's aggressive tariffs on foreign goods (tariffs that have reached levels not seen in a hundred years). But Trump is pressuring the Fed to lower interest rates by one to two percentage points and has indicated that he plans to replace current Fed Chairman Jerome Powell (whose term ends in May 2026) with someone more willing to ease monetary policy.
To make matters worse, it has also cast doubt on the United States' commitment to fully meeting its financial obligations. Early drafts of his "big, beautiful bill" included a provision allowing for a "revenge tax" of up to 20% on foreign holders of U.S. assets (including Treasury bonds) linked to countries the Trump administration accuses of pursuing "unfair" tax policies toward the United States. Furthermore, senior Trump advisers have suggested forcing foreign central banks to convert their holdings of U.S. Treasury bills into 100-year, coupon-free bonds, as part of the proposed "Mar-a-Lago Agreement."
Add to this Trump's evident disinterest in the rule of law, and it's understandable that markets see little reason to trust the United States. This explains why the dollar has depreciated by more than 10% since the beginning of 2025 (its worst first-half performance since 1973). This decline is inconsistent with Trump's sharp tariff increases and the widening of the short-term interest rate differential with other major economies (developments that should lead to a strengthening of the dollar).
Another indication of the market's loss of confidence in the United States is the more than 25% rise in the price of gold over the past six months. And a key indicator, the yield on ten-year Treasury bonds (which soared when Trump announced the "liberation day" tariffs in early April) remains at a high level, despite the considerable turbulence in the stock market, which would normally have led investors to seek refuge in the perceived safety of Treasury bonds.
The message couldn't be clearer: the markets disapprove of the Trump administration's economic policy path. The problem for Trump is that, unlike politicians, markets can't be pressured or subjected to primacy. If Trump continues to ignore investors' warnings (as seems likely), the United States had better prepare for a dollar and bond market crisis before next year's midterm elections. The days when the world allowed the United States to live beyond its means are rapidly coming to an end.
Translation: Esteban Flamini
The author
Desmond Lachman, a senior fellow at the American Enterprise Institute, was deputy director of the Policy Development and Review Department of the International Monetary Fund and chief economic strategist for emerging markets at Salomon Smith Barney.
Copyright: Project Syndicate, 1995 - 2025
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