Background: US Treasuries and the Dollar
US Treasuries have traditionally been regarded as safe investments, particularly in times of economic uncertainty. The US dollar, as the global reserve currency, benefits from an “exorbitant privilege” that allows the US to borrow cheaply and live beyond its means. However, trust in these assets has deteriorated recently.
Causes of the Loss of Trust
- Tariff Policy and Trade Wars: The aggressive tariff policy of the Trump administration has led to significant trade wars, undermining confidence in the US economy and the dollar.
- Recession Fears and Inflation: The US economy is facing the risk of recession, exacerbated by tariff policies and rising inflation expectations.
- De-dollarization: There are fears that the US might lose its status as a global economic power, potentially leading to de-dollarization.
- Unconventional Ideas to Weaken the Dollar: Ideas such as the “Mar-a-Lago Accord” could further undermine confidence in the dollar.
Implications for Global Trade and Financial Markets
- Exchange Rate Volatility: A weakening dollar leads to exchange rate volatility, making international trade more difficult.
- Risk of Stagflation: The combination of slow growth and high inflation could result in stagflation.
- Alternatives to US Treasuries: Investors are seeking alternative safe investments, increasing pressure on the US dollar.
Overall, the loss of trust in US Treasuries and the dollar could have significant implications for the global economy, including increased uncertainty in financial markets and potential changes in the global currency hierarchy.