According to the logic of textbook economics, with rising yields, and especially a strengthening dollar, the price of the “barbarous relic”, i.e. gold should fall. After all, gold does not even generate income for its owner. However, the price of gold is stubbornly rising, setting new historical records. What’s more, the value of gold has risen almost twice as fast in the last year, by forty per cent, as, for example, the US S&P stock market index. Buyers include central banks from China to Hungary, global investment funds and, of course, private individuals. Commentators explain the strong interest in gold by the fact that it is a ‘safe haven’. But they generally don’t explain what exactly is it safe from? And if there should be an escape into an asset, why not the strong dollar? The main reason behind the rise in demand for gold is that financial risks have now become systemic. The swelling of US public debt to barely manageable levels, the trade war and US President Donald Trump’s plans for re-industrialisation are combining to force the global economy, and therefore the financial system, to adjust.
“The idea that the BRICS countries are trying to move away from the dollar, while we stand by and watch, is OVER. We are going to require a commitment from these seemingly hostile countries that they will neither create a new BRICS currency nor back any other currency to replace the mighty US dollar, or they will face 100% tariffs and should expect to say goodbye to selling into the wonderful US economy. They can go find another sucker nation.”
These were the messages reiterated by newly inaugurated President Donald Trump in a late January post.
The rather specific warning was mostly interpreted by analysts, depending on their worldview, as acknowledging and justifying, or actually making it completely impossible, for the BRICS countries to detach from the dollar.
The figure can be referenced here: https://public.flourish.studio/visualisation/21806131/
But a more critical question than BRICS countries’ current options is what are the long-term consequences of US economic policy itself for its own financial system? Indeed, market fears are centred around this. It is therefore worth reviewing what the ultimate goals of the Trump administration’s tariff policy are.
- The primary objective is to reindustrialise the United States, to eliminate the predominance of imports and to create a “level playing field”. But US industry only seems competitive when compared with the European Union. It has long lost its competitiveness to its Chinese and other developing country suppliers. Despite the tariff measures of the first Trump administration and the investment support programmes of the Biden administration, US industrial output has been essentially stagnant since 2007. Democrat-backed battery production, for example, despite a boom in recent years, is still 20 per cent lower than in 2014. The repeatedly touted great success during the presidential campaign of reaching 27,000 megawatts of US solar cell manufacturing capacity (partly by wooing and withering European capacity) seems significant only until you consider that China’s capacity is 890,000 megawatts, thirty-three times America’s, only at a fraction of the production cost. Moreover, what the US produces, it does so primarily with imported equipment: imports of equipment and components, such as electronics for production, increased by 60 per cent between 2020 and 2024.
Of course, the imposition of tariffs could trigger a significant shift in this, as the price of imported equipment rises permanently relative to domestically produced equipment. But the problem is that the announcement of tariffs causes the dollar to strengthen, and the countries hit with tariffs allow their currencies to depreciate. US production costs in turn rise because of the inflationary effect, so competitiveness overall does not actually improve. A good example is the Canadian dollar and the Mexican peso: both currencies have depreciated by 7 per cent since Trump’s election, so even if the 25 per cent tariff announced in February were to come into force, its impact would be immediately weaker than expected. And the Chinese yuan is 15 per cent weaker than when Joe Biden launched the Inflation Reduction Act (IRA) to stimulate US investment, so the newly announced 10 per cent tariff on Chinese goods is only a correction in itself. As Scott Bessent himself put it, a year before he became Treasury Secretary to election winner Trump: “Tariffs would spur inflation and strengthen the dollar, which is not a good starting point for a renaissance of American industry.”
If the protective tariffs are maintained, then of course there will be an upsurge in working capital investment towards the US as companies seek to avoid paying tariffs and reduce the risk of adverse currency movements (this is the next serious threat to the European Union, for example, after the IRA).
The figure can be referenced here: https://public.flourish.studio/visualisation/21806302/
High tariffs can therefore indeed trigger the substitution of US imports, but they (or Biden’s tax cuts) are not sufficient for competitiveness on the world market, as a weak dollar is equally important. President Trump himself regularly points this out, for example when he criticises the Fed, the US central bank, and calls for interest rate cuts.
- The second key objective is to put the US finances and public finances in order. The US public debt has continued to grow at an out-of-control, extraordinary pace in recent years, and has now exceeded $36 trillion (to put it in perspective: 180 times the Hungarian gross national product, or 40 years’ worth of Germany’s total tax revenue).
US government overspending has now reached extreme levels. Again quoting Scott Bessent himself, “I’m very concerned that we have never had a deficit of this magnitude, 7 per cent, except in wars or deep recessions (…) This is the last chance to grow our way out of debt and not become a European-style socialist democracy.” To give a sense of the scale of the problem: paying interest on the national debt cost the US budget $880 billion in 2024 (in 2021, it cost $400 billion). Not only did this significantly exceed the $820 billion cost of defence spending, but it was almost a fifth of the total annual revenue of the US government!
The figure can be referenced here: https://public.flourish.studio/visualisation/21806456/
The current situation with public debt is made even more dangerous by recent events:
- The economic policy principle announced by President Trump to restore the US to its pre-1913 status, i.e. to abolish the personal income tax and make up for the lost revenue with the revenue from the tariffs imposed. This would be, to put it mildly, an extraordinary turnaround in US finances, but what is interesting for us now is that it would further increase the risk of a US debt crisis. Let’s look at the figures: last year, $844 billion worth of exports from Mexico and Canada went to the United States. Even if we assume that import volumes do not fall significantly, the tariff revenue (at tariffs of 25 per cent) would be just over $200 billion. In the case of China, average exports are $450 billion a year – even a successfully collected 10 per cent tariff would only generate $45 billion. Given that in 2024 the US had $518 billion in personal income tax receipts, it is clear that an extremely high tariff regime covering almost all partners would be needed to replace the personal income tax. But even if tariff revenues were eventually high enough to reduce the personal income tax to zero, the impact on the US debt trajectory would be small, since last year the US budget spent almost $6,800 billion (not to mention the logical problem that if imports really fall, due to an economic shock or precisely due to successful reindustrialisation, tariff revenues will fall with them).
- The growing reluctance of foreign countries to finance US public debt adds to the vulnerability of US public finances. It is telling that, while in 2014 foreign bond buyers financed $8 trillion of the $23 trillion of US public debt (almost 35 per cent), in 2024 they financed only $7.9 trillion, or just 23 per cent, of the $36 trillion of debt. Geopolitical tensions and the sanctions regime play as much a role (such as the lack of purchases from China and Russia) in this as investors’ natural concerns about US public finances. The loss of consumer confidence – through expected higher yields – obviously increases the burden of interest payments on the budget. Let us not forget: US indebtedness accelerated at its steepest pace during the Covid pandemic, when the US 10-year yield stood at just 0.5 per cent, i.e. when borrowing was almost “free”, but is now above 4.5 per cent. The consequences of “free money” at that time, i.e. debt, are now coming to fruition, and it is becoming increasingly difficult to refinance such a large debt load. So it is understandable why the BRICS’ move away from the dollar system would be so threatening to the Trump administration, as it would mean even more missing demand from the US sovereign debt market; or why the new Treasury Secretary is uttering phrases that were unthinkable a few years ago, such as the need to oblige allies that the US protects to buy more government debt.
The figure can be referenced here: https://public.flourish.studio/visualisation/21806571/
- Here too, however, a logical problem arises, precisely because of the dollar-based global financial system. It is based on the fact that countries that export to the United States (such as China) or that accumulate dollars in world trade (such as Saudi Arabia with its oil sales) reinvest the dollars they receive for their goods in US Treasury securities. They may also use them to buy other US financial assets, such as tech stocks. One could say financial products are now the most important US export items, which are used to flow dollars back to the US. However, if this “recycling” loop is damaged, for example because tariffs reorganise global trade and foreign countries are unable or unwilling to keep reserves in dollars, the US government bond market and public finances will be in crisis. The US cannot, of course, go bankrupt in its own currency: but if, in a market panic, the expected yield on US Treasuries rises dramatically, it will stifle growth and increase the annual government deficit even further. Or put another way: the US would suddenly become a developing country in financial terms.
In light of this, it is logical that both President Trump and Treasury Secretary Scott Bessent believe that the only truly workable solution is for the US to grow its way out of the national debt. This, however, as we have seen, would require a reduction in US interest rates and a significant devaluation of the dollar. This is the easiest way forward from all points of view: politically, as it does not require drastic austerity, and also economically, as a low interest rate environment would stimulate growth and help to trigger import-substituting industrial investment. It would also reduce the annual interest burden on the budget.
The concept is not even new: in 1985, Washington essentially implemented such a large-scale dollar devaluation against its major trading partners under the Plaza Accord (it is important to note here that many economists, including opinion-forming Chinese economists, believe that this agreement and the resulting overly strong yen caused the Japanese economy to stall and gradually become indebted).
But a lot has happened in the world since 1985, with the collapse of the Soviet Union, the rise of Asia, the globalisation of production chains and demographic shifts. The question arises: what will happen if Washington once again resorts to the instrument of dollar devaluation?
It will likely succeed in this, as it is always much easier to weaken a currency than to strengthen it. Given the size of the US economy and the depth of US financial markets, the dollar will remain a key currency for a long time to come. But what is true of the dollar as a trading currency may not be true of the dollar as a reserve currency. If markets – from central banks that hold reserves to global corporations – know that the US objective is to weaken the dollar and reduce US real interest rates, they will naturally reduce the size of their dollar reserves. On top of this, if the US unilaterally implements this devaluation as part of a trade war as opposed to 1985, then to mitigate the economic damage, the other central banks of the world will also weaken their currencies, further eroding the real value of global savings.
Markets are therefore right to be concerned, and are looking for assets that provide shelter from the turbulent transformation, such as the “barbarous relic”.
