Analysis
The Trumponomics temptation: A bold restructuring and a massive risk
Would the U.S. give up the hegemony of the greenback? The costs would outweigh the benefits. Better to add an exchange rate war to the tariff war, buying foreign currency to raise its price against the dollar.
A rumor has been persistently circulating in the top U.S. financial circles for days: that Trump would like to restructure part of the U.S. debt, forcing some foreign creditors to exchange the securities they hold for “very long term” bonds. The Bloomberg news agency cites a meeting organized by consulting firm Bianco Research with its clients to this effect.
This is not a “normal” swap operation (so to speak, since restructurings are still a form of insolvency), like others we have seen in the past, from Greece to Argentina, but almost a unilateral cancellation of the U.S.’s debts. They’re not refusing to pay, they’ll just do so in a hundred years. In short, Trump would be taking the approach of Edward III of England, who in 1345 cancelled the debt he had contracted with the bankers Bardi and Peruzzi of Florence to finance his wars against France, causing the first major financial crash in history.
Is it a wildly improbable scenario? Not so much, if we focus on the ties between this scenario and the Trumpian obsession with rebalancing foreign accounts and reviving his country's industry and exports, first and foremost to the detriment of Europe and China. Tariffs, fixing trade imbalances, the national debt and the dollar: this is the axis that underpins the neo-imperial policy of “Make America Great Again.”
But let us examine the matter from the beginning. Throughout the 1960s, the U.S. trade balance was in surplus; then, starting in the 1970s, the trend reversed. And since the 1990s, the country’s trade imbalance with the rest of the world has become nothing less than structural.
The U.S. currently has a deficit of $273 billion with China, of $236 billion with the European Union (including $44 billion with Italy), of $172 billion with Mexico and of $63 billion with Canada. This means that over the past decades, the U.S. has served as “buyer of last resort” for goods from Europe, Asia and neighboring countries – all thanks to the supremacy of the greenback. These goods were bought in dollars, which return to the U.S. in the form of investments in assets sold on Wall Street and underwriting U.S. Treasury securities (as a corollary, the United States spends and consumes more than it produces).
But that’s not the end of the story. Some of these resources return abroad once again, most of all to Europe, as equity in companies in the manufacturing, energy, and military sectors. It is a division of roles: the levers of finance are in Washington's hands, while the material production of goods is distributed among China, Europe and other Asian countries.
All was going great (more so for those who live on capital gains than for the working class), until the industrial and financial rise of new powers, China first and foremost, began to pose a threat to the world order built on such foundations (as shown by the signs of the de-dollarization of trade).
We thus come to the matter of the U.S.’s debt. As of January this year, it amounted to $36.2 trillion ($36,220,207 million to be exact), three times as much as the aggregate debt of Eurozone countries. Of this, $9 trillion is held by foreign countries, with the top two being Japan and China: the former with $1.1 trillion, the latter with over $800 billion. (However, the exposure of European countries has grown recently).
To get an idea of the pace of growth of this debt, it’s enough to point out that 10 years ago it stood at $18.2 trillion, half of what it is today. So the rumored scheme is Trump's idea to subvert the system (there is talk of a “Mar-a-Lago Agreement,” echoing the Bretton Woods Agreement of 1944), reducing foreign exposure, increasing exports, reducing imports, requiring “allies” to buy more weapons and more gas and oil from the U.S. There is only one problem: the dollar is too strong, given its status as the main reserve currency.
Would the U.S. give up the hegemony of the greenback? The costs would outweigh the benefits. Better to add an exchange rate war to the tariff war, buying foreign currency to raise its price against the dollar.
We are just at the beginning, and it is not easy to imagine the impact these measures may have on global financial stability. But one thing is certain: Europe stands to lose a lot in this situation, forced to finance U.S. fiscal consolidation with the loss of market share for its own production (deindustrialization), high energy commodity prices, increased defense spending and the deterioration of its own credit as well.
Originally published at https://ilmanifesto.it/tentazione-trumpnomics-autoridursi-il-debito-con-lestero on 2025-02-27