“Liberation Day” causes lasting damage in the United States
The IMF has no shortage of experience dealing with highly indebted countries that suffer capital flight after adopting protectionist measures, attacking global financial institutions, and questioning central bank independence. This often happened in the 1970s and 1980s, in rebellious regions like Latin America, when a country refused to accept its sad fate on the periphery of the system.
But since the so-called "Liberation Day" earlier this month, the crisis of confidence has gripped the most central country of all, the one that issues the reserve currency and has the most reliable debt market in the world to date.
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In two or three months, the Trump administration has turned the world upside down . “Uncertainty has skyrocketed to the point of being off the charts,” warned IMF Managing Director Kristalina Georgieva at the start of the recently concluded IMF and World Bank meeting in Washington. After the market turbulence at the beginning of the month, “financial conditions have deteriorated; volatility is rising (...) it is urgent that trade tensions be resolved as soon as possible.”
There are already some signs that the Trump administration has recognized the danger. It has suspended tariffs on everyone except China, pending negotiations. It has hinted that it intends to negotiate a solution with Beijing. “A trade war is not sustainable,” said Treasury Secretary Scott Bessent, while reaffirming US support for the IMF and the World Bank.
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Trump also quickly withdrew his threats to Federal Reserve Chairman Jerome Powell. “The pushback from Wall Street and big business has been brutal,” said a former official at a multilateral bank in Washington.
Some wonder whether the credibility of the US and the dollar has not suffered an irreversible blow.But behind the scenes at the meeting, some wondered whether the credibility of the US and the dollar had suffered an irreversible blow. No one has forgotten the strange nature of the panic attack that followed "Liberation Day." No one sought refuge in the $27 trillion Treasury debt market, as often happens in crises of confidence. Quite the opposite: billions of dollars fled the US market. The panic attack triggered a nearly 10% drop in the dollar.
“It wasn't a very significant shock compared to other times in the past, but it's certainly unusual to see the dollar fall at a time of heightened financial stress,” said Pierre-Olivier Gourinchas, chief economist at the International Monetary Fund. Tobias Adrian, head of financial stability at the IMF, noted that gold, not the Treasury bond market, “became the destination for safe-haven flows.” Adrian downplayed the danger, however. “The US debt situation is sustainable,” he insisted.
It was gold, not the bond market, that became the destination for safe-haven flows.But economists consulted outside the IMF weren't so sure about that. "Is this the end of the dollar's safe-haven status?" said Barry Eichengreen, a Berkeley economist, former advisor to the Fund and author of the most authoritative book on the dollar's status, Exorbitant Privilege . From now on, "Treasury debt interest rates are going to incorporate an additional risk premium," he added in an interview with La Vanguardia .
With debt equivalent to 120% of US GDP, according to the latest IMF data—an astronomical figure of $37 trillion—permanent damage to confidence in the security of Treasury bonds and the dollar will be severe for the American power. “The basic anchor of the dollar-denominated system is beginning to be torn from its foundations,” says economic historian Adam Tooze. Trump's trade war against the rest of the world has another side. Foreign entities—first and foremost, China—hold $8.5 trillion in US debt. Without the trade surpluses Trump seeks to punish, there would be no demand for Treasury bonds.
With higher interest rates in the Treasury bond market, debt service will become more expensive, Eichengreen continued. At some point, starting in 2027, “something has to give.” The massive debt is “the Achilles heel” for the dollar as a reserve currency, warns Ken Rogoff, a Harvard economist and former IMF chief economist and author of a new book, “Our Dollar, Your Problem .” “The dollar peaked as a reserve currency ten years ago; now Trump will accelerate the decline,” Rogoff said in promoting his book.
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