Trump’s Economic Revolution: Unraveling a Blessing & a Curse

The current tariff situation is incredibly complex and fluid, with immense long-term ramifications. Thus, this article will likely be the first of many to convey how changes to long-standing economic policy may impact the economy and markets. Stay tuned.

Before reading on, consider the following paragraphs from a speech on April 7, 2025, by the Council of Economic Advisers’ (CEA) Chairman Steve Miran(italics added for emphasis):

Today I’d like to discuss the United States’ provision of what economists call “global public goods,” for the entire world. First, the United States provides a security umbrella which has created the greatest era of peace mankind has ever known. Second, the U.S. provides the dollar and Treasury securities, reserve assets which make possible the global trading and financial system which has supported the greatest era of prosperity mankind has ever known.

Both of these are costly to us to provide. On the defense side, our men and women in uniform take heroic risks to make our nation and the world safer, preserving our liberties generation after generation. And we tax hardworking Americans mightily to finance global security. On the financial side, the reserve function of the dollar has caused persistent currency distortions and contributed, along with other countries’ unfair barriers to trade, to unsustainable trade deficits. These trade deficits have decimated our manufacturing sector and many working-class families and their communities, to facilitate non-Americans trading with each other.

Triffin’s paradox

We have written several articles on the dollar's status as the global reserve currency and how it impacts the U.S. and global economies. Because this topic is essential to understanding the current tariff situation, we share a few paragraphs from our article, Our Currency, The World’s Problem Part 1.

In 1960, 11 years before Nixon’s suspension of gold convertibility and the effective demise of the Bretton Woods Agreement, Robert Tiffin foresaw this inevitable problem in his book Gold and the Dollar Crisis: The Future of Convertibility. According to his logic, the privilege of becoming the world’s reserve currency would eventually carry a heavy penalty for the U.S.

At the time, few paid attention to Triffin’s thesis. However, he was invited to a congressional hearing of the Joint Economic Committee in December of the same year.

What he described in his book and Congressional testimony became known as Triffin’s Paradox. Events have played out primarily as he envisioned.

Essentially, he argued the reserve status forces a good percentage of global trade to occur in U.S. dollars. For trade and global economies to grow under such a system, the U.S. must supply the world with U.S. dollars.

To supply the world with dollars, the United States must consistently run a trade deficit. Running persistent deficits, the United States would become a debtor nation.

A circular unsustainable scheme

Foreign nations require U.S. dollars for trade with the U.S. and to transact with most other countries. Thus, they must hold dollars in reserve and frequently lend and invest those dollar reserves in the U.S. financial markets. Foreign nations and corporations also borrow U.S. dollars to boost their dollar liquidity. The need — or requirement — to hold dollars tends to bolster the dollar’s value over other currencies. Consequently, U.S. exports become less competitive, and imports become more attractive. This fosters a growing trade imbalance, perpetuated as foreign nations lend dollars back to the U.S., allowing for debt-driven consumption of imported goods.

As the U.S. and global economies have grown, U.S. trade deficits and outstanding debts have increased. Thus, our reliance on more debt has increased, and with it, there is a need for lower interest rates to service it. The problem is self-reinforcing. Furthermore, the U.S. manufacturing base has diminished throughout the process as cheaper imports are favored.

Consider the bullet points below and their accompanying graphs:

• The ratio of U.S. Treasury debt to GDP has grown substantially.
• The foreign trade deficit has grown 25x over the last 30 years.
• The role of manufacturing in the U.S. economy continues to erode.
• Per the U.S. Treasury International Capital data, foreigners have lent us $26 trillion between U.S. debt and equity. That number understates total investment into the U.S. by foreigners.

Other considerations

In exchange for what some deem the “exorbitant privilege” of having the reserve currency and being able to borrow endlessly, the U.S. has an unspoken agreement to provide military protection and arms to our allies. Doing so has further indebted our nation and increased our reliance on foreign funding and, again, low interest rates.

On the plus side, America is not subject to the same magnitude of currency devaluation risk that can wreak havoc on other countries. We do not need to convert dollars into another currency to purchase foreign goods or services. Thus, periods of dollar depreciation have little impact on inflation levels. Moreover, the Federal Reserve sets monetary policy primarily based on economic and financial conditions in America. However, because of the importance of exchange rates and the extensive foreign dollar holdings and international borrowing in dollars, much of the world is subject to U.S. monetary policy, whether it's appropriate for them or not.

Due to the dollar's reserve status, America has grown more dominant in the economic and military stages. Further, as shown below, we are wealthier than almost all other nations. While there are many reasons for the nation's wealth, the dollar’s reserve status is undoubtedly a contributing factor.

The blessing: Wealth

The blessing of the dollar reserve status for the U.S. is cheap debt. The result, as we shared above, is enormous wealth. However, our wealth somewhat depends on financial leverage and inflated asset valuations. If foreign investors were to reduce their holdings of U.S. loans and securities, financial asset prices would likely decline, and our wealth would follow.

Or, as we saw in 2008 and 2020, the Federal Reserve would have to step in and provide a liquidity backstop. While the Fed might be able to save yet another day, our increasing dependence on its manipulation of markets offers further evidence of the unsustainable nature of the current economic system.

The curse: Productivity

Unfortunately, low interest rates have incentivized unproductive debt use. Stock valuations near record highs, meme coins, and excessive real estate prices are just a few of many examples of grossly inflated asset values. Had we used debt toward more productive uses, our economic growth would be more robust. Therefore, our ability to service the debt would be easier. In other words, our federal debt-to-GDP ratio would be below 1 and declining, not increasing rapidly. Instead, we depend increasingly more on lower interest rates and Fed intervention.

Donald Trump

Donald Trump’s populist messaging in 2018 and 2024 won him the presidency. Reshoring jobs, reducing trade and fiscal deficits, and curtailing our global military footprint rang true with voters.

Whether his voters realize it or not, his actions seem to argue that America needs to step away from the economic system in place for the last 80 years. Consider some of his recent policies:

• Tariffs to promote domestic manufacturing and reduce imports
• Eliminating USAID
• Reducing or limiting our military activity and funding worldwide
• Aiming to cut the federal deficit via significant spending reductions
• Suspending America’s role in the World Trade Organization
• Threatening to end NATO

Summary

Triffin was correct. The Bretton Woods Agreement and some of its implicit pacts are unsustainable.

If Trump is successful in ending — or at least significantly changing — the current global economic structure, the economy and geopolitics will change dramatically. Initially, this will be highly challenging from an investment perspective.

The dollar will likely remain the world’s reserve currency, as no reasonable alternative exists. However, the unspoken agreements and promises surrounding the global economy may change drastically.

We can elect to change on our terms today or have change forced on us tomorrow. The decision isn’t easy, as change will involve pain. But, the alternative — not changing — may be much worse. Pick your poison.

Michael Lebowitz is a portfolio manager with RIA Avisors and author for Real Investment Advice. For more information, contact him at [email protected] or 301.466.1204.

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