Just look at the state of US government debt for example. Currently it stands at US$36 trillion (£26 trillion). And with total economic output (GDP) worth US$29 trillion per year, that debt is 123% of GDP, the highest it has been since 1946.
Government debts are alarmingly high in other countries too (the UK’s is at 104% of GDP, with France at 116% and China at 113%), but the US is towards the top of the range.
The recently passed budget reconciliation bill (what Trump calls the “big beautiful bill”) is projected to add US$3 trillion to that debt over the next decade. With these sorts of numbers, there is little prospect of putting US debt on a downward track.
In 2024, the US government had to borrow an additional US$1.8 trillion to cover spending not supported by tax revenue (the budget deficit). This is equivalent to 6.2% of GDP, a number that is officially predicted to rise to 7.3% during the next 30 years.
The predictable consequence of this fiscal profligacy and the chaotic tariff programme is the high rates of interest that the US government is having to pay for its borrowing.
For instance, the interest rate on ten-year US government debt (otherwise known as its yield) has risen from 0.5% in mid-2020 to 4.3% now. And as government debt yields rise, so do interest rates on mortgages and corporate borrowing.
The power of the dollar
For decades, the United States has enjoyed a high level of trust in the strength, openness and stability of its economy.
As a result, US bonds or “treasuries”, the financial assets that the government sells to raise money for public spending, have long been considered safe investments by financial institutions around the world. And the US dollar has been the dominant currency for international payments and debts.
Sometimes referred to as “exorbitant privilege”, this status of the US dollar as the world’s reserve currency brings big advantages. It benefits US consumers by making imported goods cheaper (albeit contributing to the trade deficits (when US imports to a country are worth more than its exports) which bother the president so much).
It also means the US government can borrow a lot of money before doubts arise about its ability to repay. Investors will generally buy as many bonds as the US govt needs to issue to pay for its spending.
The dominance of the dollar in international transactions also brings political power, such as the ability to exclude Russia from major global payment systems.
But this privilege is being eroded by the US president’s tariff agenda. Economic motives aside, it is the way they are being applied – their size and the unpredictability – that is really sapping investor confidence.
It’s costly to adjust trading patterns and supply chains in response to tariffs. So when the scope of future tariffs is unknown, the rational response is to stop investing while awaiting greater certainty.
The dollar has lost 8% in value since the beginning of the year, reflecting investor doubts about the US economy, and making imports even more expensive.
Financial markets are vulnerable
But perhaps the biggest danger to US financial markets is a sudden rise in yields on government debt. No investor wants to be left holding a bond when its yield rises because – as with all fixed-interest debt – the rise in yield causes the bond’s market value to fall. This is because new bonds are issued with a higher yield, making existing bonds less attractive and less valuable.
A bond holder expecting a rise in yield therefore has an incentive to sell it before the rise occurs. But the rise in yield can become self-reinforcing if the scramble to sell becomes a stampede.
Indeed, there was a jump in US yields after the increases in trade tariffs announced on “liberation day” in early April, with the yield on ten-year treasuries rising by 0.5% in just four days.
Fortunately, this rise was halted on April 10 when the tariffs were abruptly paused, allegedly in response to the fall in bond prices and an accompanying fall in share prices. The opinion of a senior central banker, that financial markets had been close to “meltdown”, was one of several such warnings.
The dollar is unlikely to be quickly dislodged from its pedestal as the world’s reserve currency, as the alternatives are not attractive. The euro is not suitable because it is the currency of 20 EU countries, each with its own separate government debt. Nor is the Chinese yuan a likely contender, given the Chinese government involvement in managing the yuan exchange rate.
But since March, foreign central banks have been selling off US treasuries, often choosing to hold gold instead.
On Trump’s watch, the reputation of the US dollar as the ultimate safe asset has been tarnished, leaving the financial system more vulnerable – and borrowing more expensive.
John Whittaker, Senior Teaching Fellow in Economics, Lancaster University
This article is republished from The Conversation under a Creative Commons license. Read the original article.