A key vulnerability of the United States is its high dependence on foreigners to finance its large budget deficits. One measure of this dependency is that foreigners own almost one-third of the $29 trillion of outstanding U.S. Treasury bonds. This makes it difficult to understand why the Trump administration undermines foreign investor confidence by engaging in budget profligacy, putting intense pressure on the Federal Reserve to cut interest rates aggressively, and periodically intimating that the Treasury will not fully honor its debt obligations.
While the stock market seems to be unfazed by the state of our public finances, early warning signs of trouble ahead are coming from other markets. Since the start of the year, the dollar has depreciated by more than 10 percent, marking its worst first half-year performance since 1973. It is concerning that this has happened at a time when we would have expected the dollar to appreciate because of Trump’s import tariffs and a widening of the short-term interest rate differential in our favor.
Meanwhile, bond yields have remained uncomfortably high, even at a time of financial market turbulence, despite the Fed cutting its interest rate by 100 basis points since September. Since the start of 2025, in a sign of waning foreign investor confidence in the dollar, the gold price has increased by more than 25 percent.
Trump would be well advised to heed these warning signs and make an early budget policy U-turn to avoid a future dollar and bond market crisis. However, I certainly do not recommend holding your breath for that to happen.