The whole world is watching with trepidation the puppet-show in the halls of power in the United States. The US remains the global hegemon, with President Donald Trump the puppet master who appears not to care about the consequences of his actions.
His latest act of impunity is opening a trade war on the world by raising so-called “reciprocal” tariffs on countries and territories that export goods and services to the US — and then pausing most of them for 90 days.
However, the horse has bolted the stable. His actions have shocked world leaders. Global inflation will go up, as supply chains already disrupted by the Covid-19 pandemic will get less sustainable and resilient.
Mr. Trump is correct that the US holds all the cards at present. Most countries hold a trade surplus with the US and are dependent on it for their economic wellbeing.
A tariff is a tax paid at the point of loading goods and services before they leave for the final destination or port. It makes imported products more expensive for US residents. But the ramifications of tariffs are worse for exporting nations that depend on the US for their exports and internal economies driven by the dollar.
Debt and dollars
The irony is that deficits driving up US national debt are actually good for the US. The US is the world’s largest consumer and debtor. It produces the debt and dollars that engineer the global economy. Countries enjoy a trade surplus with the US when they export to the US more than they import. Their surpluses and exports are valued in US dollars.
The world sends its products to the US, and the US pays in dollars printed by its Federal Reserve, which is essentially debt guaranteed by investors in US currency and debt instruments.
In other words, investors back the dollar debt, which is the cash the world outside the US receives for the goods it sends to the US. That cash is the lifeblood of the global economy. It is termed reserve currency, and it is the platform for the world’s payment systems. World currencies are valued in dollars, and they peg to the dollar.
A ‘black hole’
The US deficit exchanges for surpluses from countries that export to the US. This is an eternal merry-go-round. Increasing US national debt is a black hole. It will in fact continue to get deeper. Investors do not mind: Their belief in American economic might is insurmountable, concrete. Bondholders, meanwhile, appear to have zero issue with lending money to Uncle Sam.
In the end, we will all be dead, and future generations will have to worry about that debt headache.
