The US dollar has maintained confidence from international investors for years, a confidence maintained through relatively stable policies, both fiscal and regulatory. If international investor confidence built over time were to shatter, the US dollar would go down in value. How far? Hard to tell. But it would go down.
So, the key question is, are there any developments percolating that could undermine international investor confidence in the US dollar?
Well, yes, there are.
First, US debt is getting out of hand. As of now, the Congressional Budget Office shows debt in the hands of the public rising from 99% of GDP in 2024 to 116% in 2034. This means that if the US ever wanted to pay off their debt it would cost one year of GDP, one year of the value of all goods and services produced.
Put another way, it is like using one year of wages to pay off credit cards.
Sooner or later too much debt leads to loss of confidence from the people who fund the debt.
Second, the independence of the US Federal Reserve, a Central bank that makes decisions, good or bad, based on data and analysis, has built confidence among foreign investors. Now, President Trump is subtly undermining independence. He has said they must cut interest rates, and he signed a bill that orders independent regulatory agencies to submit their regulatory proposals for review by the White House.
The US Federal Reserve is an independent regulatory agency. Will they have to run decisions by the White House? We will see.
In the end, the Federal Reserve will probably stay independent, but any concern or fear will reduce foreign investor confidence in the US and the dollar.
Third, the US Treasury Secretary has reportedly been mulling the possibility of converting 5-to-10-year US government bonds into 100-year bonds that bear low interest rates, which is like telling someone you owe money to that they will be paid back less and over a longer time period.
At the same time, there has also been mention of taxing foreign purchases of US treasuries. They call it a “user fee” but it is a tax and it will not help build confidence.
Finally, to entrust money to someone there must be a measure of “Good Faith”. Today, Taiwan, South Korea and Japan hold most US treasuries. Part of the reason they do this is to benefit from the security umbrella the US provides. They have “Good Faith” that the US will protect them. Given the US is reducing commitments to previous security relationships like NATO and the Ukraine, these Asian allies may start to worry.
Runaway borrowing, threatened Federal Reserve Independence, forced restructuring of US bonds leading to lower rates and a longer payback period, a tax on foreigners buying bonds, or a loss of “Good Faith” from countries that hold US debt could lead to lower confidence in the US dollar.
Presently confidence still exists, but worry may be growing. How long until worry leads to a loss of confidence, we will see.
Whatever the case, as long as worry exists it is probably good to express an investment view that the US dollar is going down in value.
We will show how to do that next time.
This blog is for educational and informational purposes only, covering general market trends, industry developments, and asset features. Nothing herein is investment advice, a solicitation, or a recommendation to buy or sell any assets. Etherfuse and its guests may hold stakes in some or all of the assets discussed.
This blog is for educational and informational purposes only, covering general market trends, industry developments, and asset features. Nothing herein is investment advice, a solicitation, or a recommendation to buy or sell any assets. Etherfuse and its guests may hold stakes in some or all of the assets discussed.
