Signals of decline: TRUST and the Tipping point of US economic power

The quote „You cannot unscramble a scrambled egg“, attributed to John Pierpont (J.P.) Morgan, came to my mind while I watched the frantic attempts of the US government to contain the fallout of their misguided trade policies.

It is one thing to give capital markets a short-term boost by announcing a 90-day reprieve from unfounded tariffs, but it is an entirely different challenge to restore what has been lost for good - TRUST in the governing bodies of the strongest economy on the planet.

How to build TRUST

TRUST is the foundation of building a functioning nation. TRUST evolves from the feeling that the people in power, although you may not support all or even most of their policy ideas, nevertheless strive in their own way to improve the society they have been elected to govern. The feeling is supported by humbleness and putting others first, being transparent and open about your plans and grounding them in fact, openly inviting constructive criticism and answering to it. TRUST means following a set of basic rules, such as the constitution, consistently and over decades. TRUST grows from respect for each other, your partners on the world stage and even your adversaries.

The actions of the US government under Donald Trump form the polar opposite of building TRUST. It seems that their actions are fuelled by a staggering level of ignorance of the value of TRUST. In their minds, they replace TRUST with leverage over another, a fallacy that will cost the US (and the world) dearly.

The Trifecta of capital flight

Arguably, the reason why the US president suddenly declared a 90-day pause to his unfounded tariff plan was the sudden realisation of being on the edge of a financial meltdown. When stocks fell sharply, the dollar weakened and bond prices fell all at the same time, the scary trifecta of capital flight from the US showed its ugly head. For a nation that is in debt to the tune of 29,000 billion dollars and needs to regularly re-finance the whole lot, this is a matter of life and death and signals a lack of TRUST. Currently, about 30% of this debt is held by foreigners, with 9,000 billion up for refinancing this year alone. The share of foreign ownership of US debt has been on a downward trend since 2020, when it peaked at 35%. Even during better times, when the previous US government was still acting consistently with building and maintaining TRUST, foreign investors starting signalling that they wanted to reduce their exposure to US government risk. Annual US interest payments now exceed the vast defence budget. With government bond prices falling, interest rates will rise, making such levels of debt unsustainable.

If you are deeply indebted to someone, would your impulse be to kick them to the shin while asking for more money? I am honestly at a loss how the US government thinks to maintain a trusting relationship with the global leaders it depends on while at the same time undermining TRUST at record speed. This seems to be rooted in the perception that there are no alternatives to staying in the „dollar cycle“ and federal banks around the world will have to continue buying T-Bills.

The role of federal banks

Whether that will be the case or not depends decisively on one thing: TRUST among central bankers. Right now, federal reserve bankers from key nations still have trust in each other (often more than in their own governments, I suppose). There are good reasons why reserve banks are independent and drive monetary policy with inflation and growth as their guiding stars. It is the only way to maintain TRUST and continuity when political winds shift and governments fall.

So, while all the ignorance and misguided US tariffs will make life harder for everyone and possibly plunge the world into a recession, undermining the independence of the US federal reserve would make the fickle construction of global money flow collapse. It has overextended already and governments and private funds around the globe would be smart to start untangling some of the fire-starters lodged in the system, such as the „base trade“ in the West as well as the „reverse base trade“ in deeply indebted Japan.

The US president is already gunning for more control over the Fed. The current Fed chairman is one of the few people in US leadership inspiring TRUST. As soon as the independence of the Fed is at risk, investors from around the globe will run for the exit and we will all hold the bag...