Robert Triffin is a Belgian economist whose theories discuss the advantages and pitfalls of being the world's reserve currency. In a Triffin world, sovereign debt of the reserve currency is key to maintaining an orderly world trading system. He says that if the leading currency country maintains its economic edge over the rest of the world, the world trading system will flourish. However, he also says that if the reserve currency country's growth lags the rest of the world, that country's bonds will suffer to the extent that they will be untenable as collateral for transactions, and the lead currency will lose its status. 

The relevance of Trump's international policy cannot be ignored. In fact, in 2024, Stephen Miran, the current Chairman of the Council of Economic Advisers, wrote a paper on this topic while working as a Principal of Hudson Bay Capital. Miran pointed out that since becoming the world's reserve currency, the United States' GDP growth rate has lagged the rest of the world. Meanwhile, US Treasuries have been the collateral used to guarantee international trade. As the United States trade and budget deficits have ballooned over recent decades, the market has assessed more credit risk to Treasuries, such that their yields have become among the highest of the world's G7 sovereign bonds. As the deficits grow, credit quality will erode until the world balks at buying our treasuries. 

Such an event would dethrone the dollar. To offset this, a level playing field in world trade is necessary to reduce both the trade and budget deficits. Increased exports automatically increase GDP since all exports are subtracted when GDP is calculated. The dollar will stabilize, and our trade deficit will shrink.  Moreover, revenue from the tariffs will decrease the budget deficit and, therefore, increase the credit quality of Treasuries while reducing their interest expense. 

This leads to answers about why US interest rates have been going up amid a Fed easing cycle, when rates of all maturities typically fall.  Despite reducing short-term interest rates, as dictated by the Federal Funds rate management, long-term interest rates have remained stubbornly high. They have essentially ignored the Fed easing bias. Doesn't this beg a different question? Is the Fed losing its relevance? Even if it lowers rates, will they stay low if the budget and trade deficits do not improve? Will the yield curve balloon to record steepness because the market does not believe in the dollar's future?

The current reshaping of the world trading system is necessary to answer these questions with a positive outcome. Budget and trade deficits demand it, or the likelihood of financing those deficits is sure to evaporate. If the reshaping of the world trading system does not happen this way, the world will make it happen on its terms. The dollar will be dethroned, demand for Treasuries will disappear, and the United States will drown in a doom loop caused by a runaway budget deficit with no way to finance it.