This article appears in the August 2025 issue of The American Prospect magazine. Subscribe here.
Since the early 1980s, America has seen a consistent budgetary pattern: Republicans blow up the deficit with tax cuts for the rich and military spending, and Democrats subsequently cut down on borrowing with tax hikes and spending cuts.
History is set to repeat again. On July 4, Donald Trump’s One Big Beautiful Bill Act was signed into law. It’s a hyped-up edition of the same old Republican dogma. It contains the largest cuts to Medicaid and SNAP benefits in history, which do not even come close to compensating for giant tax cuts, mostly for the rich. It would increase the national debt by $3.3 trillion by 2034; if we assume that all the tax cuts will be made permanent (a certainty if Republicans have anything to say about it), the total is over $5.5 trillion.
For decades now, Republicans have internalized the idea that “deficits don’t matter,” to quote then-Vice President Dick Cheney. In his day, Cheney was mostly right—neither Reagan’s, Bush’s, nor Trump’s first-term antics had any directly damaging effect on the broader economy. Inequality skyrocketed, but there were no debt crises. Indeed, Trump’s 2017 cut arguably helped stimulate spending and drive down unemployment, albeit in a highly inefficient manner, in an economy that hadn’t recovered from the Great Recession.
But this time might be different. Key to Cheney’s assumption was not just the fact that Democrats would clean up the mess later, but also the dollar’s role as the global reserve currency. Since the collapse of the Bretton Woods system of fixed exchange rates, turbulent economic times have reliably led to a flight to the safety of dollars and U.S. government debt. That creates a consistent demand for dollar-based assets, so countries and businesses can settle international transactions, and build up exchange reserves to defend against potential currency crises.
That assumption is now being called into question. Trump’s wildly erratic behavior, abolishing whole federal agencies by fiat and yanking up and down tariffs at random via social media post, has created vast turbulence in the international economy. But instead of a flight to dollar safety, since Trump has taken office, interest rates on 10- and 30-year Treasury bonds are up modestly, while the dollar’s value has fallen about 15 percent against the euro, and about 10 percent against the pound and yen.
This suggests that a new economic order is taking shape, after the keystone nation of the global economy decided to elect an unhinged maniac, again. Absent some kind of reckoning with MAGA on par with President Grant’s all-out assault on the Ku Klux Klan in the 1870s, America will never live this down, and all future administrations will be burdened with Trump’s legacy of lower growth, lower employment, higher inflation, higher interest rates, and a dramatically higher cost of financing the national debt.
RONALD REAGAN’S DEFICITS WERE PRIMARILY caused by high interest rates, stemming from the Federal Reserve’s efforts to tame inflation. Bill Clinton achieved a short budget surplus in the late 1990s in part from some tax hikes on the rich, but mainly by lucking into a long economic boom. George W. Bush took that surplus and handed it to the rich; but much larger deficits later in his term were caused by the 2008 economic crash, which cratered revenue and required an expensive bailout. Barack Obama passed an inadequate stimulus, but quickly pivoted to austerity by 2010, and subsequently deficits fell, though slowly.
Trump repeated the Bush pattern, except faster. He passed a large tax cut for the rich in 2017, then finished his first term with a pandemic-fueled economic crash, made worse by catastrophic mismanagement. Democrats and Republicans in Congress drew up the CARES Act, by far the most generous policy for the poor and working class in American history, which Trump signed. That and other pandemic rescues drove skyrocketing borrowing.
Biden learned from Obama’s mistakes with a much larger stimulus, which drove the fastest economic recovery from a deep recession in American history. Thereafter deficits fell, but as Biden did not raise taxes much, deficits stabilized at about 6 percent of GDP. As the Fed raised rates to combat rising inflation, interest payments as a share of GDP rose to 3.8 percent by late 2024, the highest level since 1998. In 2024, interest on the debt grew larger than the military budget.
The unquestioned faith in the dollar has been shaken, and for good reason.
It’s important to emphasize here that the austerity mindset that budgets should be balanced if possible, and every dollar of new spending must be “paid for” with taxes, is both economically illiterate and hugely damaging to the American economy. The Obama pivot was driven in part by a panicked frenzy among the D.C. establishment, even though unemployment was still at 10 percent. Austerity was a major reason why Democrats got killed in the midterms that year, and why the economy suffered a lost decade of chronically slow growth and high unemployment. The problem with Republican deficits is not so much that they happened, but that they were spent on tax cuts for the rich rather than productive investments in, say, renewable energy.
In addition, as the issuer of the global reserve currency, America has an obligation to provide dollar assets. As Michael Pettis and Matthew Klein argue in their book Trade Wars Are Class Wars, if the government won’t provide them in the form of Treasury bonds, demand for other dollar assets will drive up its value, tanking American exports and widening the trade deficit.
Indeed, the dollar’s reserve status is partly to blame for America’s chronically large trade deficit. As economist Paul Krugman points out, much of these deficits have been financed by foreign investment in the U.S. If those investors lose confidence in America, they might pull back, similar to a “sudden stop” crisis that countries like Argentina and Portugal have faced.
There are built-in shock absorbers in place for a country as critical to the global economy as America. But those guardrails are buckling.
FIRST OFF, ALL THAT FOREIGN INVESTMENT is denominated in U.S. currency. “That means that a sharp depreciation of the dollar will by itself bring the international investment position back into balance,” economist J.W. Mason said in an interview. Second, America still has the great benefit of borrowing in a currency that it controls. That means the Federal Reserve has control of the interest rate—it can always print money to increase or decrease rates to any level it wishes (at least above zero). “When it comes to sovereign debt in its own currency, the power of a central bank is like that of the God of the Old Testament,” said Mason.
But depreciating the dollar would come at the cost of higher inflation from higher import costs, and a major reduction in investment. And cutting rates, as Trump has called for, conflicts with the Fed’s dual mandate to ensure full employment and price stability. Interest payments are a skyrocketing share of the government budget in part because of the Fed’s rate hikes to fight the inflation of 2022-2024. Chair Jerome Powell cut rates in 2024, but since Trump took office, has hesitated to cut further. Inflation has persisted at about half a point above the Fed’s 2 percent target. This limits the Fed’s freedom of action.
Trump has regularly attacked Powell for not cutting rates, and might fill the Fed board with toadies to do the job. But rate cuts, combined with other factors, would boost inflation even more. Tariffs are already spiking some prices. New home prices are likely to rise as Trump is deporting so many construction workers. The enormous tax cuts will drive up borrowing, as will the cost of rolling over existing debt, some $14 trillion of which must be refinanced over the next three years. IRS cuts carried out by DOGE, with the obvious goal of preventing audits of wealthy tax cheats, will further cut revenue by an estimated $500 billion this year alone; that’s more money out there to be spent. As a result of all of this, either interest rates will have to stay high, or prices will keep rising.
Weakening demand for the dollar could create a kind of depreciation on its own. But the modest fall in the dollar so far is nothing like a currency flight. Indeed, there is no viable global currency benchmark to replace the dollar, nor one on the horizon. The only realistic candidates are China or the European Union, but China would have to abandon its currency control system and open up its capital markets so foreigners could get renminbi, while the EU would have to get over its congenital allergy to borrowing and issue trillions in euro bonds. Neither looks at all likely.
Still, the unquestioned faith in the dollar has been shaken, and for good reason. So many countries and institutions were willing to use dollars because America, by and large, was trustworthy. It granted ready access to dollars and took steps to preserve their value. The Fed even acted as a global lender of last resort during the 2008 crash and the pandemic, allowing central banks in the EU, U.K., Switzerland, and Japan to access “swap lines” where they could get dollars by exchanging their own currencies.
Though many people and countries suffered from American dominance through sometimes undeserved sanctions, and access to the Fed’s swap lines was highly unfair to poorer nations, by and large using the dollar was a smart move. Now Trump is making that look risky and foolish. How is the world supposed to trust a nation degenerate enough to elect an ultra-corrupt lunatic who is tearing up the global trade system designed by and for America itself—twice? If Trump is willing to threaten wars of conquest against two separate NATO allies (Canada and Denmark), who knows who else he might sanction? And even if he is replaced with a Democrat who undoes his policy, they might be replaced by a Trump-like figure again.
So while dollars will continue to be used around the world, I expect a steady erosion in the dollar’s hegemonic status, with a greater share of foreign exchange using a basket of other currencies—the euro, the pound, the yen, the Swiss franc, and so on. It’s not so much Trump’s deficits that are the core of the problem, but rather how his election and behavior have shaken global faith in America itself.
Joe Biden’s stimulus and green investment program led to a near-perfect recovery from the pandemic crash, at least in terms of GDP and employment. Almost every country suffered from similar inflation, but American prices stabilized faster, thanks to higher production rather than crushed demand, and growth outstripped that of every other major developed nation.
Trumponomics, by contrast, will produce the opposite: a poorer, weaker America, with structurally higher prices, dedicating a large and growing share of its economy to financing debt created by Republican tax cuts for the rich. And it will all be entirely self-inflicted.
This article appears in Aug 2025 Issue.