The world is heading toward a financial crisis, and the state of US politics has left Washington ill-prepared to respond. Donald Trump’s second term is described as likely to produce a misguided and chaotic policy reaction, with ordinary people and markets alike left to absorb the fallout from decisions made at the top.
Who Pays When the System Wobbles
The article says a bona fide financial crisis has not broken out since the US housing meltdown of 2007, 19 years ago, and that even the Covid pandemic, the subsequent surge in inflation and the collapse of Silicon Valley Bank in 2023 did not lead to financial upheaval. That history has not produced any meaningful collective readiness. Instead, financial markets and governments may believe they have acquired immunity, while the world careens toward a moment of financial upheaval that could dwarf the damage caused by the last one.
The most frightening part, the piece says, is not the specific nature of the crisis but the incompetence with which it will be handled. Current US politics practically guarantee that Washington’s response will be misguided, steered by Donald Trump’s incontinent appetites and animosities. In a world where mistrust has strangled space for collective action, damages are likely to be compounded by similarly blinkered responses around the globe. Maurice Obstfeld, former chief economist at the International Monetary Fund, said: “The political fundamentals are really bad.”
The Debt Machine and Its Fragile Props
The largest risk, the article says, revolves around the federal government’s accumulation of debt, now in excess of 120% of the nation’s gross domestic product, a near unprecedented level, and likely to keep growing at a fast clip because of massive built-in budget deficits for the next decade. The article describes a global context in which the US’s appetite for capital to finance datacenters or the federal deficit is met by China’s export of capital to recycle its huge trade surplus.
A win-win fix would be for China to spend more on its own stuff while Americans, especially the federal government, spent less, but the article says this seems exceedingly unlikely given politics in Washington and Beijing. It says it is unclear what would detonate a sell-off of US government debt, though Treasury bonds still provide the largest, most liquid pool of safe investable assets. Markets were in a tizzy last week, sending rates on government bonds sharply higher over worries about the Iran war and inflation. The article also points to 3 April last year, when Trump’s tariffs on everything sent the price of treasury bonds briefly into a tailspin, as evidence that Washington’s increasingly idiosyncratic decisions could send investors running for the exit.
The world is not that of 15 years ago, the article says, when real interest rates neared zero and central banks in China and many developing countries held massive amounts of treasury bonds, providing a stable source of financing for US deficits. Today, investors buying treasuries want yield and diversification, and they will mercilessly dump US assets if the tide turns sour.
What the Powerful Are Calling a Plan
The article says US politics can still do a lot of damage. It imagines Trump bombing Iran again, invading Cuba or Greenland, taking control of the Federal Reserve and strong-arming it to cut interest rates, or increasing the deficit through military spending. It says he shows no concern over growing federal debt and that Republicans in Congress show no interest in stopping him. It asks which of them will stand in the way of his appetites, given his ability to take down anyone who dares oppose him.
The closest anybody in government has come to a plan to address the nation’s indebtedness, the article says, was Scott Bessent, the US treasury secretary, who claimed AI will save the day by generating massive productivity growth and enormous tax revenues to fill the government’s coffers. The article says nobody else has said a word. That silence hangs over a system that keeps betting on growth, extraction and financial engineering while the risks are pushed downward.
If investors freak out and sell off treasuries, raising interest rates on government debt, Trump might strong-arm the Fed to buy the bonds and keep rates low. But pumping that money into the economy would stoke inflation, which would encourage more investors to flee for the exits, sending the dollar into a tailspin. The ideal strategy, the article says, would be to close the hole in the federal budget. The Fed might force that path by refusing to print money and buy government debt, but Trump is unlikely to appreciate austerity and the odds are slim given his lock on Congress and increasing sway over the Fed.
Maurice Obstfeld said: “If you try to war game it, the Fed doesn’t have any good options. The only good option is fiscal regime change in the Congress.” The article says that is not likely to happen.
The piece adds that France faces the unhelpful combination of a budget crisis and a looming election likely to bring to power a populist right wing that has much in common with Trump’s Maga. China, meanwhile, may not face political instability, but it has shown little interest in helping address the imbalances contributing to the world’s financial fragility, insisting on subsidizing manufactures for export in order to generate jobs.
The article concludes that when the crisis hits, international cooperation is unlikely to play much of a role because of the animosities Trump has worked so hard to kindle, and says the world is staring into an unprecedented future in which a financial crisis like the world has never seen invites the most self-defeating government response ever.