The Great Illusion of the U.S. Economy?

While Donald Trump seeks to defy history, the world’s leading power is, for now, maintaining its dominance. But one cannot defy the natural order of things without eventually being caught up by reality. The great cycle upon which the United States has built its power is, little by little, reaching its final stage. It is only a matter of time.

An initial assessment of Donald Trump’s economic policy could be made. After more than a year in office, the “America First” policy he has implemented appears to be bearing fruit for the time being: financial markets are hitting record highs, the dollar is currently strong, and a massive influx of capital is flowing into the world’s leading power, particularly from Europe. Everything therefore suggests that the U.S. president is enabling the United States to maintain its dominance.

But such an analysis would overlook the essential point: since the end of the gold standard in 1971, the U.S. economy has been driven by ever-increasing money creation, a trend that is hypothetically endless. However, since this growth is made possible primarily by debt, the world’s leading power has become entirely dependent on it, to the point of using it as a tool to buy time and delay its inevitable collapse. Each crisis has thus been averted by ever-increasing liquidity support — and therefore debt — from the Fed.

The recent private credit crisis is further proof of this. Despite ongoing monetary tightening and gradual rate hikes since 2022, the U.S. central bank’s balance sheet has been expanding again since last December thanks to the implementation of a new program. The Fed therefore has no need to lower interest rates, as this crisis is being contained by the injection of fresh money into the markets. Added to this financial support is now another, more implicit but now necessary form of support: in the face of the war in Iran and the risk of a financial crash, Donald Trump is making repeated statements to reassure the markets, including the possibility of a forthcoming reopening of the Strait of Hormuz. This action not only protects the U.S. financial system but, above all, further postpones the Fed’s dilemma[1], as it is ultimately doomed to choose between a financial crisis and an inflationary crisis.

In this context, the world’s leading power is therefore resorting to increasingly unprecedented measures. The U.S. Treasury, despite being heavily indebted, is also being mobilized to support the U.S. economy. As the conflict in the Middle East drags on and Gulf countries are forced to rethink their economic models, dollar swap lines have been established by the Treasury to prevent a forced sale of assets held by the monarchies. Since these assets have largely been invested in U.S. bonds and stocks since the historic partnership established with the United States and the creation of petrodollars in 1974, massive sales would lead to an immediate rise in U.S. interest rates and an increase in the country’s debt burden. These dollar-denominated loans, settled in local currency, therefore provide the monarchies with the abundant liquidity they need. This mechanism was first implemented by the Treasury last year to support the Argentine economy and enable Javier Milei to win the legislative elections.

The United States is implicitly asking the Gulf states to continue supporting it until it secures a victory in Iran and thus maintains its dominance in the region. These countries are also long-standing financiers of U.S. debt. However, the collapse of their oil revenues could eventually force them to stop their purchases (just like other countries, including its historic “allies” such as European nations, which are facing soaring prices for their gas and oil imports, as well as a standoff with the United States), which would lead to an even sharper rise in interest rates across the Atlantic. In a form of financial cannibalism — the sole horizon of capitalism — the United States could thus end up being the sole buyer of its own debt, which would, by definition, signal the end of the dollar’s exorbitant privilege. In this regard, the Treasury plans, following the Fed’s lead, to repurchase nearly $12 billion in public debt during the month of June.

Thus, even if the United States manages to attract massive amounts of foreign capital due to the crisis in the Middle East and the need for many countries to obtain dollars to protect their currencies, de-dollarization — which is already underway —, will accelerate in the coming months. This trend, combined with the growing monetization of their debt, will consequently lead to a sharp depreciation of the U.S. dollar and a rise in inflation. In fact, inflation is already on the rise, reaching 3.8% in April in the United States, as we anticipated, given that it has become a new reality in this new world order.

At this historic juncture marking the end of the economic cycle, the United States is thus facing a worst-case scenario: rising inflation coupled with high interest rates. The inability to choose between a sharp hike in interest rates — which would trigger a global financial crisis — and a rate cut — which would accelerate inflation and precipitate a crisis of confidence in the dollar — is now forcing the world’s leading power into a middle ground whose consequences will only continue to grow. Yet, when one refuses to face the truth, it inevitably comes to the fore: long-term rates are reaching historically high levels (the 30-year rate has already hit its highest level since 2007), and U.S. banks are recording unrealized losses of nearly $300 billion. These losses are linked to successive rate hikes that erode the real value of the bonds held. And this scenario is set to worsen: the faster inflation accelerates, the higher rates rise, the greater the risk of a chain reaction of sell-offs, and the more likely the prospect of a banking contagion becomes.

In the face of this growing financial instability, gold will be the big winner. Despite a temporary decline — linked to rising U.S. bond yields and the fact that gold does not generate a direct return — its role as a safe-haven asset will gain momentum as the Fed’s inevitable dilemma draws nearer. After posting its best performance last year since the 1979 oil crisis, all scenarios remain possible today, especially since the establishment of a new international financial system is more likely than ever. The overwhelming majority of central banks plan to increase their gold reserves over the course of the year, even though they already account for nearly 30% of total reserves (the highest level since 1993) and now constitute the world’s leading reserve asset, ahead of U.S. Treasuries. The appeal of monetary institutions will also boost demand from global investors due to the confidence it inspires. Finally, since gold reflects the shifting global balance of power (hence the growing purchases by BRICS countries), Donald Trump’s desire to conduct a physical inventory of the country’s reserves shows not only that the United States is trying, in vain, to remain relevant in history, but above all that gold will continue to play an indisputable role.