The risk of further increases in bond interest rates is substantial. We are coming out of a period of unnaturally low interest rates – because the central banks had artificially depressed rates for years with their bond purchases („quantitative easing“). With the reversal of bond purchases („quantitative tightening“), monetary policy is being normalised, and interest rates are also normalising. In other words, interest rates are rising to market levels. The Trump government's economic policy, with persistently high budget deficits, is now bursting into this normalisation process. It is therefore likely that the US government will have to offer even higher interest rates in order to continue to attract sufficient investors.

The US government seems to be testing the limits in budgetary policy as well as in other policy areas. To a certain extent, this is actually playing with fire, because a country's debt sustainability depends very much on the confidence of investors and financial market participants. If confidence is lost, the mood can change very quickly. It is impossible to predict when confidence will be lost. This is what makes the situation with high national debt so delicate. The US government must therefore be careful not to overstep the mark. In principle, the US could probably manage even higher debts for a while if the US remain strong in terms of growth and (economic) policy reliability.

It is indeed the case that the USA is „too big to fail“ and „too interconnected to fail“. The USA is not a small country, but the largest economy in the world with a huge capital market. We remember from the Greek crisis that the biggest problem was the contagion effects. If the USA were to default on its debts, the contagion effects would be unimaginable. Conversely, this also means that investors could not simply retreat to safe havens in the event of a financial quake, as these would also be affected by the shockwaves. It is therefore in the interests of all parties involved to prevent such a worst-case scenario from occurring in the first place. Nevertheless, you cannot rely on this one hundred per cent.

Inflation is, at least for a certain period of time, a means of reducing the debt ratio and thus relieving the burden on the state. As the wave of inflation in recent years has shown, the national debt ratio then falls even without consolidation efforts by the government. From the beginning of 2021 to the beginning of 2023, the US debt ratio fell from 132% to 118% of GDP. It has now risen again to over 120% of GDP. It must be said that inflation is not a serious instrument of fiscal consolidation. It is an instrument of redistribution from creditors to debtors. It is also a dangerous instrument in the long term, but for now it brings relief.

Of course, it would be a bad sign if the central bank had to intervene. But in an emergency, it would probably do so again and buy government bonds again, possibly on a large scale. Thanks to their ability to create money, central banks are a very credible player when it comes to stopping a market panic. Even if this is a reassuring realisation, such „fiscal dominance“ of monetary policy has negative side effects.

Firstly, higher inflation rates and a weaker dollar are to be expected. In the long term, a loss of confidence in the USA would also be a major problem. After all, who wants to lend money to a country that solves its own problems by „printing money“, thereby devaluing its own currency? This is why it would be so important for the Trump government to flip the switch soon and return to a reliable, growth-friendly economic policy.

I think it is likely that the swan song for the dollar as the reserve currency is premature. The dollar will certainly lose ground, but it will probably remain dominant. The key point here is that there is a lack of serious alternatives. Neither the euro nor the Chinese renminbi nor cryptocurrencies are likely to replace the dollar as the reserve currency in the foreseeable future. The European capital market is too fragmented. Other countries are too small. China is big, but not reliable and the currency is not freely convertible. I know there are other arguments – but the lack of alternatives is an important factor for the time being.