Trump’s World Stagflation Also Undermines Dollar Hegemony

By Jomo Kwame Sundaram  and Nurina Malek

KUALA LUMPUR, Malaysia, Jun 19 2026 (IPS) - US President Trump’s policies are supposed to make America great again (MAGA), which means different things to various parties. Some of its consequences are inadvertent, including undermining dollar dominance and inducing stagflation worldwide.

Bretton Woods

In July 1944, delegates from some 44 countries met in Bretton Woods, New Hampshire, to create a new multilateral monetary and financial system.

The US held 70% of the world’s gold reserves at the time, with gold priced at $35 per ounce. Other central banks bought and held US Treasury bonds and similar dollar assets as liquidity reserves.

This effectively made the US dollar the primary means of payment in the post-war international monetary system. The exchange rates of other national currencies were all set against the dollar.

As other economies recovered post-war, the US current account and trade surplus declined. Until 1971, the International Monetary Fund (IMF) occasionally adjusted fixed exchange rates for ‘structural’ balance-of-payments deficits or surpluses.

Exorbitant privilege

This dollar-based international monetary system gave the US what France’s Gaullist leadership called an ‘exorbitant [economic] privilege’.

Under the Bretton Woods arrangements, the US would never face balance-of-payments problems, as it paid for imports with its own currency, which it could print at will.

The US federal government could fund its large and growing budget deficits by selling Treasury bills. This debt is now around $39 trillion, over 125% of annual GDP!

Foreign central banks soon became accustomed to holding US Treasury bonds as official reserves, effectively funding the large and growing federal debt.

Such foreign central bank demand kept the dollar strong in foreign exchange markets. Persistent capital inflows into the US have kept the dollar overvalued.

The strong dollar has boosted domestic consumption of imports, depressed exports, widened trade deficits, and kept consumer price inflation in check.

In 1960, Robert Triffin warned the US Congress about the inevitable problems that arise when a national currency is also used as an international reserve currency.

He urged the US Federal Reserve Bank (Fed) to consider the dollar’s international role when making domestic monetary policy.

In August 1971, President Richard Nixon unilaterally ended the US Bretton Woods commitment to redeem dollars with gold. Thus, the dollar clearly became a fiat currency, with exchange rates shaped by market confidence.

Protection through diversification

After the 2009 Great Recession, Western central banks kept nominal interest rates low for over a decade through coordinated ‘quantitative easing’ (QE).

Low interest rates were maintained for over a decade through the 2020-21 Covid-19 recession before the Fed raised interest rates from 2022, ostensibly to address inflationary pressures.

Borrowers worldwide were thus induced to take on more debt. Governments, corporations, and households borrowed more, increasing accumulated debt.

International payment obligations are increasingly being settled by other means. Gradually, dollar-based arrangements are co-existing with euro- and renminbi-based arrangements and BRICS-initiated alternatives.

Thus, US indebtedness and stagnation have been growing with inflationary pressures. Unsurprisingly, other monetary authorities’ previous preference for holding US Treasury bills as official reserves has declined.

Instead, official reserves have been increasingly diversified to include more gold holdings ostensibly to help hedge against inflation and currency debasement.

About 36,200 tonnes, a fifth of all gold holdings, are now held by central banks, up from 15% at the end of 2023. By 2025, non-US central bank gold holdings exceeded their US Treasury bonds for the first time this century!

Trump 2.0

Criticism of the dollar system has resurfaced from time to time, especially as Washington weaponises more financial instruments and arrangements.

The second Trump administration has threatened major US federal government creditors, including China and longtime allies such as Japan and the Gulf monarchies.

As loyal allies are bullied, many are quietly moving away from prevailing dollar-based international monetary and financial arrangements, which have long been preferred for convenience.

After bombing ten nations in the first year of Trump 2.0, US military spending has been rising rapidly, especially with the Iran war and many of its consequences likely to be protracted despite the promise of a ceasefire.

With international confidence in the US consistently undermined by unexpected unilateral White House initiatives, governments are trying to reduce their vulnerabilities, especially by diversifying their reserve assets.

But unlike early in his first term, Trump now welcomes a weaker dollar as “great”. His ongoing efforts to lower Fed interest rates also reflect successive US presidents’ refusal to address ever-larger federal fiscal deficits over the decades.

With inflation rising, market premiums over Fed interest rates are pushing up commercial rates. These hurt the real economy, employment, and banks, many struggling with rising defaults.

All this exacerbates financial ‘market corrections’ in the US and beyond. Trump-induced international disruptions are worsening instability and slowing economies worldwide.

Trump’s policies have slowed the world economy, including the US. With efforts to address the Hormuz crisis undermined by Israel, his legacy will now surely include having induced the first major stagflation in almost half a century.

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Beware Independent Central Banks

By Jomo Kwame Sundaram

JOHANNESBURG, South Africa, Sep 23 2025 (IPS) - US President Trump’s snide barbs against his appointee, US Federal Reserve Bank Chairman Jerome Powell, have revived support for central bank independence – long abused by powerful finance interests against growth and equity.

Independent central banks are supposed to improve the quality, equity, and growth impact of monetary policy. Instead, they have primarily served powerful financial interests, with contractionary and regressive effects leading to slower, unequal growth.

Independent of whom?

Central banks were established to determine monetary policy to shape financial conditions to achieve national economic objectives.

In recent decades, the new conventional policy wisdom has been that independent central banks should set monetary policy. Thus, they have been influenced by powerful financial interests, typically foreign, in smaller, open developing countries.

In the last half-century, many governments have changed laws under the influence of international finance to legislate central bank independence from governments of the day, especially the executive and legislative branches.

Meanwhile, most central banks have come to equate financial stability with price stability as ‘inflation targeting’ became the leading policy fetish.

When inflation rises, central banks raise interest rates, which reduces economic activity. However, some central banks of open economies, especially those pegging to major international currencies, target the exchange rate.

Thus, reducing inflation by conventional means worsens contractionary pressures. Many governments now face the threat of ‘stagflation’, i.e., recession with inflation. Central banks recognise this trade-off regarding how much growth has to decline for inflation to fall.

With interest rate management as their primary policy tool, central banks may raise interest rates in anticipation of inflation, despite its adverse consequences for growth, income and employment.

Such contractionary effects have reduced wages and jobs worldwide. Only a few, mainly large developed economies, have had other priorities, such as growth or employment.

Ironically, the end of the Bretton Woods fixed exchange rates regime and the counter-revolution against Keynesian economics from the late 1970s ensured the irrelevance of Milton Friedman’s monetarist emphasis on central banks’ money supply targeting.

Worsening inequity

Central banks worldwide respond to and anticipate inflation by raising interest rates to curb inflation.

‘Inflation targeting’ causes significant collateral damage, typically reducing growth, income and employment. Poor households’ incomes are likelier to fall, especially with labour-displacing technological change, such as mechanisation, automation, and artificial intelligence (AI) applications.

As unemployment increases, poor workers are more likely to lose jobs, especially hurting poorer families. Banks have typically profited handsomely from such situations, although most people are worse off.

With lending rates rising, banks get even more interest as borrowing rates lag, not increasing as much. Max Lawson cites an IMF study finding that the adverse effects of higher interest rates are “not counterbalanced by the positive effects of lower interest rates.”

The US Fed strongly influences central banks worldwide. Higher Fed interest rates from 2023, in response to minor inflationary pressures, have hurt developing countries, especially the poorest.

As most Global South companies and governments have incurred dollar-denominated debt, countries’ central banks raised interest rates to deter capital outflows.

Quantitative easing

‘Quantitative easing’ (QE) refers to central bank interventions buying financial assets. Such interventions were sought as it is difficult for central banks to cut interest rates below zero to revive economies. QE seemed to fit the bill.

Commercial banks typically get more for their deposits with the central bank when it raises interest rates. Thus, they receive considerable additional windfall interest payments from the central bank risk-free.

QE programmes seek to raise asset prices. Central banks buy assets such as government debt, inducing private investors to acquire riskier assets. US government debt is still the most important financial asset in the international monetary system.

Thus, QE tries to induce growth, presuming earlier contractionary policies will continue to curb or ‘moderate’ inflation.

This has even been justified as prudent, as inflation rates were below target despite interest rates near zero.

Major Western central banks adopted QE following the 2008-09 global financial crisis. Many governments spent even more in response to the COVID-19 pandemic from 2020.

Such efforts sought to counter the downward spiral of falling financial asset prices. The US Fed’s QE intervention involved ‘portfolio rebalancing’. It bought over $600 billion in US Treasury bonds and almost $300 billion in mortgage-backed securities.

Wealth is concentrated in relatively few hands in most societies. Jordi Bosch showed the top ten per cent holding 11 times more wealth than the bottom half in the euro zone, while the bottom fifth had more debt than assets.

QE interventions increase financial asset prices, enriching owners, especially the rich, who have more assets. As prices rise, their worth generally increases. Hence, such central bank interventions further enrich the already wealthy.

As the world struggles to cope with challenges posed by the current conjuncture, we must not jump out of the frying pan back into the fire kindled by central bank independence.

Related IPS Articles:

• Global South Stagnating under Heavier Debt Burden

• Exchange Rate Movements Due to Interest Rates, Speculation, Not Fundamentals

• Developing Countries Need Monetary Financing

• Stop Worshiping Central Banks

• Central Bank Myths Drag down World Economy

• Ideology and Dogma Ensure Policy Disaster

• Inflation Phobia Hastens Recessions, Debt Crises

• Inflation Targeting Farce: High Costs, Moot Benefits

• Fighting Inflation Excuse for Class Warfare

• When Saviours Are the Problem

• Finance Drives World to Stagflation

Available online at: Beware Independent Central Banks

Trump Undresses Rival Trade Myths

By Jomo Kwame Sundaram

KUALA LUMPUR, Malaysia, Jul 1 2025 (IPS) - President Trump’s tariffs have exposed neoliberal trade ideology and undermined corporate lobbying in the name of free trade. But his rhetoric has also exposed the fallacies of his own economic strategy.

Ideological shift?

To be sure, there has never really been an era of truly free trade in centuries. International trade has typically been partially and unevenly free and, more often than not, regulated.

Most supposed neoliberals have never consistently promoted free trade regardless of circumstances, but only when it seemed to serve their national and corporate interests well, e.g., via unequal exchange.

Trump’s tariffs claim to revive manufacturing jobs, which the US has lost to cheaper imports. But employment lost to automation will be almost impossible to regain. Worse, his tariffs will regressively tax US consumers.

Free trade does not help selective investment and technology promotion. Biden sought to promote new industries, often at high cost, with his Inflation Reduction Act, CHIPS and Science Act, and other industrial policy measures.

However, these have been undermined by Trump’s insistence on repudiating earlier administrations’ initiatives and cutting non-military government spending even when they serve his ostensible strategic ends.

With tariffs, his main policy weapon in his bullying transactional approach to exclusively bilateral bargaining, Trump’s reindustrialisation ambitions may only partially succeed.

His refusal to bargain collectively enhances the US advantage in such asymmetric negotiations. Others anxious to curry favour have already conceded excessive concessions, even exceeding Washington’s expectations!

The fates of the worst-off thus only worsen, generating widespread resentment and antagonism. But few tangible gains are likely from the weakest, except for mineral concessions.

Bretton Woods over

In the 1960s, French President Charles de Gaulle complained the 1944 Bretton Woods agreement (BWA) had given the US an ‘exorbitant privilege’. The price of an ounce of gold was set at $35.

This peg allowed the US to borrow cheaply from those who needed US dollars. Selling US Treasury bonds to the world thus closed both its current account (trade) and fiscal deficits.

Pressure on the greenback rose over the 1960s, especially with sharply rising Vietnam War spending. France then led others to demand gold instead of holding dollars.

In August 1971, President Nixon unilaterally repudiated the US’s BW obligation to redeem gold at the promised dollar price. But this did not end the US’s exorbitant privilege.

The US allowed the Saudi-led OPEC to raise the oil price if payments were in dollars. The petroleum price hike also set back its emerging European and Japanese industrial rivals.

Since 1971, US dollar acceptance has relied on the belief that it will continue as the international reserve currency.

Thus, exorbitant privilege has become a matter of faith.

Ironically, while Eurodollars had undermined the BWA, petrodollars saved the dollar’s reserve currency status and exorbitant privilege, with oil becoming the ‘new gold’.

Neoliberal trade myths

Half a century of neoliberal trade rhetoric has claimed ‘trade liberalisation’ benefits all, e.g., free trade lifts all boats, its leading myth.

Although this has not even been true of the Global North, it has not deterred economic policy pundits from advocating free trade agreements with the US as the solution to Trump’s tariffs!

But even trade mahaguru Jagdish Bhagwati insists that only an equitable multilateral trade agreement can lift all boats. He denounced bilateral, regional, and other plurilateral agreements as termites detracting from it.

The most popular computable general equilibrium (CGE)-based trade simulations assume unchanging full employment, trade, and fiscal balances.

Such estimates of free trade gains are misleading, as their methodologies typically ignore trade liberalisation’s significant problematic effects, such as output and job losses and trade and fiscal imbalances.

Unsurprisingly, cost-benefit studies by the World Bank and others projected net losses for most of the Global South from the 2001 Doha Round of World Trade Organization (WTO) negotiations.

False narratives

Trump’s ‘shock and awe’ Liberation Day announcement brought much of the world to heel in one fell swoop. As the president bragged, scores of governments rushed to “kiss his arse”.

However, Trump’s priorities, especially his proposed tax cuts, the changing world political economy, and the diverse nature of US interests, will erode public support for his agenda.

Trump’s policy narrative is unashamedly incoherent and self-contradictory. The Financial Times noted, “The US president wants both to protect domestic manufacturing and hold the dollar as the reserve currency.”

Self-servingly dismissive of received conventional wisdom, his jingoistic rhetoric and self-congratulatory style successfully target his faithful with cherry-picked evidence and half-truths.

Even if Trump’s tariffs fail on his own terms, he can still claim to have tried to make America great again. He will continue to blame opposition within and without to secure his jingoist MAGA base.

Related IPS Articles:

• Trump Accord Sows Discord in US Empire

• Trump’s ‘Shock and Awe’ Tariffs

• New Geopolitics Worse for Global South

• The Global South in the New Cold War

• Weaponizing Free Trade Agreements

• TNCs Reviving TPP Frankenstein

• Trade, Currency War Weapons Double-Edged

• What’s different about Trump’s tariffs?

• Trump’s Trade War in Perspective

Available online here: Trump Undresses Rival Trade Myths