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.

Related IPS Articles

• New US Fed Policy Deepens World Stagflation

• Central Bank Hedging Triggered Gold Fever

• World Must Pay to Make America Great Again

• Trump Wants World to Subsidise US Empire

• America First Deepens World Stagnation

• Western Finance Ruining Economies of the Rest

• US Fed- Induced World Stagnation Deepens Debt Distress

• Weaponizing Free Trade Agreements

• Trade, Currency War Weapons Double-Edged

Trade Liberalisation Undermines Development

By Jomo Kwame Sundaram 

ZAMBOANGA, Philippines, Feb 10 2026 (IPS) - Despite lacking both evidence and theory, many economists claim trade liberalisation accelerates development. But only a few economies have gained many jobs from external market access.

Instead, most economies have experienced greater deindustrialisation and food insecurity, besides deepening their vulnerability to recent tariff threats.

Multilateral trade liberalisation

In conventional trade theory, gains from trade liberalisation are mainly one-time increases in output and exports due to static comparative advantage.

Post-World War Two (WWII) US foreign policy transformed multilateral relations and transnational institutions, including international economic governance.

With the growing power of transnational corporations, many multilateral institutions, including the United Nations system, have been reconfigured or marginalised.

The General Agreement on Tariffs and Trade (GATT) was a ‘second-best’ compromise after the US Congress vetoed the creation of the International Trade Organisation, despite widespread international enthusiasm for the 1948 Havana Charter.

Almost half a century later, the World Trade Organisation (WTO) was established in 1995, following the 1994 Marrakesh Declaration concluding the Uruguay Round of GATT negotiations.

Trade mahaguru Jagdish Bhagwati argued that multilateral trade has been undermined by plurilateral and bilateral arrangements favouring dominant partners.

With the era of trade liberalisation essentially over since the 2008-09 global financial crisis (GFC), free trade advocacy has received a new lease of life from mythmaking about the ‘pre-Trump’ era.

Uneven, mixed effects

Mainstream trade theory does not entertain the possibility of ‘unequal exchange’, however defined.

Nor does it even incorporate Bhagwati’s notion of ‘immiserising growth’ when productivity gains reduce prices for consumers, rather than increase producers’ earnings.

The three decades of trade liberalisation from the 1980s saw slower, but more volatile growth than the post-WWII quarter-century termed the ‘Golden Age’. More recently, stagnationist tendencies have dominated since the GFC.

With trade liberalisation, many developing countries have experienced greater food insecurity and deindustrialisation, as the manufacturing shares of their national income shrank.

Much import-substituting industrialisation after WWII or independence has since collapsed. Besides resource processing, very few new industries have emerged in Africa.

‘Aid for Trade’ for poorer developing countries implicitly acknowledges trade liberalisation’s adverse effects by mitigating some of them. Why then should they abandon protectionism if they need to be compensated for doing so?

Wealthy nations have also insisted that developing countries end manufacturing tariffs. But as Dani Rodrik has quipped, why rich nations “need to be bribed by poor countries to do what is good for them is an enduring mystery”.

African nations and Caribbean and Pacific small island developing states enjoyed preferential access to European markets, which full multilateral trade liberalisation would eliminate.

Such preferences for Sub-Saharan Africa have pitted African against Asian least developed countries, undermining the collective negotiating strengths of both.

Many countries had expected the current Doha Round to eliminate rich nations’ producer subsidies, tariffs, and non-tariff barriers, but that has not happened.

Cutting farm support in the North could make food agriculture in developing countries more viable, but would also raise food import prices in the interim.

World Bank ‘structural adjustment’ programmes and IMF fiscal discipline requirements have undermined rural infrastructure and productivity, setting back smallholder agriculture in most developing countries.

Setbacks, not gains

Trade liberalisation also reduces tariff revenue. Such losses have hurt developing nations, especially the poorest, for whom tariffs often accounted for up to half of all tax revenue.

Such revenue cuts severely undermined the fiscal means of developing nations, crucial for government spending and investment, including for development and welfare.

Most governments are unable to replace lost tariff revenue with new or higher taxes. Meanwhile, more borrowing to offset lost tariff revenue has worsened indebtedness.

Trade liberalisation advocates are typically vague about how it is supposed to raise exports, incomes, and tax revenue, besides compensating for lost tariff revenue.

Instead, tax burdens typically become more regressive as overall tax revenue declines. Real consumption is supposed to rise as import prices fall with lower tariffs, but could also decline due to increasing consumption taxes.

Less policy space

Trade liberalisation has also reduced available development policy tools, especially those relating to trade, investment, and industrialisation.

The constraints imposed by trade liberalisation and investment agreements have generally limited the scope for and potential of development policy initiatives.

The actual role and impact of trade policy for growth and employment remain moot. But there are no analytical reasons or robust empirical evidence that trade liberalisation per se ensures sustainable development.

World Bank and most other studies acknowledged modest, if not negative, net gains for most developing countries from any realistically achievable outcome.

It is often ignored that realistic expectations of gains from trade liberalisation rely crucially on a strong positive export supply response.

However, such a response is unlikely when internationally competitive, productive and export capacities do not already exist, as in most developing countries, especially the poorest.

Hence, most of the Global South has not been able to overcome the worst consequences of trade liberalisation to achieve sustainable development.

In any case, the WTO Doha Round talks were ended by rich nations in 2015.

With the increasingly blatant self-interested contravention of WTO rules by the US, European and other wealthy nations, developing countries may best enhance their development prospects by reverting to GATT rules.

This would allow them to opt in, as appropriate, rather than resign themselves to the uniform ‘one size fits all’ WTO rules and regulations, regardless of context, circumstances, capacities and capabilities.

Related IPS Articles

• No African Development from Western Trade Policies

• Trump Undresses Rival Trade Myths

• Trump’s ‘Shock and Awe’ Tariffs

• Trade Liberalisation Kicked Away African Development Ladder

• Trade Deception Returns in Pan-Africanist Guise

• Weaponizing Free Trade Agreements

• Trade Liberalization for Development?

• Agricultural Trade Liberalization Undermined Food Security

Available online at: Trade Liberalisation Undermines Development

Economic Dogma Blocks Pragmatic Policies

By Jomo Kwame Sundaram 

KUALA LUMPUR, Malaysia, Jan 19 2026 (IPS) - After condemning pragmatic responses to the 1997-98 Asian financial crises, the West pursued similar policies in response to the 2008 global financial crisis without acknowledging its own mistakes.

Politicised exchange rates

After US Federal Reserve Chairman Paul Volcker sharply raised interest rates from late 1979 to curb inflation, the dollar’s value strengthened despite deepening stagnation.

US exports could barely compete internationally, particularly with Germany and Japan. During his first term, Trump initially pursued a strong dollar policy, which undermined exports and encouraged imports.

The September 1985 ‘Plaza Accord’ among the G7 grouping of the world’s largest economies, held at New York’s Plaza Hotel, agreed that the Japanese yen and the Deutsche mark must both appreciate sharply against the US dollar.

The ‘strong yen’ period, or endaka in Japanese, ensued for a decade until mid-1995. This made Japanese imports less competitive, enabling the Reagan era boom.

By accelerating reunification with the East and the new euro currency, German Chancellor Helmut Kohl prevented the mark strengthening as much as the yen.

Thus, Germany avoided the Japanese catastrophe after its decades-long post-war miracle ended abruptly with the disastrous 1989 Big Bang financial reforms.

Liberalising capital flows

As the IMF urged national authorities to abandon capital controls, East Asians borrowed dollars, expecting to repay later on better terms.

Meanwhile, the dollar only stopped weakening after the US allowed Japan to reverse yen appreciation in mid-1995.

Under Managing Director Michel Camdessus, the IMF began pushing capital account liberalisation. This contradicted the intent of the Fund’s sixth Article of Agreement, affirming national authorities’ right to manage their capital accounts.

Despite considerable evidence to the contrary, Camdessus’ IMF preached the ostensible virtues of capital account liberalisation.

East Asian emerging financial markets were initially delighted by the significant capital inflows before mid-1997. After the strong yen decade, the US dollar appreciated from mid-1995.

When financial inflows reversed after mid-1997, some East Asian monetary authorities were unable to cope and turned to the IMF for emergency funding.

Many paths to crises

The Asian financial crisis is typically dated from 2 July 1997, when the Thai baht was ‘floated’ and its value quickly fell without central bank support. The ensuing panic quickly spread like contagion across national boundaries via financial markets.

Financial investors – in Bangkok, Singapore, Hong Kong, Tokyo, London and New York – hastily withdrew their funds, often mindlessly following perceived ‘market leaders’ without knowing why, like animal herds in panic.

Funds fled economies in the region, like frightened audiences in a dark theatre hearing a fire alarm. Capital even fled the Philippines, which had received little finance, because it was in Southeast Asia, the ‘wrong neighbourhood’.

After earlier celebrating Malaysia, Indonesia, and Thailand as ‘East Asian miracle’ economies, confidence in Southeast Asian investments fell suddenly.

Central banks in the region were sceptical of IMF prescriptions but believed they had little choice but to comply.

Press photographs showed Camdessus standing sternly, with arms folded like a displeased schoolmaster, over the Indonesian President bowing deeply to sign the IMF agreement.

This humiliating image probably expedited Soeharto’s shock resignation soon after, in mid-1998, over three decades after he seized power in a brutal military putsch in September 1965.

Following an earlier financial crisis, a 1989 Malaysian law had prohibited some risky banking and financial practices, but the authorities sought to attract foreign investments into its stock market.

Thailand had become vulnerable by allowing borrowers direct access to foreign banks through the Bangkok International Banking Facility and its provincial counterpart.

Debtors could thus bypass central bank regulation and supervision. The Thai currency float prompted massive funds outflows from the country.

As market confidence waned, funds fled Malaysia’s bourse, triggering a massive collapse in the currency’s value against the dollar, which had steadily weakened against the yen between 1985 and 1995.

Following massive capital outflows, Malaysia finally introduced capital controls on outflows from September 1998, fourteen months after the crisis began!

The controls enabled Malaysia to stabilise its currency and the economy temporarily, but also ended the earlier decade of accelerated industrialisation and growth.

Learning from experience

Rather than acknowledge and address the worsening problem due to earlier capital account liberalisation, the Fund made things worse with its prescriptions.

It insisted on keeping capital accounts open and raising interest rates to reverse outflows. This slowed economic growth as borrowing – and hence, both spending and investing – became more costly.

As investment and spending are necessary for economic growth, IMF prescriptions exacerbated the problems instead of providing a solution.

The East Asian financial crisis was undoubtedly avoidable. Experience has shown that financial markets and capital flows do not function as mainstream theories claim.

Thus, financial dogma and its influence on economic theory and policy obscured more realistic understanding of how markets actually operate and the ability to develop more pragmatic and appropriate policy alternatives.

History never fully repeats itself. But better policymaking for financial crisis avoidance and recovery will only emerge from more informed, historically grounded analysis.

Related IPS Articles

• Trump Undresses Rival Trade Myths

• Can East Asia Show the Way?

• Another Nobel for Anglocentric Neoliberal Institutional Economics

• Industrial Policy, East or West, for Development or War?

• Central Bank Myths Drag down World Economy

• Ideology and Dogma Ensure Policy Disaster

• Inflation Phobia Hastens Recessions, Debt Crises

• Nothing to Learn from East Asia?

Available online at: Economic Dogma Blocks Pragmatic Policies