For some 80 years, the dollar’s unparalleled global role – particularly its status as the world’s dominant reserve currency – has conferred upon the United States an “exorbitant privilege,” as Valéry Giscard d’Estaing, then France’s finance minister, famously put it in 1965. While US President Donald Trump has no desire to give up the privilege – and has threatened tariffs against anyone who tries to challenge it – his administration’s capricious, short-sighted, and erratic policymaking may well decide the issue.

As Harvard’s Jeffrey Frankel observes, the Trump administration is effectively “engineering” the dollar’s demise with its “coercive” Mar-a-Lago Accord, which aims to weaken the dollar and, in turn, improve America’s trade balance. While “dollar devaluation and dollar dominance are not necessarily mutually exclusive,” it is “hard to see how the dollar’s global status would survive” an agreement that “discourages central banks from holding US Treasury securities.”

Even if the Mar-a-Lago Accord never materializes, warns Jim O’Neill, a former chairman of Goldman Sachs Asset Management, a number of “cyclical, structural, and even systemic factors” are likely to make “continued dollar weakening more likely.” The structural and systemic factors include Trump’s tariffs, which are likely to “raise US inflation and create knock-on effects in the real economy,” and his abandonment of America’s role as a “security guarantor” and the “dominant player in the post-World War II multilateral institutions.”

The economist Dambisa Moyo expands on the cyclical factors at work, identifying at least ten signs that the US is headed for an economic slowdown, even recession. The pervasive theme is falling confidence, both among Americans – worsening consumer sentiment, disappointing payroll figures, and a falling quits rate – and international investors, whose risk appetite is declining.

Michael R. Strain, Director of Economic Policy Studies at the American Enterprise Institute, thinks the Trump administration is engaged in a “deliberate” effort to “undermin[e] the foundations of US prosperity.” Aside from “rank incompetence” and wrongheaded “mercantilism,” the most “ominous” explanation is that Trump has “bought into the MAGA view that the US economy needs a fundamental, painful transformation.” Despite “tanking” investor confidence, however, Strain has not given up hope that “equilibrating forces in the political system may soon apply the brakes” to the Trump administration’s “madness.”

CAMBRIDGE – In 1985, US officials met with their counterparts from the other G5 countries at New York City’s Plaza Hotel to negotiate a coordinated intervention to bring down the value of the dollar. The successful Plaza Accord is now apparently serving as inspiration for US President Donald Trump’s administration, as it seeks ways to weaken the dollar and, it hopes, improve America’s trade balance. True to form, Trump and his devotees – notably Stephen Miran, the incoming chair of the Council of Economic Advisers – would call the arrangement the “Mar-a-Lago Accord,” as it would be negotiated at the president’s eponymous Florida resort.

One could imagine a sensible proposal for coordinated intervention among major economies to weaken the dollar. The United States would take steps to reduce its budget deficit, and large surplus countries like Germany would increase theirs, thereby addressing the fundamental driver of today’s international trade imbalances.

But the Mar-a-Lago Accord does nothing of the sort. Instead, it is a coercive vision that risks doing exactly what the Trump administration fears: hurting America’s ability to finance its deficits (and, in particular, to keep interest rates low) and undermining the US dollar’s status as the leading international currency.

Start with interest rates. An intervention by foreign central banks to weaken the dollar’s exchange rate would entail a reduction in their holdings of US Treasury bills. But falling demand for T-bills would lead to declining prices and rising interest rates. Think about it this way: if the trade balance improves when the economy is at full capacity, components of domestic demand (household consumption and business investment) have to be crowded out.

As for the dollar, its dethronement is, in a sense, integral to the vision animating the Mar-a-Lago Accord. The first person to use the term was reportedly the economist Zoltan Pozsar, who proposed a “Bretton Woods III” agreement which would replace the dollar-based global monetary system with a system based on central bank digital currencies (CBDCs), together with gold or other commodities. According to Pozsar, the US government would strengthen its balance sheet by revaluing gold.

But such an effort to devalue the US dollar could well lead to the greenback’s demise as the dominant global currency – a process that would be accelerated if monetary easing by the US Federal Reserve was part of the agreement. While Trump has pushed for a more accommodative monetary policy, he has also made clear that he wants to maintain the US dollar’s global primacy, even if he has to use tariffs to force countries (such as the BRICS economies) not to undermine it.

To be sure, as Treasury Secretary Scott Bessent has noted, dollar devaluation and dollar dominance are not necessarily mutually exclusive. In the late 1990s, for example, the dollar simultaneously depreciated and accounted for a larger share of central banks’ foreign-exchange reserves. But there is a clear tension between the two objectives. If a Mar-a-Lago Accord discourages central banks from holding US Treasury securities, it is especially hard to see how the dollar’s global status would survive.

Yet that is precisely what Miran seems prepared to do. He proposes making foreign central banks hold 100-year US bonds without coupon payments instead of the T-bills they now hold. (This would amount to restructuring US debt, which is equivalent to default.) Alternative – or additional – provisions include the introduction of “user fees” charged to foreign central banks that hold US debt and a more general tax on foreign investment in the US (reminiscent of the Tobin tax on short-term currency transactions that was proposed in the 1970s).

The sovereign wealth fund (SWF) that Trump has ordered be created is apparently also supposed to play some unspecified role in the Mar-a-Lago vision. It is not clear where the money for this SWF would come from. Like developing economies, the US would be well advised not to start an SWF that it would have to borrow to fund owing to insufficient international reserves. It is also worth noting that SWFs work best when – unlike Trump’s proposed fund – they are invested in foreign, rather than domestic, assets.

Even setting aside the SWF, Miran’s proposal is not grounded in reality. Why would the world’s central banks and other investors accept 100-year bonds – which would pay no interest for a century – in place of good old T-bills? Why would they swallow new fees and taxes on their US debt holdings or investments?

Trump might say that the answer is simple: so they can avoid punitive tariffs. But he has brandished this weapon so relentlessly – in the name of so many objectives, with so many postponements and reversals – that it is quickly losing its impact. Far from sticking around to kneel before Tariff Man, countries are trickling toward the exits. If Trump pushes too hard, the trickle may well turn into a stampede away from the dollar.

Attempts to leverage US military and geopolitical power to coerce countries into accepting the terms of the Mar-a-Lago Accord would likely prove similarly ineffective. Yes, in the 1960s, Germany agreed to cover the costs of stationing American soldiers on its territory, in order to preserve the Bretton Woods system. And in 1991, Kuwait and Saudi Arabia covered a large share of the costs the US incurred fighting the Gulf War. But there is a critical difference between now and then: goodwill.

With his propensity for threats and coercion, willingness to betray friends and allies, and disregard for rules and norms, Trump has systematically destroyed whatever international political capital he inherited, decimating US global leadership in the process. The coercive Mar-a-Lago Accord – which harks back to the Roman Empire’s demand for tribute from territories its legions occupied – would only accelerate America’s decline. The Mar-a-Lago brand is best reserved for golf tournaments and rococo weddings.

LONDON – Although I no longer live and breathe the markets on a daily basis, I have never forgotten some key lessons I learned early on as an economist working in the financial industry: it is much easier to be wrong than right.

Consider one of the big, early surprises of 2025. Late last year, following Donald Trump’s election victory, the US dollar was steadily rising, reflecting widespread expectations of relatively robust US economic growth, additional fiscal stimulus, and new or somewhat higher tariffs that supposedly would strengthen the dollar further. Instead, the dollar has been declining sharply.

Something else I learned early on is that, given the size and depth of the foreign-exchange market – where all known information gets priced in very quickly – it pays to be skeptical of overwhelming consensus views. Often, some element of the consensus outlook proves rather questionable. For example, I found it odd that so many forecasters saw tariffs as pro-dollar and unlikely to be overly disruptive to the US economy, despite being a net negative for US consumers.

Then there is the fact that some of Trump’s closest economic advisers have spoken openly about the need for other currencies to be stronger. That is why they have been pushing some new version of the famous 1985 Plaza Accord, whereby Japan and Germany agreed to strengthen their own currencies against the dollar to placate the United States. The so-called Mar-a-Lago Accord is supposed to do the same.

What seems clear to me is that the Trump administration is focused on US manufacturing and its own definition of competitiveness, neither of which offers much basis for expecting a persistently strengthening dollar. True, the usual counter-argument is that tariffs are needed because the dollar’s strengthening cannot be stopped, given the “exceptional” US economy’s unrivaled merits. America is “exceptional.” It boasts deep, liquid financial markets and cutting-edge technology, and it is preeminent in security matters and superior to its peers in terms of overall growth.

If the dollar’s relative weakness in 2025 is merely a price correction, these fashionable arguments will likely re-appear and carry it upward again. And yet, there are cyclical, structural, and even systemic factors that may make continued dollar weakening more likely.

On the cyclical front, recent high-frequency data point to a near-term softening of the US economy, with the closely watched Federal Reserve Bank of Atlanta’s GDPNow tracker forecasting negative growth for the first quarter of this year. Of course, it is too early to know whether this will be borne out. But while it could be just a temporary or technical artifact of the data, it is hardly the only warning sign. The latest business and consumer confidence surveys also give cause for concern.

Moreover, even people outside of the financial industry are becoming more unsettled about future inflation. The latest University of Michigan five-year inflation expectations survey (one of my own favored indicators) shows a rise to 3.9% – the highest in more than 30 years. If this trend persists, watch out.

Some analysts argue that this index is not as reliable as it once was, owing to changes in the survey methodology and the suspicion that Democratic voters are more inclined than Republicans and independents to respond. But professional pollsters know how to account for such discrepancies, and unless the actual calculation is somehow more biased toward Democrats, this argument is unconvincing.

In any case, many more commentators are suddenly talking about US stagflation, and owing to Trump’s erratic and aggressive behavior, other countries are not simply standing still. As I noted last month, policymakers in many countries – especially in Europe, but also in China – recognize that they must make changes to reduce their economies’ dependence on the US.

All these developments in the US and globally can account for the dollar’s recent decline. But there is also a more fundamental issue apart from what might otherwise be a “cyclical” decline. If Trump persists with tariffs and they do raise US inflation and create knock-on effects in the real economy, the longer-term equilibrium value of the dollar is likely to be less than it might have been. This, too, would warrant an adjustment in the price of the greenback – and perhaps a rather large one, if Trump keeps doubling down on his current approach.

That brings us to the systemic dimension. There is a long-running academic debate about why the dollar’s strength has persisted for so long, with some arguing that its value goes hand in hand with US power as a security guarantor and the dominant player in the post-World War II multilateral institutions. If the US is now abandoning these roles, others will be forced to stand up for themselves, and the dollar’s unquestioned dominance could finally come to an end.

LONDON – The US stock market’s downward trend appears to be continuing, with the Dow Jones Industrial Average and the S&P 500 down 4% and 6%, respectively, this year. And this is just one of many signals that should prompt any sensible business leader, investor, or policymaker to start preparing for a US economic slowdown, or even a recession.

The first sign that a US economic slowdown may be imminent is worsening consumer sentiment. The University of Michigan’s index of consumer sentiment fell from 71.7 in January to 64.7 last month, its lowest level since November 2023. Similarly, The Conference Board’s Consumer Confidence Index declined by seven points in February, to 98.3. More ominous, its Expectations Index – which reflects consumers’ short-term outlook for income, business, and labor-market conditions – dropped 9.3 points to 72.9. Anything below 80 usually signals a recession ahead.

The second worrying sign for the US economy is a deteriorating manufacturing outlook. The ISM Manufacturing Index fell from 50.9 in January to 50.3 last month – below market expectations of 50.5. A key reason for the decline was a decline in the number of new orders – partly reflecting uncertainty over US tariffs – after three months of expansion.

Payroll figures – which are arguably among the most-watched market indicators (along with interest rates) – are similarly bleak. Total nonfarm payroll employment rose by 151,000 in February, which not only fell short of expectations (159,000) but also came in significantly below the monthly average over the previous 12 months (168,000). At this rate, job creation may prove inadequate to support strong US growth in 2025, which the International Monetary Fund currently expects to reach 2.7%.

A fourth sign that the US is headed toward a slump is that average weekly hours worked fell to a five-year low of 34.1 hours in January, and remained unchanged in February. This is consistent with a longer-term trend: weekly hours worked have been declining steadily since April 2021, when they reached a post-pandemic peak of 35 hours.

The fifth ominous signal is the quits rate, which fell from 2% in October 2024 to 1.9% in November and December. While it rose to 2.1% in January 2025, the rate has been broadly declining since the Great Resignation of 2022, when quits peaked at 3%. This suggests that workers are apprehensive about the economy’s prospects.

Beyond these macro variables, a number of market signals are also pointing toward recession. Ten-year US Treasuries began the year with a yield of about 4.57%, but recently rallied to 4.16%. This represents a flight to safety, with investors choosing guaranteed income over risk assets, which would suffer more in a recessionary environment.

Another sign of declining risk appetite is investors’ retreat into gold. Prices are up 40% since the start of 2024, having risen 13% in the last six months alone, and are now on track to reach an unprecedented $3,000 per troy ounce by the end of 2025. While this trend partly reflects central banks’ replenishment of their gold reserves, ordinary investors’ embrace of risk-off assets is also fueling it. Gold-backed exchange-traded funds benefited from net global inflows of $3 billion in January, driving their total assets under management to a new month-end record of $294 billion.

Moreover, put options (a form of downside protection) are becoming more expensive. Market participants determine put-option pricing by looking at volatility measures, such as the three-month implied volatility for the S&P 500, which has risen recently, though it remains within a “normal” level. Meanwhile, credit spreads – such as the five-year high-yield CDX spread – are widening, as investors price in increased risk of bond or loan defaults.

Since travel spending reflects consumer and business sentiment and aligns with broader economic activity, airlines’ projections can act as a bellwether for the economy. And a recent announcement by Delta Air Lines sent a decidedly negative signal: the company cut its first-quarter revenue-growth expectations by more than half, from a maximum of 9% to a maximum of 4%, citing macroeconomic uncertainty. Other US airlines, including Southwest and American, soon followed with their own downbeat forecasts.

A final signal that the US economy may be in trouble is the Federal Reserve Bank of Atlanta’s GDPNow model, which projects GDP growth of negative 2.4% in the first quarter. This might be excessive: for now, it appears unlikely that GDP will contract in the first quarter. But there is good reason to think that growth will fall well short of recent years’ 2.5% rate.

A recession implies two consecutive quarters of negative GDP growth, which means that the US could enter one in the second or third quarter of 2025. Already, economists and financial commentators are revising their forecasts. Former US Treasury Secretary Lawrence H. Summers now puts the odds of a recession this year at 50%.

But not all recessions are created equal. For the US, the magnitude and duration of any recession would depend largely on factors that remain impossible to predict – notably, trade tariffs and geopolitics.

WASHINGTON, DC – US President Donald Trump’s management of economic policy has been a disaster. Previously, it would have been unfathomable for a president – including Trump during his first term – to inflict so much harm on the economy deliberately. As alarmed as I am, though, I am not panicked. A recession remains unlikely, and equilibrating forces in the political system may soon apply the brakes to this madness.

Trump’s campaign policy agenda had both pluses and minuses. While there were obvious flaws, much of what he wanted to do would have advanced prosperity. As recently as late January, I wrote that Trump seemed to be off to a good start. His approaches to AI and antitrust enforcement were promising, as were his commitments to expanding domestic energy production, eliminating harmful regulations, and cutting corporate taxes. Investors largely agreed with this assessment: the S&P 500 and the Nasdaq each hit all-time highs following Trump’s election in November, and stayed high well into February.

In recent weeks, Trump has reversed that good start. I fully endorse the goals of Elon Musk’s Department of Government Efficiency (DOGE) to reduce the scope of government activity and eliminate wasteful spending. But DOGE’s chaos has spooked consumers and investors. Worse, Trump’s on-again, off-again tariff increases and open hostility toward crucial trading partners (Canada, Mexico, and the European Union) have soured business and consumer sentiment, increased inflation expectations, chilled investment, and sent stocks plunging. On March 13, the S&P 500 sank into a correction, falling 10% from its record high three weeks previously.

Why is Trump doing this? I’ll offer three explanations. First, we are witnessing rank incompetence. As has been widely reported, DOGE has charged into federal agencies and fired workers, only to attempt to rehire them days later when it realized how important they were. It is repeatedly posting data with significant errors about its “spending cuts.” Clearly, there is no plan here. DOGE simply has no idea what it is doing, and all its frenetic activity has amounted to nothing but confusion. There have been no material spending cuts: Federal spending in February was higher than in any previous month. If anything, DOGE’s ineptitude is likely to set back the cause of reducing the size and scope of government.

Trump’s execution of trade policy has been equally incompetent. Many Trumpologists are trying to discern a strategy, as if the president were “playing five-dimensional chess.” He isn’t. There was no master plan, for example, behind his decision to enact a large tariff increase on Canada on March 4, then exempt automobile manufacturing on March 5, and then exempt goods in compliance with the United States-Mexico-Canada Agreement (USMCA) on March 6.

The second explanation is that Trump is a true mercantilist who genuinely, and wrongly, believes that if the US is running a bilateral trade deficit with another country, it must be losing economic value to that country. For example, he has criticized US businesses that import lumber from Canada on the grounds that the US has “more Lumber (sic) than we can ever use.” He refers to lumber imports as a “subsidy.”

Trump’s mercantilism helps to explain how his administration can be pursuing so many often-conflicting trade-policy goals concurrently. At various times, the White House has argued that tariffs will reduce fentanyl imports and illegal immigration, provide federal revenue to finance tax cuts, and force other countries to lower their barriers against US exports. Trump’s actions appear more rational if you remember that he sees a lower bilateral trade deficit as a win in and of itself. If he can achieve a few of these other goals as well, he may consider that icing on the cake.

But there is a third, more ominous explanation. It’s possible that Trump may have recently bought into the MAGA view that the US economy needs a fundamental, painful transformation. He said as much on March 9, in an interview on Fox Business.

When asked about the damage from his tariffs, Trump replied that “for years, the big globalists have been ripping off the United States… What I have to do is build a strong country. You can’t really watch the stock market. If you look at China, they have a 100-year perspective ... We go by quarters. You can’t go by that ... What we’re doing is we’re building a tremendous foundation for the future.” Trump then smeared the decidedly pro-business Wall Street Journal with the same aspersion – “globalist” is a slur in the MAGA movement – and he has repeatedly declined to rule out a recession.

This type of anti-elite rhetoric and calls for economic pain are common among MAGA types like Steve Bannon and Vice President J.D. Vance, but they are unusual coming from Trump. It is still unclear whether he really has been converted to an ideology that welcomes harmful economic outcomes, but if he has, the outlook for 2025 (and beyond) is troubling.

Still, the laws of political gravity have not been suspended. Political success must ultimately rest on a foundation of policy success, and Trump’s policies are not succeeding. More than 60% of Americans disapprove of his handling of tariffs, and over half disapprove of his handling of the budget and his management of the federal government. Until Trump changes course, those numbers will continue to climb. The higher they go, the easier it will be for congressional Republicans and corporate executives to speak out against Trump.

If the president wants his party to do well in the 2026 midterm elections, he will be under enormous political pressure to rein in the chaos, resolve policy uncertainty, and govern more responsibly. Indeed, Trump has already responded to political pressure and publicly placed limits on Musk and DOGE, tipping power away from them and toward cabinet secretaries. The same will happen with his tariff plans.

Fortunately, Trump inherited a strong economy. Data for the current quarter continue to show economic strength. The economy added 151,000 net new jobs in February; unemployment remains low; household income is robust; and new claims for unemployment benefits were not trending up in February or March. Furthermore, much of the president’s agenda will boost near-term growth. It would take a lot to tip the economy into recession. The sooner Trump regains investors’ and consumers’ confidence, the less likely that outcome becomes.

H.L. Mencken famously observed that “democracy is the theory that the common people know what they want, and deserve to get it good and hard.” The people wanted Trump. But they don’t want this. In the US system of democratic capitalism, that simple fact will carry a lot of force.