DESMOND LACHMAN: Trump’s reckless policies will give the gold rally legs

If there is any upside to Donald Trump’s irresponsible economic policies for SA, it is that they will continue to boost the gold price by undermining confidence in America’s economic exceptionalism. This is likely to precipitate a dollar crisis and the signs are that this process is already under way.

America is the world’s largest debtor nation, and is therefore highly dependent on the kindness of strangers to finance its large twin current account and budget deficits. Almost $9-trillion of about $29-trillion in outstanding US Treasury bonds are owned by foreign creditors, including the Chinese and Japanese governments. If the US is to meet its large government borrowing needs it can thus ill afford to undermine investor confidence.

Yet it would seem that Trump is going out of his way to do just that, including by pushing for congressional passage of his “big, beautiful” debt-boosting-busting, tax cutting budget bill. With the country already running a budget deficit of 6.5% of GDP, it is estimated that over the next decade the bill’s implementation will add another $2.5-trillion to the budget deficit.

That will put the US public debt in relation to the size of the economy on a path to well exceed the level it reached immediately after World War 2. That is bound to cause investors to fear that the US will have difficulty meeting its debt obligations and will try to inflate its way out of its debt problem.

Other ways in which Trump is undermining foreign investor confidence that the US will honour its debt commitments in a noninflationary way include beating up on Federal Reserve chair Jerome Powell to cut interest rates aggressively; including a clause in the budget bill allowing Trump to impose a tax of up to 20% on Treasury bond interest payments on countries he deems to be pursuing unfair policies; and floating in the proposed Mar-a-Lago Accord the idea of forcing foreign US government bondholders to exchange their bonds for a 100 year zero coupon bond.

In response to all of this we have seen a sharp decline in the dollar and a large spike in gold prices. Since the start of the year the dollar has declined about 10% and the gold price has increased by a third to about $3,400/oz.

Making the dollar’s downward move all the more significant is that it is occurring while one would have expected it to appreciate. Normally when one country imposes high import tariffs on the rest of the world its currency would be expected to appreciate. So too when the interest rate differential in favour of the US increases as the European Central Bank and Bank of China cut interest rates.

Most significant of all, one would have expected the dollar to appreciate amid huge world economic uncertainty and market turbulence, when investors seek safe haven status assets. It is striking that this week, as the Middle East blows up and international oil prices go through the roof, there appears to be no real bid for the dollar or US Treasury bonds.

That the dollar has depreciated when many things were working in its favour is a measure of how foreign investors are losing confidence in America’s ability to manage its public finances and economy. And if there is one thing that can be counted on, it is for Trump to continue pursuing reckless economic policies that further undermine the dollar.

While that is not good for the US and world economies, it will give legs to the impressive gold rally that is in full swing.

• American Enterprise Institute senior fellow Desmond Lachman was a deputy director in the IMF’s policy development and review department and the chief emerging-market economic strategist at Salomon Smith Barney.