DOGE’s failure is a warning: The dollar will frown some day

About the author: Edward Price teaches at New York University’s Center for Global Affairs and served at the British Consulate.

The dollar smile may be the world’s most astonishing economic phenomenon. The second will be when—and why—the dollar frowns.

What is the dollar smile? A chart showing dollar appreciation rises both when the U.S. does relatively well and relatively poorly, compared with the rest of the world. Why? If there’s bad economic news, a flight to safety occurs. Capital moves from high risk to high quality assets, seeking protection. Often, that means U.S. Treasuries. There’s nothing safer. Simple. But here’s the oddity. Capital rushes to the U.S. even if that bad economic news came from the U.S. The U.S. is the safest bet. Hence the smile.

Why does the dollar smile?

Reputation. The U.S. has had several characteristics that are the envy of the world: rule of law, zero sovereign defaults, clear property rights, political calm, fiscal capacity, and functioning markets. These traits, in combination with the post-war financial architecture, have resulted in almost unlimited global demand for dollars. Folks use the greenback for trade and for savings. The more the dollar is supplied, the greater its demand.

Economists think the law of supply and demand is a law. It is barely a guideline. The dollar bucks it every day.

But these characteristics are weakening. None have crumbled entirely. Nor have any kept their shine. The age of MAGA, however, challenges each. Today, it is easy to imagine an America of lawlessness, defaults, property seizures, political rage, fiscal failures and a malfunctioning marketplace. If habeas corpus goes, so too does ceteris paribus.

Only this month, a troubling 20-year Treasury auction saw weakened demand for U.S. debt. Also in May, Moody’s downgraded the U.S. credit rating. These aren’t death knells. But nor are they wedding bells. Global capital appears to be dating, not marrying, Uncle Sam, and only reluctantly.

The Congressional Budget Office also forecasts annual interest payments of $952 billion in 2025 and $1 trillion in 2026. This is unsustainable. One day, lenders will simply say no—or they will demand an interest payment we cannot afford. Can we reverse course? Apparently not. President Donald Trump’s tax bill would only make things worse. Estimates from the CBO are that it will add $3.8 trillion to the national debt.

Sad!

Meanwhile, the DOGE drama damaged the U.S. Elon Musk showed the world, in bright Technicolor, that we cannot reduce the deficit, at least not without also upsetting the social order. Musk saved $160 billion by his own estimate. Others estimate that Musk’s savings came at a cost of $135 billion. Perhaps the most absurd $25 billion saving in U.S. history.

Why would any of this make the dollar frown? It tarnishes our look. Upon some perception that the U.S. is wobbling, economically, politically, or otherwise, a flight to safety would occur. But unlike with the smile, that flight would be from the U.S. to just about anywhere else. Just look at the strong performance of European equities since so-called Liberation Day, when Trump unveiled his most aggressive tariffs.

To be sure, I’ve been warning of a shift in dollar perception for a while. But I don’t know how severe the dollar frown might be. I just know that, if the U.S. fiscal and monetary trend carries on, I wouldn’t be smiling either.

Here’s the bottom line. If there is, one day, a run on a fiat dollar, it will be due its oversupply. No economic policy could stop that run. More dollar supply would only worsen it. After the 2008-09 financial crisis, central bank interventions known as quantitative easing restored “market function." This they did by nationalizing a lot of said market. In essence, new dollars had rescued old banks.

But there is no way for new dollars to bail out new dollars. If people fear dollar oversupply, QE would only make things worse. Federal Reserve Chair Jerome Powell has all but confessed this danger in admitting the Fed’s dual mandate may, one day, become an impossible choice.

If the dollar is in trouble, why not indulge in one last splurge? Upgrade our infrastructure, build a million homes, stockpile drones, rifles and shells for any global war ahead? If the dollar must frown, why not on our terms?

Alas, that would require a unified national effort. Instead, the administration is busy faulting President Joe Biden for the fall of Rome in 476 A.D. Biden may have been there. But he certainly wasn’t to blame.

Since 1971, the U.S. has offered the world a purely fiat dollar. The IOUs we issue are for other IOUs. Thus, the magic trick of the dollar isn’t power but perception. And if there’s one thing Trump has cost the U.S., it is honor. We look tacky and broke at just the time we cannot afford to look anything other than rich. Who knows what a $400 million Qatari jet will cost us in the long run?

British Prime Minister Harold Macmillan was asked what could blow his government off course. “Events, dear boy," he famously answered. Macmillan wasn’t powerless. And yet, the simple happening of things—life’s ups and downs—kept him up at night.

Macmillan is dead. He isn’t worrying about a thing. But events, in markets, should be America’s main worry now. One day, there will be an event. That event will cause a flight to safety. And that safety may not be us.

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