Macroscope | Trade war, rate cuts, huge deficits – Trump gets away with it thanks to the US’ ‘exorbitant privilege’
- Globalised finance means capital flows into the US in times of uncertainty, even when the US causes that instability. Investors should question whether the US’ budget-busting is sustainable
In 1965, the finance minister of France, Valéry Giscard d’Estaing, fumed about the “exorbitant privilege” America enjoyed in the global economy because of the advantage conferred on the country and its companies by the dollar’s status as the world’s reserve currency.
Fast forward nearly 55 years, and the US dollar still reigns supreme. What has changed, however, as financial markets have become globalised, is the propensity of large amounts of capital to flow to the US during periods of uncertainty, even if the source of that uncertainty lies in America itself.
One of the most vivid examples of this was the market reaction to the unprecedented decision in 2011 by Standard & Poor’s, the credit rating agency, to downgrade America’s sovereign debt. No sooner did S&P strip the US of its coveted triple-A rating than investors piled into Treasury bonds, which act as the benchmark for government and corporate borrowing costs the world over.
Yet, since Trump’s inauguration in January 2017, the S&P 500 equity index has surged 31 per cent, compared with an 11 per cent rise for the MSCI All Country World Index ex US, a gauge of stocks excluding American shares. What is more, the benchmark 10-year Treasury yield has fallen 40 basis points to just above 2 per cent. Indeed, since the trade war escalated sharply in April 2018, the Bloomberg dollar index – a measure of the greenback’s performance against a basket of other currencies – has gained 9.5 per cent.