Delgadose Maravillas knows that Wall Street operators joke saying that the longest river of emerging market economies is that of «denial.» But given the irrational exuberance that takes over the American stock market -which quotes historically high assessments, despite the escalation of geopolitical risks and reckless economic policies of the administration of President Donald Trump -one might think that they are traveling that river in a cruise. Geopolitical stability seems to scarce today. Europe dealt with its greatest land war since World War II; Violence and agitation flash again in the Middle East, and the United States relations with China are at their worst time, with possible consequences for the fluid supply of Taiwanese semiconductors to the United States. They are so much, the economic risks within the United States increase, to a large extent as a consequence of Trump’s policies. Higher import tariffs in a century will reduce the competitiveness of the long -term economy, while preventing them from reaping all the benefits of international trade. And Trump’s mass deportation measures will make national production difficult and will raise costs, especially in the agriculture and construction sector. TRUMP is also endangering the fiscal health of the United States. There is no doubt that American public finances were on an unsustainable path before Trump returned to the White House in January. According to the Congress Budget Office (CBO), the US budget deficit amounted to 6.4% of GDP last year, despite the almost full employment. If the United States had maintained that trajectory, its public debt ratio-pib would have increased to 118% of GDP in 2035. Now, this is expected to occur even before-and Trump’s “large and beautiful fiscal law” is one of the main reasons. The CBO estimates that the extensive fiscal and health legislation will add 3.4 billion dollars to the budget deficit in the next ten years. The Committee for a responsible federal budget places that figure above the four billion dollars. This would increase public debt to at least 125% of GDP by 2034. The US economy has a fundamental vulnerability: it depends largely on the will of foreigners to finance their double budget and commercial deficit. Foreign investors currently have about 8.5 billion dollars – almost one third – of the 28 billion dollars in the United States Treasury bonds in circulation. (The same does not happen in other countries, such as Japan, where national investors have about 87% of government bonds). In order for foreign investors to continue financing US indebtedness, they must trust that the country will fully comply with their debt commitments, instead of trying to inflate them or breach their payment obligations. However, Trump seems to be doing everything possible to convince foreign investors that they cannot be trusted in the United States. To start, he is strongly pressing the Federal Reserve to cut the interest rates aggressively, although it is likely that inflation-which is already well located above the goal of 2%-increases, due to the tariffs of Trump. Fed-, has proposed to force foreign investors to convert the treasure bonds they currently have in American bonds to 100 years without payment of coupons. The Trump administration has also considered imposing a tax of up to 20% on the interests that some foreign bond holders obtain from their treasure letters. The recent dismissal by Trump of the director of the Office of Labor Statistics, after the publication of disappointing employment data, has done nothing but aggravate the concern of investors. If the confidence of foreign investors in the United States collapses, crises linked to the dollar and the bond market will occur. In fact, the dollar and bond markets are already reacting to the growing risks. Since the beginning of this year, the value of the dollar has collapsed around 10%, despite the increase in import tariffs and the extension of the differential of short -term interest rates with other important economies. And the yields of the treasure bonds have been high, which suggests that the American treasure market is no longer perceived as the refuge was once ever. Meanwhile, gold prices have increased around 25%. However, stock assessments follow the clouds -as before the collapse of the bubble of the Puntocom in 2001-. This has some precedents. As the economic historian Niall Ferguson has pointed out, the stock market remained buoyant on the eve of the First World War, despite the clear indications that the geopolitical order crumbled. A explanation is more difficult to discern. As Isaac Newton said after the collapse of the Bubble of the South Seas in 1720: “I can calculate the movement of the celestial bodies, but not the madness of the people.” DESMOND LACHMAN, principal researcher at the American Enterprise Institute. © Project Syndicate 1995–2025.
