After Trump tantrums, will gold replace dollar as global anchor?

medium119532034Donald Trump wants to smash the current world economic order, whose financial anchor is the dollar. If Trump’s changes erode faith in the financial anchor, where will the world go? Some analysts think we may have to return to the old gold standard.The US has been the global stabiliser since World War II. It helped create the World Bank and International Monetary Fund (IMF), which act as lenders of last resort to troubled economies today. In financial crises, the US has played the lead role in organising rescues.The dollar’s domination is resented by many BRICS countries, including India and China. Trump has threatened sanctions on BRICS countries creating an alternative currency. Yet, he is doing more than anyone else to topple the dollar’s primacy by arguing that the US has been taken for a ride by the post-WWII system, which must, therefore, be demolished.The dollar anchored that system. Without the guarantee that the US will ride to the rescue in global crises and hammer out solutions in concert with lesser but significant players, we may return to the situation in the 1930s, when the lack of a global anchor deepened the Great Depression.Economic historian Charles Kindleberger wrote, “The 1929 depression was so wide, so deep and so long because the international economic system was rendered unstable by British inability and United States unwillingness to assume responsibility for stabilising it.” medium nocaptionhttp://youtu.be/m7u0j6LkrzE?si=VSf7iRHMWcuqyJvDUntil WWI, most countries were on the gold standard, with the currency of national countries being tied to their holdings of gold. But, in WWI, countries needed to finance humongous war spending for which they lacked enough gold. So, they abandoned the standard and started issuing currency unbacked by gold.After WWI, many countries tried returning to the gold standard but found that this meant hugely shrinking government spending to match their limited gold holdings. Country after country abandoned the gold standard. Without that anchor, the risks of international trade and payments skyrocketed. This did not start the Great Depression, but certainly deepened it.The world economy, Kindleberger argued, needed a leader willing to incur some cost and risk for the benefit of the whole. “For the world economy to be stabilised, there has to be a stabiliser, one stabiliser,” he wrote.The Heritage Foundation, a right-wing think tank, produced a document, Project 2025, in advance of the US election to supply Trump with a ready-made agenda for revolutionary economic overhaul. Trump distanced himself from the document because some of its suggestions would have cost him votes. However, it echoed many of his own thoughts. Several top officials in the new Trump administration were co-authors of Project 2025. They will seek to implement as much of it as possible.Project 2025 urged the US to exit the World Bank and IMF. Even without actual withdrawal, Trump could neuter them, having the largest shareholding in both.He is considering a Project 2025 proposal to unilaterally force holders of US gilts to exchange them for 100-year bonds of lower value. This would expropriate all holders of the financial instrument that has anchored the global economy since 1945. Most countries hold 50-70% of their forex reserves in US gilts and would be devastated. But the US would suddenly have far less debt to service and so could cut taxes and run larger budget deficits with impunity.The plan is backed by US treasury secretary Scott Bessent and head of the economic advisory council, Stephen Miran. Alternative measures with similar effects are also being considered. This expropriation may then be forced on G7 partners at a ‘Mar-a-Lago Accord’, analogous to the Plaza Accord of 1985 that forced a cheaper, more competitive dollar on G7 partners. medium nocaptionhttp://youtu.be/iq0YQtdiptY?si=HOFrNaOZvobQyzlCHowever, the global bond market will not take this lying down. The US will lose its current ‘exorbitant privilege’ to print unlimited dollars without being hit with higher interest rates by bond markets. The dollar will cease to be the global anchor and become just one more currency.No central bank or investor would view the euro or other currencies as credible alternatives to the dollar. So, some analysts predict a return to the gold standard to provide an anchor. Already central banks are increasing their gold holdings and could go much further.However, the problems that felled the gold standard after WWI remain. Countries want to run budget deficits to fund various things (especially defence in Europe). They do not want to be constrained by a lack of gold holdings. Voters will rebel against the extreme austerity required for a pure gold standard.Do major countries minus the US have the means and will to create an alternative anchor? No, Europeans are not going to join hands with China and Russia on this issue. Can Europe and Japan provide a partial anchor buttressed by gold? Don’t make me laugh. No alternative anchor looks viable today.The world may continue without an anchor for some time. But when the next financial crisis comes, a world without an anchor will suffer enormously.Lead illustration: Uday Deb