In these early weeks of the Trump administration, overseas policymakers and players in financial markets are trying to work out what it all might mean. In simple terms, it means Making America Great Again (MAGA), as Trump promised throughout his campaign. But equally, it seems to involve making everyone else worse again, and that’s a dangerous ploy when the US is dependent on a hefty inflow of foreign savings to fund its yawning current account deficit. In short, is the administration biting the hand that feeds it?

As we – and presumably others—have pointed out many times, the US attracts large capital inflows from abroad. It has to fund its near USD24tr of external debt. This debt reflects the fact that the US saves too little and invests too much. This imbalance, alongside the US’s ability to fund this without excessive weakness in the dollar or excessively high interest rates, helps produce US ‘exceptionalism’. But in order to generate the dollars, the US requires to fund this imbalance; foreign countries need to export more to the US than the US exports to them.

In other words, the US is forced into running a large current account deficit, which is of the order of USD 1 trillion per year at the moment. But while it might appear that this deficit is borne of the US’s paucity of savings relative to investment, there is another argument that foreign investors are too willing to send dollars to the US.

For those with long enough memories, this is an idea taken up by former Fed Chair Ben Bernanke twenty years ago when he talked about a global savings glut. At the time, he blamed this for pushing US Treasury yields down to levels that were perhaps not justified on the basis of the domestic economy. If the problem is not that the US saves too little but that foreign investors want to put too much money to work in the US, then a'solution’ to the problem of the consequent large current account deficit is to discourage those external investors from sending cash to the US.

On this score, we can only say that the Trump administration is doing an admirable job as it undertakes actions that threaten to isolate the US. Here we are not just referring to tariffs and the ripping up of international trade accords, like the USMCA deal with Canada and Mexico. We are also talking about other measures, like the actions taken against USAID and the threats to take over, or buy, Greenland and Gaza. We could go on, and, indeed, in the future there will be more actions that further alienate the Trump administration.

If all of this were to cause a significant reversal in capital flows to the US, it could not only help shrink the current account deficit but possibly sink the dollar into the bargain. At this point, we might also make note of other actions that are being taken outside the US that will potentially attract capital and perhaps encourage more to pull back their US investments. Here we might look at some of the repricing of certain commodities in currencies other than the dollar, the development of Central Bank Digital Currencies (CBDC’s) that Trump has outlawed in the US, and more.

Nonetheless, Steven Barrow, Head of Standard Bank G10 Strategy is still left with the following question. Can the Trump administration really cause sufficient concern and alarm amongst foreign investors to make them re-think their US involvement, such that it precipitates a massive decline in US asset holdings, notably in the dollar? History would tend to suggest that the answer is ‘no’. Trump spent much of his first term alienating the US via things like tariffs, climate policy, disrespect for multilateral institutions, and more, and yet the dollar is a lot stronger today than when he took office in 2017. Of course, we could say that Biden spent his time in office building many of these bridges again, and this is when the dollar really surged; not during Trump’s first term. As ever, only time will tell on this one.

“We suspect that much will depend on the actual performance of the US assets that attract so much foreign investment, such as the so-called ‘magnificent seven’ stocks and more. Early indications so far this year are that US assets could underperform and potentially crimp the dollar," said Steven Barrow.