Round-up: End of U.S. financial hegemony. The plan to get Greenland. Bills of Attainder are back.

Analysis of the week's events

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Trump trashes America’s financial exceptionalism

Forget stocks. The real story of this week’s financial panic is about bonds. And it could signal the end of American financial hegemony.

The dollar has long played the central role in the global financial system. The fact that so much global trade and investment happens in dollars means that every central bank in the world, not to mention a huge share of private economic actors, need to hold them. While they’re holding those dollars, they often invest them in U.S. government bonds.

Bonds are certificates that governments issue as a way of borrowing money. When you buy U.S. bonds, you are lending the government money, which it will pay you back with interest. Because the U.S. economy is so strong and the government has never defaulted on its debt, U.S. government bonds - also known as “treasuries” - are usually considered one of the safest investments in the world.

For the U.S., this creates a virtuous cycle. Everyone needs dollars, and the safest place to invest them is treasuries. This enables the U.S. to borrow money cheaply, financing its massive budget deficits. Those deficits put even more dollars out into the world, many of which will in turn end up invested back into treasuries. French Prime Minister Valéry Giscard d’Estaing famously called this America’s “exorbitant privilege”.

Treasuries and the dollar have another feature. Usually, whenever there’s a global financial panic, investors sell risky assets and buy dollars and treasuries. They’re “safe harbor” assets - things you can be certain will hold their value even as everything else crashes. This gives the U.S. government an enormous ability to weather financial panics.

Usually, that is, until now.

During the financial panic caused by Trump’s tariffs, both the dollar and treasuries acted strangely. They both got less expensive, not more. People weren’t running to them as safe harbor assets - they were selling them like every other risky investment.

This has never happened before in the entire history of postwar U.S. financial hegemony.

But it also should hardly be surprising. Trump’s tariff policies are a direct attack on the the economic model that has underpinned that hegemony. And the chaotic way that they have been implemented betrays a degree of economic illiteracy and unpredictability which makes it hard to argue that the United States deserves to be treated as exceptional by global investors.

To be sure, that model has anyway been under strain for a long time, mostly because the U.S. debt burden is becoming unsustainable. Being a global reserve currency means running persistent trade and fiscal deficits in order to keep pumping enough dollars out into the world to satisfy demand. That means a lot of debt.

But the solution isn’t to destroy the economy and tank growth. It’s to fix the deficit. Raising taxes would be a good start. According to one analysis, the U.S. would be running a budget surplus right now if it weren’t for the Bush and Trump tax cuts. But Trump wants to slash taxes even more.

Ernest Hemingway once said that you go bankrupt “gradually, then all at once”. At this rate, Trump might just be the president to make it happen all at once.

The plan to get Greenland

Over the last month, the U.S. plan to get Greenland has moved from bizarre rhetoric to formal planning.

The National Security Council has reportedly met several times to consider how to acquire the island, and sent instructions to various parts of the U.S. government to set a plan in motion.

Here’s a flavor of the plan from The New York Times:

Mr. Trump’s advisers have discussed using advertising and social media campaigns to sway public opinion on the island, according to another person briefed on the matter…

The U.S. messaging campaign will include an unlikely appeal to Greenlanders’ shared heritage with the native Inuit people of Alaska, nearly 2,500 miles away, the official said…

The Trump administration is also studying financial incentives for Greenlanders, including the possibility of replacing the $600 million in subsidies that Denmark gives the island with an annual payment of about $10,000 per Greenlander.

Some Trump officials believe those costs could be offset by new revenue from the extraction of Greenland’s natural resources, which include rare earth minerals, copper, gold, uranium and oil.

It’s easy to laugh at this. Inuit Solidarity is unlikely to persuade most Greenlanders to hand their sovereignty over to America’s erratic president. And extracting that mineral wealth is not going to be easy. America has past experience with large-scale engineering projects on Greenland, such as its ‘Project Iceworm’ plan to build a secret network of underground nuclear missile silos. That failed, a victim of the unforgiving climate.

But the reason we shouldn’t laugh is because of what might happen when this ham-fisted attempt fails.

Trump has said of Greenland that “one way or the other, we’re going to get it”. Now he’s putting the formal machinery of government behind that promise. Its plans might begin like this, but it could well end with a military takeover and a war, however brief, with a NATO ally.

Let’s hope it doesn’t go that far. But with Trump acting increasingly erratically, who can rule it out?

Bills of attainder are back

If you read Article I, Section 9 of the U.S. Constitution, you come across a curious line: “No Bill of Attainder or ex post facto Law shall be passed”.

Bills of Attainder were a form of punishment commonly used by the English and British Parliament in the centuries before the American Revolution. With a Bill of Attainder, Parliament could declare someone to be guilty of a crime (usually treason) and impose a punishment (usually death or the forfeiture of property). They involved no due process, allowing Parliament to dispose of it or the monarch’s enemies without having to go to the trouble of holding a trial.

The U.S. Constitution categorically banned Bills of Attainder because they were a tool of tyranny. With them, a majority of Parliament could impose draconian penalties on any member of the political opposition, a power that was considered inappropriate in a nation of laws. Several of the authors of the Constitution had been the subject of Bills of Attainders themselves, and they had seen state legislatures abuse them during the American Revolution. With the promulgation of the national constitution, they wanted to ensure it could never happen again.

And yet, today, under the Trump administration, it is happening.