Inflation, Instability, and the Risk to the U.S. Dollar
Normally, it’s too early to judge a new president by the state of the economy. However, former President Trump has and is enacting changes that are immediate, sweeping, and deeply consequential — unlike anything we’ve seen in modern times. The impact of these changes are real, and the risks to economic stability are significant.
To understand this we are going to focus on inflation because hitting a lot of buttons that will absolutely cause prices to increase. It will make the COVID bump under Biden look wonderful.
The Dollar’s Role — and Its Fragility
- Global Reserve Currency Status
The U.S. dollar remains the world’s reserve currency, largely due to the United States’ perceived stability. Countries store value in dollars because they are viewed as low-risk and resilient. However, if the dollar weakens significantly — whether due to inflation, fiscal instability, or global uncertainty — it could lose its reserve status. That shift alone would increase prices in the U.S., as imports become more expensive. And that’s before factoring in the effects of tariffs.
(This drop in the dollar valuation would normally help make US Exports more appealing, but the way this has been handled, what would normally be a benefit will likely not begin to offset the downside of the actions being taken.) - Tariffs as an Inflation Driver
Tariffs, in theory, encourage domestic production by making foreign goods more expensive. While that goal may be sound, the way these tariffs have been roll out — suddenly and without a coordinated plan — makes the transition extremely painful. The sharp rise in costs hits consumers directly, and many companies are left scrambling.
Better approaches could include:
- Targeted negotiations focused on national security concerns.
- Gradual, phased implementation to give businesses time to adjust.
The rapid, large-scale rollout of tariffs, without preparation, reflects a fundamental misunderstanding of how supply chains and international business actually work.
Shaking Confidence Across the Economy
When Federal departments were suddenly closed, contracts were canceled, and mass firings happen without clear cause, it sent a chilling signal to the business world. Companies lost confidence, cut back on spending, and stalled hiring. This drop in demand has ripple effects, especially when paired with retaliatory tariffs from other nations and slumping sectors like tourism.
From a supply and demand standpoint, it would seem that this would reduce inflationary pressure, but this will likely not hold and become an inflationary lever because businesses will not be able to “sell” more to cover their overhead and will have to get the maximum profit from their new, lower sales volumes. (We saw this with restaurants during covid.)
Why Inflation Pressure Matters
Inflation affects far more than consumer prices — it directly impacts national debt and financial policy.
- Debt and Bond Sales
The U.S. typically sells government bonds at low interest rates thanks to investor trust. That trust begins to erode when inflation rises or political instability grows. In that case, the Federal Reserve may need to increase interest rates to make bonds more attractive, therebyraising borrowing costs across the board.
This is huge because the Fed, who has been able to use interest rates to control economic growth and inflation for nearly 4 decades may not have this tool any more. - The Debt Spiral
Interest payments on our national debt already consume a large portion of the budget. If interest rates rise just 1%, that percentage grows significantly. If rates climb too far, debt payments could consume a majority of the federal budget — meaning less spending in other areas unless we increase the debt more and run the risk of a debt spiral.
Also, our debt is often measured as a percentage of our GDP, so if the economy is humming along, the debt may be less of an issue.
With the actions Trump has taken, an economic slowdown is unavoidable. The only question now will be how bad and how fast will it hit. The likely answers to both of these questions are not something I want to discuss, but let’s just say with an economic slowdown, the national debt could become a larger, even less sustainable percentage of our GDP.
Who Stands to Gain?
In a volatile or collapsing currency environment, those with alternative assets — like cryptocurrencies — can benefit significantly. Both Trump and Elon Musk have ties to crypto ventures. While this doesn’t prove intent, it does raise concerns about conflicts of interest and long-term consequences. They could stand to gain enormously if all this creates a currency collapse.
Still not known: Could Rising Rates Spark a Banking Crisis?
This risk isn’t hypothetical. We’ve already seen smaller banks fail under the pressure of rising interest rates. If inflation continues to climb and the Fed responds with aggressive hikes, the financial system could tip into crisis faster than expected. (I need to look into the specifics of this.)
A Legacy of Stability — Now in Jeopardy
For over half a century, the U.S. has relied on smart fiscal policy, strong institutions, and global cooperation to manage its economy. Even in moments like the 2008–09 financial crisis, measured and coordinated action helps avert disaster.
But today, that steadiness feels missing. Reckless decisions, rushed policies, and a disregard for expert guidance threaten to destabilize not just the economy — but the country itself.
Interest Rates as a Policy Weapon
For decades, the Federal Reserve has used interest rates as a tool to balance economic growth and spending. Now, if inflation surges beyond expectations, driven in part by erratic policies, the Fed may no longer be able to manage it with interest rates alone — especially if those rates must rise simply to finance government debt.
This dynamic threatens to explode the deficit and blow up the federal budget. In that scenario, cuts to key programs like Social Security and Medicare may be unavoidable , even as tax breaks for the wealthy expand.
