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Yves here. I usually find common ground with Satyajit Das’ insights, but this time I feel compelled to clarify something. As we’ve noted before, most finance-trained professionals tend to conform to traditional economic thinking, with only a few breaking away from that mindset. Das appears to overlook that for a currency issuer like the US Federal Government, inflation serves as the primary spending constraint, rather than the need to satisfy bondholders. The US can trigger inflation through excessive spending or poorly directed expenditures, particularly those that favor rentierism. As a result, Das expresses concern that the US might implement capital controls.
That said, I’m not suggesting that the US is immune to economic or financial crises. The aftermath of the 2008 meltdown has led many to anticipate another significant crash. As discussed in “ECONNED,” the previous crisis stemmed from extreme leverage linked to certain collateralized debt obligations (CDOs), and from financially fragile institutions that indulged in risky practices. While indicators of double leverage exist, we currently lack clarity on the extent and locations of these vulnerabilities. They seem to be less concentrated in banks and more prevalent among fund managers, including hedge funds, credit funds, sovereign wealth funds, and pension funds.
Thus, even if (more like when) the US encounters a crisis, its outcome could manifest as either economic stagnation or a stock market decline that doesn’t equate to a financial disaster (think of the dot-com bubble burst), potentially combined with a state of stagnation arising from excessive private debt.
Importantly, the crisis in the US may not be as severe as what other nations could experience, particularly those struggling with acute energy and food shortages like the UK, the EU, India, and various countries in the Global South. Even in such turmoil, the US might still be perceived as the least problematic option available.
I consulted with several banking and economic experts, none of whom see indications that policymakers or financial institutions are contemplating capital controls; such measures appear highly improbable (barring any aimed at further penalizing immigrants).
Of course, Trump’s erratic behavior and preference for unconventional solutions can’t be overlooked. Nonetheless, he doesn’t appear to be considering a policy measure like banning or capping diesel exports, which could bolster Republican prospects in the midterms. Experts agree that such a move would likely reduce US diesel prices significantly within weeks. In contrast, implementing capital controls would create substantial opposition from banks and influential financiers, offering little in the way of immediate benefits.
By Satyajit Das, a former banker and author of numerous technical works on derivatives and several general titles: Traders, Guns & Money: Knowns and Unknowns in the Dazzling World of Derivatives (2006 and 2010), Extreme Money: The Masters of the Universe and the Cult of Risk (2011) and A Banquet of Consequences (2016 and 2021). His latest book, The Everything Bubble: A Guide to the New Age of Financial Speculation and Phantom Wealth, will be released in 2027. He has also written on ecotourism – In Search of the Pangolin (2006) (with Jade Novakovic) and Wild Quests: Journeys into Ecotourism and the Future for Animals (2024). This is a version of a piece published in the print edition of the New Indian Express
Following a notable win against Iran, President Trump is now refocused on his ongoing and chaotic economic strategies. Many US tariffs, particularly on food and essential imports, remain unimplemented. The administration, constrained by its defeat in the Supreme Court, is leaning on questionable justifications regarding forced labor and unfair trade practices to attempt re-establishing tariffs that range from 10 to 50 percent.
Tariffs, a favorite topic of President Trump, have failed to rectify the trade deficit, which continues to hover above 3 percent of GDP. American importers and consumers have borne approximately 96 percent of the burden, with foreign exporters absorbing a mere 4 percent.
Tariff revenues have consistently fallen short of original projections, projected to generate only around $181 billion in 2026, significantly below the record $264 billion in 2025. This amounts to merely 9 percent of the anticipated $1.9 trillion budget deficit in 2026 and does not fulfill promises of a $2,000 taxpayer dividend or eliminate income tax. Over the coming decade, tariffs could yield $1.8 trillion but are expected to reduce US GDP by roughly 0.5 percent. This reduction could counteract many benefits of the new tax cuts without financing them.
The economic battleground is now shifting to US government debt, which is on the verge of surpassing $40 trillion (130 percent of GDP). Budget deficits, driven by tax cuts, an aging population, and increased defense spending, could add an additional $3-4 trillion over the next decade. Consequently, debt servicing costs are projected to double within the next ten years. There is growing concern about short-term borrowing aimed at reducing interest costs and lessening pressure on long-term bond yields. Approximately 30 percent of US debt matures within a year, placing it second only to Japan, while an average maturity of 6 years represents one of the shortest globally.
Currently, a large portion of US government debt is not held by long-term investors such as central banks, pension funds, or insurance companies. Instead, hedge funds now own approximately $2.5 trillion, funded primarily through substantial borrowings aimed at capitalizing on short-term arbitrage opportunities.
The dual need to finance both trade and budget deficits exposes the US to risks associated with foreign capital withdrawal. Foreign investors possess about $17 trillion (18 percent) of US equities and $8.5 trillion (24 percent) in US Treasury securities, alongside significant holdings in corporate and agency debt. Ownership of US Treasuries by foreign entities has declined from over 50 percent to approximately 25-30 percent.
To meet its policy goals, the administration may increasingly target revenue from overseas sources and consider capital controls. Introducing taxes on foreign entities could garner electoral support, encompassing penalties (up to) a maximum of 20 percent above existing rates on entities from nations considered to impose discriminatory taxes on American businesses. Additionally, changes in tax treatment of foreign sovereign wealth funds or further taxes on foreign remittances, as well as new port fees, could be options. Seizures of foreign assets, such as Venezuelan energy resources, remain another possibility.
However, primary measures will likely focus on preventing capital flight while either eliminating debt or pushing repayment into the distant future. The Mar-a-Lago Accord proposed by Stephen Miran, Chairman of the US Council of Economic Advisers, suggested swapping some US Treasury securities for longer-dated low- or zero-coupon debt (essentially a default), requiring foreign holders to pay a user fee for government securities (a withholding tax), and placing securities in a limited access escrow account (asset seizure). Additional measures could include restricting foreign investment, de-listing foreign companies, and imposing limitations on the export of funds.
Essentially, the US may resort to economically repressive policies targeting foreign firms and investors to mitigate debt and deficits—an approach that Treasury Secretary Bessant has acknowledged. This strategy would coincide with domestic financial repression through deficit-influenced borrowing and lower interest rates designed to create nominal growth and inflation, ultimately reducing US debt in real terms. This strategy mirrors President Trump’s own business tactics, characterized by heavy borrowing for expansion, followed by multiple bankruptcies. Proposed modifications to US government bond terms resemble debt-to-equity conversions seen in corporate restructuring.
For foreign investors, this shift presents significant challenges, as the US, in Trump’s terms, holds “all the cards.” The importance of the dollar and US Treasury bonds far surpasses America’s role in global trade. A capital war, especially if executed in the haphazard manner of previous tariffs, carries the risk of triggering a financial catastrophe. The resulting volatility in asset prices, interest rates, and currency markets would far exceed the chaos experienced during the “yikes” following the Liberation Day Tariff announcement. Such a scenario could incite a global financial and economic crisis.
Foreign investors with substantial holdings in US dollars now find themselves in a precarious position. Having adhered to mercantilist practices by accumulating vast reserves in dollars, many countries are now grappling with the threat of severe economic and political instability. Europe is estimated to possess around $8 trillion in US assets, while major Asian investors hold US investments totaling nearly $3.7 trillion. Japan, the leading holder of US government debt, owns close to $1.1 trillion, while China holds approximately $689 billion in US Treasury securities. Should these countries attempt to divest to scale, they risk significant losses as asset prices and the US dollar would likely decline under selling pressure. Conversely, maintaining their exposure may lead to devaluation of their investments, severely impacting their financial stability.
During trade disputes, foreign entities, particularly those without the economic clout of the US, have been cautious, attempting to preserve the status quo. However, the dynamics of capital battles are far more complex, especially in the short term. Establishing alternatives to the US dollar, developing new payment systems, and creating independent funding mechanisms will require substantial time. The ultimate recourse for creditors may involve collaborative threats of mass divestment, compelling a collapse of the dollar, increased US interest rates, and funding difficulties for American corporations. Concerns regarding European investors potentially selling portions of their US government bonds likely contributed to the retreat over Greenland. However, this strategy, reliant on mutually assured destruction, demands that investors risk catastrophic losses.
Many foreign nations, having previously overlooked the critical truth that relying on another party for both physical and financial security places them at their mercy, now find themselves with limited options.
In conclusion, any aspirations for a return to stability and more conventional practices seem misplaced, at least in the near future.
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