By Jomo Kwame Sundaram and Nurina Malek
KUALA LUMPUR, Malaysia, Jun 19 2026 – US President Trump’s policies are supposed to make America great again (MAGA), which means different things to various parties. Some of its consequences are inadvertent, including undermining dollar dominance and inducing stagflation worldwide.
Jomo Kwame Sundaram
Bretton Woods
In July 1944, delegates from some 44 countries met in Bretton Woods, New Hampshire, to create a new multilateral monetary and financial system.
The US held 70% of the world’s gold reserves at the time, with gold priced at $35 per ounce. Other central banks bought and held US Treasury bonds and similar dollar assets as liquidity reserves.
This effectively made the US dollar the primary means of payment in the post-war international monetary system. The exchange rates of other national currencies were all set against the dollar.
As other economies recovered post-war, the US current account and trade surplus declined. Until 1971, the International Monetary Fund (IMF) occasionally adjusted fixed exchange rates for ‘structural’ balance-of-payments deficits or surpluses.
Exorbitant privilege
This dollar-based international monetary system gave the US what France’s Gaullist leadership called an ‘exorbitant [economic] privilege’.
Under the Bretton Woods arrangements, the US would never face balance-of-payments problems, as it paid for imports with its own currency, which it could print at will.
Nurina Malek
The US federal government could fund its large and growing budget deficits by selling Treasury bills. This debt is now around $39 trillion, over 125% of annual GDP!
Foreign central banks soon became accustomed to holding US Treasury bonds as official reserves, effectively funding the large and growing federal debt.
Such foreign central bank demand kept the dollar strong in foreign exchange markets. Persistent capital inflows into the US have kept the dollar overvalued.
The strong dollar has boosted domestic consumption of imports, depressed exports, widened trade deficits, and kept consumer price inflation in check.
In 1960, Robert Triffin warned the US Congress about the inevitable problems that arise when a national currency is also used as an international reserve currency.
He urged the US Federal Reserve Bank (Fed) to consider the dollar’s international role when making domestic monetary policy.
In August 1971, President Richard Nixon unilaterally ended the US Bretton Woods commitment to redeem dollars with gold. Thus, the dollar clearly became a fiat currency, with exchange rates shaped by market confidence.
Protection through diversification
After the 2009 Great Recession, Western central banks kept nominal interest rates low for over a decade through coordinated ‘quantitative easing’ (QE).
Low interest rates were maintained for over a decade through the 2020-21 Covid-19 recession before the Fed raised interest rates from 2022, ostensibly to address inflationary pressures.
Borrowers worldwide were thus induced to take on more debt. Governments, corporations, and households borrowed more, increasing accumulated debt.
International payment obligations are increasingly being settled by other means. Gradually, dollar-based arrangements are co-existing with euro- and renminbi-based arrangements and BRICS-initiated alternatives.
Thus, US indebtedness and stagnation have been growing with inflationary pressures. Unsurprisingly, other monetary authorities’ previous preference for holding US Treasury bills as official reserves has declined.
Instead, official reserves have been increasingly diversified to include more gold holdings ostensibly to help hedge against inflation and currency debasement.
About 36,200 tonnes, a fifth of all gold holdings, are now held by central banks, up from 15% at the end of 2023. By 2025, non-US central bank gold holdings exceeded their US Treasury bonds for the first time this century!
Trump 2.0
Criticism of the dollar system has resurfaced from time to time, especially as Washington weaponises more financial instruments and arrangements.
The second Trump administration has threatened major US federal government creditors, including China and longtime allies such as Japan and the Gulf monarchies.
As loyal allies are bullied, many are quietly moving away from prevailing dollar-based international monetary and financial arrangements, which have long been preferred for convenience.
After bombing ten nations in the first year of Trump 2.0, US military spending has been rising rapidly, especially with the Iran war and many of its consequences likely to be protracted despite the promise of a ceasefire.
With international confidence in the US consistently undermined by unexpected unilateral White House initiatives, governments are trying to reduce their vulnerabilities, especially by diversifying their reserve assets.
But unlike early in his first term, Trump now welcomes a weaker dollar as “great”. His ongoing efforts to lower Fed interest rates also reflect successive US presidents’ refusal to address ever-larger federal fiscal deficits over the decades.
With inflation rising, market premiums over Fed interest rates are pushing up commercial rates. These hurt the real economy, employment, and banks, many struggling with rising defaults.
All this exacerbates financial ‘market corrections’ in the US and beyond. Trump-induced international disruptions are worsening instability and slowing economies worldwide.
Trump’s policies have slowed the world economy, including the US. With efforts to address the Hormuz crisis undermined by Israel, his legacy will now surely include having induced the first major stagflation in almost half a century.
IPS UN Bureau
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