US vice president JD Vance has said in public that he does not think the dollar’s reserve currency status is good for the United States.

Consider what that is. A sitting administration has renounced the role its own currency plays in the world economy, on the record, in plain words!

Back in 2023 JD Vance said this:

“I am not sure that I think the reserve currency is actually good for the United States of America. I think there is a good argument that reserve currency status is akin to coal in Appalachia: it’s a resource curse, right? It allows your consumers to consume very cheaply.

That’s been the story of the American economy over the last 15 or so years, even before that. We can just borrow basically an unlimited way because we have the reserve currency, so that’s a massive subsidy to incurring debt. The debt is cheaper even in a raised interest rate environment…

So we have this massive subsidy to cheap debt for the American consumer. Well, that’s good, right? Consuming is important, especially food, medicine, things like that. But I think it’s a massive tax on American producers.”

What is he saying here?

That it is a problem that the rest of the world will go on financing the large US budget deficit and thereby holds the dollar stronger than it would otherwise be. And that this hits US manufacturing.

And the analysis is right enough. Reserve currency status does make it possible for both the state and the private sector to finance themselves more cheaply. And yes, it is a challenge for manufacturing, if you disregard what happens to wages and prices when the dollar is stronger.

Vance has bought completely into Trump’s obsession with the manufacturing sector, and I think the conclusion is clear. This administration believes that the US economy can be lifted by a cheap dollar, and that reserve currency status stands in the way.

And it is not only talk

On Friday 31 July the US Treasury went into the currency market and bought Japanese yen. The United States had not done that since 1998, which is twenty-eight years ago.

It did not pay in dollars. It sold euros out of its own reserves, and it did not tell the European Central Bank until after the trade had gone through.

On the surface this is two finance ministries, the Japanese and the American, intervening in the currency market, and twenty or thirty years ago we saw that fairly often. A Treasury Secretary did not think a currency was where it ought to be, so he bought and he sold.

Note that these are the finance ministries and not the central banks, which matters more than it sounds. The central bank may execute the trade, and in the US case the New York Fed does it on the Treasury’s instruction, but the decision was US Treasury Secretary Scott Bessent’s.

The two things are one thing. The vice president says he does not want the dollar to be the reserve currency, and the Treasury Secretary goes into the market to strengthen the yen. He does it in euros rather than in dollars, and I would not want anyone to be reassured by that, because buying yen against the dollar is pushing the dollar down whatever currency you pay with.

So the US government is now actively trying to weaken its own currency without saying so directly. The market will work that out soon enough.

The real story is why now, and why after more than twenty years of not doing it. I have watched central banks and finance ministries in currency markets for a long time, and this one does not look like the others.

The official explanation does not survive contact

US President Trump said the Japanese had a weakened currency and would like some help, and that the United States is always there for Japan.

You can of course take the Americans at their word: the Japanese are in trouble because their poor currency has become so weak, the Japanese are our good friends, it is a shame for them, and so we are helping.

But the explanation is strange. Is the US Treasury Secretary to go out and help every friend whose currency weakens, and are we to buy every currency whose president is on good terms with Donald Trump?

The Treasury has already been very willing to support the Argentine peso for President Milei, who is seen as an ally, and the Japanese have recently acquired a conservative and relatively nationalist new prime minister whom Trump apparently likes. Meanwhile the Europeans are the ones we do not like, so we sell their currency and buy our friends’. I would call that a maxim with very little to do with economics.

“A massive subsidy to incurring debt”

The rule of thumb is that if the nominal interest rate on government debt exceeds nominal GDP growth, public debt rises as a share of GDP automatically, without any fiscal easing at all. And then you risk losing control not only of the debt, but of inflation expectations, and therefore of interest rates.

The 30-year Treasury yield, nominal GDP growth, and federal debt as a share of GDP, quarterly, 1980 to 2026. Source: BEA and US Treasury via FRED.

Take a look at how that has worked. The yield beat nominal growth in 89% of quarters from 1980 to 1999, and the debt ratio went from 31% of GDP to 58% over those two decades. It beat growth in 39% of quarters from 2000 to 2019, and in 19% since 2020, which is the only reason the arithmetic looks tolerable at the moment. Federal debt stood at 122.6% of GDP in the first quarter of this year.

Consider what that would mean. If the debt becomes unsustainable in earnest, it stops being only a fiscal problem and becomes a monetary one. The market begins to expect that the Federal Reserve will have to run the printing press into overtime, and then inflation explodes, the dollar collapses, and interest rates go through the roof.

We are not there yet. But underlying real growth in the United States is in my view around 2%, and if the Fed is to deliver 2% inflation, that gives 4% nominal GDP growth, which is well below the thirty-year yield. To secure 2% inflation and stabilise debt as a share of GDP at the same time would require massive fiscal tightening.

“The debt is cheaper even in a raised interest rate environment”

The thirty-year US Treasury yield keeps ticking up day after day. It closed at 5.21% on 13 August, and the last time it was at that level was 12 July 2007. We are at pre-crisis levels, and there is no doubt that this causes real concern in the US Treasury and certainly also at the Federal Reserve.

So I would expect the Treasury Secretary to be occupied with telling investors, who after all are the people financing the enormous US budget deficit, that something is being done about it.

Instead Bessent has turned his attention to the Japanese yen, which he thinks has become far too weak. The yen has weakened since around 2014 and at an accelerating pace since 2020, and it is precisely since 2020 that the long US rate has risen in earnest.

The 30-year US Treasury yield and the yen against the dollar, daily, 2000 to August 2026. Source: US Treasury and Board of Governors via FRED.

Bessent’s logic is therefore this. If he can get the yen strengthened, the close correlation with the US rate must mean that he thereby fixes his own problem. A stronger yen, a lower US rate.

And I think that is exactly as thin as it sounds.

The yen is around 158 today. It strengthened 3.2% in July and lost half a point again in August, so the intervention worked for about a week. And note where the thirty-year closed on the day of the intervention itself: 5.27%, the highest reading of the year.

So what does he do when the yen is back where it started within a month? His mission will have had one result, which is to burn part of the Treasury’s currency reserves, and one has to ask what the purpose was. The US voter might reasonably ask why money is being sent to strengthen the Japanese currency. If the Japanese want a stronger currency, they can raise interest rates like the rest of us.

And there is a reason the division of labour settled where it did. Central banks secure low inflation, finance ministries keep the public finances in order, and currency intervention disappears from the arrangement.

Imagine what happens when it does not. If the US government sold dollars, the dollar would weaken, which amounts to pumping money into the system and creating inflationary pressure. That runs directly against the Federal Reserve’s mandate of 2% inflation, and the Fed would have to soak it up again. A finance ministry cannot run around operating in the currency market entirely independently of what is being done with monetary policy.

You cannot write long books about successful intervention in the currency market, and people have tried.

The norm that was broken

Intervention is normally coordinated, and I would stress how deliberate that is. Economists call the reason beggar-thy-neighbour: if you weaken your own currency to buy competitiveness, everyone else does the same and nobody gets anything out of it.

The great central banks are in close contact for that reason. Under the pandemic they came out together and said that they were easing monetary policy, providing liquidity in size, printing money, doing it together and announcing it together, on the simple maxim that we should not work against each other and should get as much effect out of it as possible.

Everyone in the market could see what happened on 31 July anyway. It was not 800 European pension funds deciding simultaneously to buy yen and sell euros, and anyone who sits in the financial markets knows when a central bank is in the market. In Denmark, where we run a fixed exchange rate, Danmarks Nationalbank intervenes as a fully announced policy and confirms it afterwards.

So the Europeans broke no collegial confidence whatsoever, and I would put it more sharply than that. It is the Americans who stopped operating within the normal institutional frame, and it is the Trump administration’s conduct over the past eighteen months that has changed, not anybody else’s.

We are holding a party in the stairwell without telling the neighbours, and when somebody is annoyed about it, we decide the problem is theirs.

Nobody has asked why the yen is weak

Here is the thing I have not seen mentioned in this discussion at all. Donald Trump started a war with Iran, which has sent global energy prices sharply up, and Japan is extremely dependent on imported energy.

Had that war not been started, and had the oil price stayed nearer $65 a barrel than close to $100, the Japanese yen would in my view have been considerably stronger than it is today. So if that is really what is going on, Trump might look at his own foreign policy rather than at the currency market. And note the paradox: both the Chinese and the Japanese are hit hard by rising oil prices, which forces them to sell US government bonds.

Then there is the Bank of Japan, which raised its policy rate to 1% in June, the highest in thirty-one years, and held there in July. Core inflation was 1.6% in June, below the bank’s 2% target for the fifth month running, and the bank has cut its own forecast for the current fiscal year from 2.8% to 2.5%.

So inflation is not rising as much as expected, there is a repricing of how far the Bank of Japan has to go, and all else equal you get a weaker currency out of that.

And there are no warning lights flashing on Japanese inflation. We are not talking about 4 or 5%, we are talking about inflation just above 2%.

“It allows your consumers to consume very cheaply”

Some countries save and others dis-save, which is where I would start. For the past thirty or forty years the Asian countries have had large savings, while the Americans, and partly the Europeans, have run deficits both on the public finances and on the current account. The Americans simply consume more than they have money for.

Japanese households in particular have saved a great deal, so that Japan as a nation has plenty of savings despite its large public debt, and that money went to the most liquid bond market in the world, belonging to the nation with the greatest need to borrow it. The Americans have been able to live beyond their means for thirty years because there were willing buyers of US government bonds.

The ten-year Japanese government bond yield hit 2.88% on 9 July, the highest since 1996.

Take a look at what that does to a Japanese pension fund. If you can get almost 3% in your own currency with no exchange rate risk, that may well be preferable to placing the money abroad. So buyers disappear from the European and the US bond markets, and yields there are pushed up.

Japanese investors sold nearly $30 billion of US debt in the first quarter of this year alone, and Chinese holdings are down to $683 billion, the lowest since 2008, against a peak of $1,320 billion in 2013.

And they are not being replaced. Chinese ageing means Chinese growth comes down and Chinese savings get spent rather than placed abroad, Japan has been through the same for years, and the problem is no smaller in Europe. The Americans already spend more servicing the debt than they spend on defence.

So that, I think, is Bessent’s real worry. What if the Japanese stop buying our government bonds, and what happens then to the US interest rate?

The man who thinks he is cleverer than the market

Bessent was, in and of himself, a relatively unwritten page. He was known in the international financial world from his time with George Soros, but he had no remarkable career beyond that, and then he went solo and started his own macro fund, meaning a fund that invested on macroeconomic signals.

The truth is that the fund did terribly, really terribly, and it performed miserably against comparable funds right up until he decided to become Donald Trump’s Treasury Secretary.

Then it became interesting. He suddenly began arguing that tariffs were a good idea, and in the run-up to the presidential election he was the one trying to put Trump’s rather unorthodox economic proposals into a rational frame and say that it is not as insane as you think, and not really in conflict with economic theory.

As a theory nerd I get thoroughly irritated every time I hear him, because he uses economic and theoretical concepts wrongly, again and again. He seems like the one trying to be the clever boy in the class and is not, and I think more and more people have arrived at the same view. There is no larger plan, and his boss is completely uncontrollable.

Anyone who has been near the investment world has met the investor who is very, very certain that this is what is going to happen. When someone keeps telling you that the market is wrong, it is usually because he is the one who got it wrong, and once he starts calling the market irrational you can be sure of it. I have been there myself.

Bessent is that type. He thinks he can just fix it, that he is a little cleverer than the market, that he knows where the yen should be, or the US equity market, or the US bond market. That thinking is what made his own macro fund perform so extraordinarily poorly. Now he is doing it with the world economy.

They share a model, and it is taught nowhere

Vance has the same bad habit as his Treasury Secretary, which is to use technical terms they clearly do not understand. But the vocabulary is not the point, because they share an economic model.

It is certainly not taught at the world’s economics faculties, and it is, as Vance says, heterodox.

The model resembles to an uncanny degree Modern Monetary Theory (MMT), the internet’s darling of eight or ten years ago.

Central to MMT is that monetary policy should finance the public sector without inflation. And like MMT, the Vance-Bessent thinking offers a quick fix: you do not have to touch the public finances, because it can be fixed with tariffs and a weaker dollar.

Underneath it all sits the same conviction, which is that the market cannot be left to sort it out. This administration thinks it can set the right exchange rate, the right share price, and the right import prices, and fine-tune the economy that way.

That is extremely interventionist thinking, and it dominated economic policy in the Western world in the 1970s, which from the beginning of the 1980s we said we would get nothing out of. It is worth saying plainly when we are placing this administration on a left-right scale.

Vance is asking for a permanently weaker real dollar, which monetary policy cannot deliver, and he is asking for it in a period when inflation is already too high. The Federal Reserve has not managed to deliver 2% inflation in a single month in six years.

“A massive tax on American producers”

If you want an example of the consequences of this kind of thinking, look at Erdoğan’s Turkey.

Lira per dollar and the Turkish consumer price index, monthly, indexed to their 2016-2025 average = 100. Source: OECD via FRED.

Note first what this was not, because the lira floats and nobody devalued anything. This was monetary policy, and the currency did what a floating currency does when the money is that easy.

And then look at what the two lines do. The lira falling and Turkish prices rising is one event rather than two. The cheaper currency never sat there as a competitive advantage waiting to be used, because it went into the price level.

The bill

We have of course tried the coordinated version too. In September 1985 the G5 met at the Plaza Hotel in New York to get the dollar down, saying officially only that a further orderly appreciation of the non-dollar currencies was desirable, while behind closed doors they had set a target of a 10 to 12% depreciation and $18 billion of intervention over six weeks.

Reagan had cut taxes and expanded defence spending while Paul Volcker ran tight money against it, which is a basic lesson in macroeconomic theory: tight monetary policy and easy fiscal policy push rates up and make the currency stronger. The hole in the US public finances was nothing like the size of the one we have now. And the Americans decided the strong dollar was not only their problem but the rest of the world’s too.

At the Louvre in February 1987 the United States promised to bring the deficit down to 2.3% of GDP in fiscal 1988, Japan promised to ease monetary policy, and Italy turned up and refused to sign. The Japanese said yes and kept the promise, with the deficit coming down to about 2.5% and held there for years.

The great villain then was Japan, and there were stories about the Japanese owning all of Manhattan.

In 1987 Donald Trump, that Donald Trump, took out an advertisement in a number of US newspapers thundering against Japan for exploiting the Americans. When I heard him say a few days ago that Japan were good friends, I thought that the way he thundered against the Japanese nearly forty years ago is the way he now thunders against everybody else.

Nothing has changed. The Americans are still dependent on the Japanese and the Chinese and everybody else financing their large deficits. What has changed is that the problem has become markedly larger, and that the Chinese and the Japanese may no longer have the ability to do what they did before.

In my view neither Plaza nor Louvre had any positive effect on anything at all, other than to let the Americans think their public finance problems were for somebody else to fix. Japanese interest rates came down because of the financial crisis of the 1990s and an ageing population that arrived in Japan earlier than in the rest of the world. That is precisely the thinking behind Bessent and Trump, and the debt problem does not go away by selling euros and buying yen.

So let me put it together. Structurally, the Chinese and the Japanese as the two main buyers no longer have the desire or the ability or the need to buy so many international bonds. The Americans have not got a grip on their public finances. And the Federal Reserve has not been able to get a grip on monetary policy.

Add those three together and you get one thing. Interest rates keep creeping up, and if they do it in the United States they do it in the rest of the world. That is the threat in this for everyone outside America, and it is why I think what we have seen from both Bessent and Vance matters.

It ought to cause real unease on Wall Street and at the Federal Reserve, and not least among US consumers, who can hardly expect lower inflation.

Take them at their word

So my advice to investors and to policy makers outside the United States is simple. Listen to what Vance says. They mean it when they say it, and the mistake being made almost everywhere at the moment is to treat it as rhetoric that will be quietly walked back once somebody explains the arithmetic to them.

It is not rhetoric, because one of them supplies the doctrine and the other executes it in the market with public money. That is what 31 July was.

They will come to regret it, and I think the regret will arrive sooner than they expect. But regret is not a policy, and it does not unsay anything that has already been said to the market.

What we are looking at is a weak dollar policy in all but name. And underneath it sits a refusal: this administration does not want the responsibility that comes with producing the world’s reserve currency, and it would rather hand that job back than pay for it.

Whatever else this is, it can in no way be good for the dollar, and it can in no way be good for the outlook for US inflation. A permanently weaker dollar is not a competitiveness programme. It is synonymous with permanently higher interest rates and permanently higher inflation.