In a further indication of concerns over the role of the dollar as the international reserve currency and the stability of the global financial system, the price of gold touched a new record high on Tuesday.
In early trading in Asia, it rose 0.9 percent to $3,508 per ounce before falling back to just under $3,500. Uncertainty over the direction of the international financial system and the dollar’s role is also reflected in longer-term trends.
The price of gold has nearly doubled since the start of 2023, much of the rise due to increased buying by central banks. At the end of last year, gold overtook the euro as the second-largest component of central bank reserves after the dollar and now comprises around 20 percent of these assets.
With the removal by President Nixon of the gold backing from the US dollar in August 1971, the dollar has functioned as a fiat currency. That is, it is not backed by real value but rests on the financial power of the American state and its institutions.
Confidence in that power has been steadily eroded because of a series of financial crises—in 2008, March 2020 and the bank failures of March 2023—with indications that a tipping point is approaching. The US is now the most indebted country in history—government debt is $37 trillion and rising, and the interest bill on it at $1 trillion a year is becoming the largest expenditure item in the US budget.
It is being further undermined by the policies of the Trump administration and its overturn of the entire framework of the post-war international economic and financial order. This was seen in the reaction to Trump’s “liberation day” tariff announcements in early April, when interest rates in bond markets spiked and, contrary to normal experience in conditions of turbulence, the value of the dollar fell.
The immediate turbulence caused by Trump’s economic war against the world has subsided.
But a new source of instability has been set in motion by the administration’s attacks on the political independence of the US Federal Reserve, manifested in the continuous demands that it lower interest rates—possibly by as much as three percentage points—and the attempts by Trump to have his supporters take control of the Fed’s governing bodies.
The spearhead of his efforts is the sacking of Fed governor Lisa Cook, but it is clear this is only the first step. In a paper he co-authored last March, one of Trump’s key economic advisers, Stephen Miran, slated to become a member of the Fed’s governing body if his confirmation by the Senate goes ahead, has advocated a “reform” of the Fed giving the president the power to sack its chairman and others “at will.”
These moves have raised concerns that the abolition of Fed independence is going to intensify a developing crisis resulting from the rise of debt.
Billionaire Ray Dalio, founder of Bridgewater Associates, one of the largest hedge funds in the world, has been sounding the alarm for some time. In an interview with the Financial Times this week, he escalated his warnings.
The US under Trump was drifting to 1930s-style autocratic politics, he said.
“I think that what is happening now politically and socially is analogous to what happened around the world in the 1930–40 period.”
A central bank, pressed to keep interest rates low, “would undermine the confidence in the Fed defending the value of money and make holding dollar-denominated debt assets less attractive, which would weaken the monetary order as we know it.”
Dalio noted that international investors had started to shift out of Treasury bonds into gold.
He has likened the build-up of debt to the accumulation of plaque in the human circulatory system, blocking the circulation of money in the way that plaque blocks the movement of blood.
“The great excesses that are now projected as a result of the new budget will likely cause a debt-induced heart attack in the relatively near future,” he said.
There was now a revenue imbalance, with the government spending about $7 trillion while raising only $5 trillion in revenue. This would bring a massive debt issuance at a time when investors were questioning whether Treasury bonds were “good storeholds of wealth” and that “the demand for debt will unlikely keep up with the supply.”
The clear indications of a crisis building up, noted by Dalio and others, combined with the actions of Trump in weakening confidence in the financial and economic institutions, such as his sacking of the Bureau of Labor Statistics head after a downbeat jobs report claiming the figures were “rigged,” have raised the question of why there has not been a major market reaction.
The stock market, albeit with ups and downs and some worries over the elevation of tech and AI stocks, has continued to power ahead, and there has not been a sell-off in the bond market.
This phenomenon has been the subject of comment in the financial media about why markets have ignored the attack on the Fed and why they are not “freaking out,” as the well-known economist and former New York Times columnist Paul Krugman put it in a Substack post last week.
He noted that while there had been small tremors in the bond and currency markets, “there have been no significant upheavals in the financial markets that reflect the severity of the situation we are in.”
Krugman went on to cite recent examples of when the markets had ignored warning signs of a crisis when conditions for its eruption were building up.
In 2005, there were good reasons to suspect there was a housing price bubble, but the index of default risk on securities backed by subprime mortgages did not show any serious decline until well into 2007. And then the crisis broke in September 2008.
Another example of “market complacency,” he wrote, was the euro area crisis that began in 2009, but bond yields on Spanish debt used to finance speculative real estate investment “stayed very low until the crisis was already underway.”
He said the “usual pattern” was one of market complacency “until the last possible moment” and markets acted “as if everything is normal until it’s blindingly obvious that it isn’t.”
He concluded by saying that “the absence of a strong reaction to Trump’s assault on the Fed isn’t a sign that everything is OK. We are, in fact, looking at a policy disaster in the making. But the markets probably won’t react strongly until the disaster is already upon us.”
And what will then take place? Some of the answers to that question were provided in a podcast involving Dalio and Gideon Rachman, foreign affairs columnist for the FT, at the beginning of July.
Asked to comment on the policies of Argentine President Javier Milei, who has carried out a massive austerity program demanded by the International Monetary Fund, Dalio gave it his tick of approval. He said that the raising of interest rates and the pursuit of a “very tight” monetary policy was the “classic way” to deal with the debt crisis. In other words, this was the way to deal with the global debt crisis in the US and internationally.
Milei has received support from extreme right-wing and fascistic politicians. Trump has proclaimed that Milei is his “favorite president,” and the leader of the British Tory party, Kemi Badenoch, said recently she would like to become the UK version of the Argentine fascist.
Such remarks make it clear that there is no “peaceful” or reformist solution to be found within the framework of the capitalist economy. They recall a passage from a letter from Karl Marx to Friedrich Engels in 1868 in which, after elaborating the framework of Das Kapital, he concluded: “… we have the class struggle, as the conclusion in which the movement and disintegration of the whole shit resolves itself.”
The markets may, at least at this stage, be ignoring the warning signs of a major crisis brewing in the very foundations of the profit system, but capitalist governments and the institutions of the state are not.
In every country, there is a growing drive to the imposition of authoritarian and fascist forms of rule—spearheaded in the US, the center of the developing economic and financial crisis, where the Trump administration, in direct violation of constitutional norms, has deployed the military in the capital, Washington, and is looking to use the armed forces in other major cities.
Trump proclaims the great strength of the US economy but has warned that if his reciprocal tariffs have to be repealed as a result of legal action—there have now been two court rulings against them—the US could face a 1929-style depression. This is an indication he is aware that even as the stock market surge continues, all is far from well just below the surface.
The capitalist ruling classes in the US and throughout the world are developing their response to the major eruptions of class struggle which the irresolvable contradictions of the capitalist profit system will inevitably produce.
The working class must also prepare, above all politically, through the understanding that the only way out of the crisis of the capitalist order is the fight for the program of international socialism aimed at the conquest of power.
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