Is It The Beginning Of The End Of American Hegemony?
The economic fragility that Trumpian policies threaten, combined with other factors, has made capital flee the traditional safe haven of choice.
History usually creeps upon you in homoeopathic doses, unless it happens with a bang, such as the 9/11 attacks, or with a whimper, such as when the US exited Saigon, defeated and humbled, and being forced to retreat after having dropped more bombs on Vietnam than it had on the Axis powers during all of World War II.
Last week saw a development that future historians would probably describe as the beginning of the end of American hegemony of the world: the dollar fell after a rating downgrade by Moody’s.
What is so special about a currency weakening after the issuing government’s credit rating goes down a notch, you might ask. After all, this routinely happens to countries and currencies that are unfortunate enough to suffer a rating downgrade. But this is the first time that has happened with the US. When S&P lowered the credit rating of US government bonds a notch in 2011, and when Fitch did the same in 2023, the dollar actually strengthened.
The 10-year US government bond is the anchor of the global financial system; it tethers the value of the dollar vis-à-vis all other currencies. The bulk of world trade is invoiced and settled in dollars, whether the US is a buyer or a seller in the transaction.
Of the world’s foreign exchange reserves of $12,750 billion, 53% is held in dollars, according to the International Monetary Fund’s COFER (Currency Composition of Official Foreign Exchange Reserves) database. The euro comes in as a distant second, at 18.6%.
When the primary monetary instrument that determines the value of the world’s anchor currency undergoes a rating downgrade, it creates considerable nervousness in the world’s financial markets and triggers a fight-or-flight response. Fight in this context is rather nebulous. Flight is the easy option.
And where to flee in times of financial uncertainty, other than to the safety of US Treasuries? That is the safe haven financial asset, apart from gold. So, when the US government paper was downgraded, capital rushed into the US government bond market from the rest of the world, strengthening the dollar.
But this time has proved different.
Changing Perception Of America
The biggest difference is that the world sees the US being bent on self-harm, even as another major power, China, begins to outclass it in some sectors. The US is raising the costs of all industrial inputs with tariffs that are, on average, at least four times as high as they were before Trump assumed office, and could be significantly higher if Trump sticks to his plan to impose reciprocal tariffs.
The US is defunding its universities, deporting immigrants, restricting the immigration of even the most qualified researchers, cutting off allies and sowing the seeds of lasting division in its society. In the short term, there could be higher prices and slower growth.
The Budget that the US president Donald Trump administration has prepared and is currently making its way through Congress would present the rich with deep tax cuts and the less well-off with reduced Medicaid, and emaciated state capacity to deliver whatever welfare remains funded.
Trump seeks to undo the industrial policy of his predecessor, through which he had sought to build new manufacturing capacity in the US in areas of advanced technology, whether semiconductors or decarbonisation.
Even as Trump wants to cut the overall size of the Budget, he wants to increase military spending, including for a new ‘golden dome’, a missile defence system that could cover all of the US. The poor, a sizable section of whom voted for Trump, believing his promise to make America great again, are being asked to sacrifice welfare payments, so that America’s super-rich can get a permanent reduction in their tax burden.
Trump and his family are winning new business orders and creating new businesses in different parts of the world, from Vietnam to Saudi Arabia. Trump has accepted an expensive gift from the Qatari regime, a presidential plane. The gift goes to the US department of defence as of now, but whether it would be handed over to Trump’s presidential library after he leaves office is open to speculation.
The economic fragility that Trumpian policies threaten, combined with the prospect of a huge fiscal deficit and steady rise in the national debt, has made capital flee the traditional safe haven of choice, when the rating downgrade struck.
Back In India…
Capital flowed into Indian stock markets, too. India’s reserves have risen, almost to the $700 billion mark. The rupee has strengthened. The forecast of a good monsoon, in terms of both total rain and likely spatial and temporal distribution of the rains, has raised hopes in India. The Purchasing Managers’ Index is on the rise, and the expectation of growth would surpass 6% this year and the next is taking root.
Consumer price inflation is below 4%, the midpoint of the Reserve Bank of India’s target range. Wholesale price inflation is negligible. While the Core sector growth rate was an abysmal 0.5% for April, the HSBC Flash purchasing managers’ index for composite economic activity is robustly above 60 in May, improving from April.
That said, the government cannot afford to go slow on the promised capital expenditure from the Budget. Since the Budget’s offer of Rs 1 lakh crore worth of tax giveaways will take time to materialise as additional expenditure by taxpayers, the government could think of incentivising frontloading of the consumption from anticipated low tax payout by individuals.
The government could offer to refinance at low rates loans that banks disburse to taxpayers who wish to increase their consumption out of anticipated tax breaks.
Presidential Reference Challenge
The Bar Council of India further liberalised its rules for foreign lawyers and legal firms to practise in India. The liberalisation will be on a reciprocal basis, however. Lawyers see much work ahead in assorted areas.
The President of India has referred 14 questions to the Supreme Court relating to the Court’s order setting deadlines for the Governor and the President to act on bills passed by state legislatures and sent up for the Governor’s assent. The Supreme Court took this extreme step, to introduce non-arbitrary specificity to the Constitution’s mandate for the Governor to act ‘as soon as possible’, after the Tamil Nadu governor RN Ravi sat on 12 bills sent for his assent by the legislature for years, and, when the government moved the courts against such inertia, sent two of them to the President and the rest back to the House without the accompanying message the Constitution requires.
When the House promptly passed the bills and sent them back for his assent, he referred the lot to the President. The government moved the Supreme Court against this obstruction of legislation.
The oldest of the bills in question dates back to 2020. The Supreme Court considered the Governor’s actions to be unconstitutional and deemed the bills to have been passed and converted into law. This led to the Presidential reference.
The Court also directed that bills that the Governor does not think suitable should be sent back with his message articulating his objections within three months. And, in case the governor chooses to refer a bill to the President, the President should send the bill back to the House via the Governor within three months.
The Presidential reference indicates that the President finds irksome such restrictions on the freedom of the Governor and the President to interpret ‘as soon as possible’ as they like and kill bills passed by state legislatures through sheer inaction.
The quality of the minds at work behind the Presidential reference, on which the government’s best legal heads have reportedly laboured, is brought out by Question no 13: “Do the powers of the Supreme Court under Article 142 of the Constitution of India limited to matters of procedural law or Article 142 of the Constitution of India extends to issuing directions /passing orders which are contrary to or inconsistent with existing substantive or procedural provisions of the Constitution or law in force?”
The question fails to hang together grammatically. Further, it seems to ask if the Court, meant to uphold the Constitution, could issue directives that are unconstitutional.
Some cheer is provided by a Kannada author, Banu Mushtaq, who got the International Booker Prize for a collection of short stories, Heart Lamp. The Prize is awarded to the author and the translator. The award should help Indians appreciate the literary gems that lie unnoticed in India’s multiple languages that the British dishonoured by labelling them as vernaculars.
