Matthew’s view
Most of the world’s finance ministers and central bankers were in DC last week for the spring meetings of the IMF and World Bank. For many of those from so-called “emerging markets,” the goal was to convey competence and respectability to money managers and to officials of the multilateral institutions, with the Argentine delegation among the stars of the show. These are people who know that their countries depend, at least to a degree, on the goodwill of others. They also know that the confidence of their own citizens cannot be taken for granted. If they make a mistake, they risk capital flight, with spiking borrowing costs and plunging currencies simultaneously crushing the economy and pushing up consumer prices. The fear of that double whammy instills discipline, which can be painful when it comes to fighting downturns, but EM policymakers know that the alternative to austerity is even worse . Finance ministers from these developing economies were in Washington bearing a message of humility and competence.
And then there were the Trump administration officials. The US is not an emerging market, of course, but its prosperity still depends on being an attractive place to invest and build businesses. That is now under threat. As Citadel’s Ken Griffin put it at Semafor’s World Economic Summit , the Trump administration has put America’s “brand at risk” and that it could take “a lifetime to repair the damage that has been done.” The Trump officials disagreed both publicly and privately, blithely defending the destructive and capricious policy changes of the past few months in an effort that apparently failed to inspire confidence among the people who actually decide whether to buy Treasury bonds .
We are already seeing some of the consequences for markets. Consider Turkey, which is blessed with an educated citizenry, a diversified economy with a robust manufacturing sector, and membership in the EU Customs Union. Living standards, on average, are comparable to Portugal and Poland . Yet the country’s long history of political instability and currency collapses has created lasting costs for society. Turks hold much of their savings in foreign currency and gold , while locals and foreigners alike are quick to run from Turkish assets at the first sign of trouble. That makes it more expensive for Turkish businesses to raise money to finance investments, and it makes it almost impossible for Turkish households to borrow, whether via mortgages or credit cards.
When the Erdogan government arrested the mayor of Istanbul — a leading opposition candidate — in March, foreigners pulled record sums out of the country , causing the lira to plunge by 10%. The central bank has since sold a whopping $40 billion of foreign currency reserves to prevent the currency from falling even further.
On April 2, the US surprised the world with the announcement of “reciprocal” tariffs , which seem to have been generated by a chatbot. While the Federal Reserve has not felt compelled to intervene in the currency markets, the dollar has nevertheless lost about 10% of its value against alternatives perceived to be safer, such as the euro and Swiss franc. Moreover, yields on US Treasury bonds briefly went up even as stock prices were falling. That is an unusual combination that cannot be explained solely by the expected impact of tariffs on growth and inflation. We do not yet have detailed data on transactions, but it is likely that foreigners and Americans were both behind the selling.
Administration officials like to dismiss the impact of tariff volatility by pointing out that imports are only 14% of the US economy, and that their agenda will do wonderful things for the other 86%. (Counterpoint: Utilities are only 1.5% of GDP , and it would be a catastrophe if every American lost access to water, heat, and electricity, but never mind.)
So consider what else the Trump administration is doing, from arresting judges to collecting quasi-bribes to berating businesses for raising prices to pressuring the central bank for lower interest rates to deporting citizens to slashing support for scientific research , all while undermining the alliances that have helped keep peace in Europe and Asia for generations.
So far, these actions have not had the same immediate market impact as tariffs. But over time, they might make the US a place where foreign and domestic investors are less confident that their assets are safe, quicker to run for the exits at the first sign of trouble, and more willing to hedge by holding a bit more of their wealth outside the country — or at least outside the dollar. In other words, a bit more like Turkey, or perhaps Argentina. The massive rally in the price of gold since early 2024 is one potential indicator of what that might look like.
In his presentation at the IMF , Santiago Bausili, the head of Argentina’s central bank, said that his goal was to make Argentina a “normal country” after decades of mismanagement by Peronists. Yet he also believed that even if he and his colleagues did a good job, Argentines would still want to use dollars alongside the peso for transactions, as well as hold much of their wealth in dollars. The mistakes of the past have created an enduring constraint for Argentine policymakers, limiting their ability to respond to downturns without triggering financial outflows that ultimately increase the pain for ordinary people. The US is not in that situation yet, by any means, but it is also a little bit closer than it was — and too many of the officials in charge seem unaware of the risks.