Abstract
As Donald Trump eyes a second term, his “Make America Great Again” agenda signals a shift towards economic nationalism and “fiscal dominance,” where government priorities overshadow central bank independence. This raises concerns about the U.S. dollar, as fiscal deficits could undermine investor confidence. Emerging markets like Argentina and Turkey face similar pressures, prioritizing short-term gains over fiscal stability. Thailand, though not yet at risk, must be vigilant amid rising public debt and global volatility. Maintaining institutional credibility and fiscal discipline will be crucial for navigating potential economic fallout.
Summary
The Rise of Fiscal Dominance
As Donald Trump aims for a second term, a wave of economic nationalism looms. Under his “Make America Great Again” slogan lies the concept of “fiscal dominance,” where government spending takes precedence over central bank independence. Trump’s first term saw unfunded tax cuts and growing deficits, setting the stage for potentially more aggressive fiscal policies in a second term.
The Dollar’s Future
The impact of fiscal dominance on the U.S. dollar poses a complex dilemma. Rising fiscal deficits may attract foreign capital, potentially strengthening the dollar. However, if the Federal Reserve raises rates, it risks straining the government’s debt management. Political pressure to maintain low rates could accelerate inflation, undermining the dollar’s purchasing power, affecting investor confidence in the long term.
Implications for Emerging Markets
Emerging markets such as Argentina, Turkey, and El Salvador are showing signs of fiscal dominance, driven by high debt and limited central bank autonomy. This political interference raises risks of inflation volatility and currency depreciation. While Thailand is not yet in fiscal dominance, it faces similar pressures that require careful balancing to maintain fiscal discipline and protect financial credibility amid growing global economic challenges.
Source : Exporting fiscal dominance: Trump 2.0 and global economic risks
