Exporting fiscal dominance: Trump 2.0 and global economic risks

As Donald Trump prepares for a second term, the global economy braces for a renewed wave of economic nationalism. Beneath the slogan of “Make America Great Again (MAGA)” lies a deeper macroeconomic shift, “fiscal dominance”, where government spending and political priorities override central bank independence.

In Trump’s MAGA world, fiscal dominance is not a theory. Instead, it’s a governing model where government spending and debt concerns take precedence over central bank independence and inflation control. His first term already featured unfunded tax cuts, rising government deficits, and pressure on the Fed. Trump 2.0 promises more of the same, with louder calls for ultra-low interest rates toward 1% to reduce debt servicing costs. Politicizing monetary policy undermines its institutional integrity and marks a dangerous shift away from long-standing norms.

The Dollar’s dilemma

A key question emerges. Will fiscal dominance lead to a stronger or weaker U.S. dollar? The answer is far from straightforward.

Traditionally, rising fiscal deficits could attract foreign capital, pushing up interest rates and strengthening the dollar. But under a populist “America First” agenda, this logic begins to unravel. If the Federal Reserve raises rates to combat inflation, it risks straining the government’s ability to service its massive debt load. With trillions in outstanding federal debt, even modest rate hikes can significantly increase interest payments, potentially crowding out other spending and shaking investor confidence. This dynamic raises concerns about U.S. fiscal sustainability and its long-term creditworthiness.

On the other hand, if the Fed yields to political pressure and keeps rates low, inflation could accelerate, eroding the dollar’s purchasing power. In either scenario, investor confidence in the dollar as a stable store of value may weaken, prompting a search for alternatives. While global uncertainty might temporarily boost the dollar as a safe haven, the long-term erosion of fiscal discipline and institutional credibility points to a gradual, secular decline in the dollar’s global standing.

A global contagion

U.S. fiscal dominance is not an isolated event, but it has the potential to become a global contagion. Given the scale of the U.S. economy and the dollar’s central role in global finance, shifts in U.S. fiscal and monetary policy inevitably ripple across borders. But the contagion is not just economic, it’s institutional. When the Fed is perceived as politically influenced, it weakens the global norm of central bank independence, encouraging similar pressures elsewhere.

This erosion of credibility can embolden governments, especially in emerging markets, to prioritize short-term political goals over monetary discipline. Countries with weaker institutional frameworks and high debt burdens are particularly vulnerable. The result is a “race to the bottom,” where central banks face growing pressure to accommodate fiscal needs, even at the expense of inflation control and long-term stability.

Emerging markets under parallel pressure

A growing number of emerging markets, including Argentina, Turkey, and El Salvador, are showing signs of fiscal dominance. Common drivers include high debt burdens, limited central bank autonomy, and political incentives to keep interest rates low. These countries have already faced consequences such as inflation volatility, currency depreciation, and capital flight.

Argentina, under President Milei, has made progress in restoring fiscal balance, but its legacy of populist spending and monetary financing left deep inflationary scars. Turkey is recovering from years of politically driven rate cuts that pushed inflation above 75%, with recent efforts to restore monetary credibility still underway. In El Salvador, expansive fiscal programs and unconventional policies, including Bitcoin adoption. This reflects the tension between political ambition and monetary discipline. These cases highlight how political interference in monetary policy can destabilize prices, weaken currencies, and erode investor confidence, especially in economies with weaker institutional safeguards.

While these trends are rooted in domestic governance and political cycles, spillovers from U.S. fiscal dominance, including dollar volatility and shifting capital flows, are amplifying the risks. Some EM governments are also adopting similar practices: prioritizing short-term political gains over long-term macroeconomic stability.

Navigating Thailand’s fiscal challenges

Thailand is not yet in a state of fiscal dominance, but the pressures are building. Public debt has risen significantly due to pandemic-era spending and persistent budget deficits. Popular initiatives such as the digital wallet scheme may add fiscal pressure if not carefully managed. Meanwhile, demographic shifts, particularly an aging population, will place permanent pressure on public finances.

Moreover, Thailand’s export-driven economy remains exposed to global volatility. A sharp slowdown in global demand could weaken exports and consequently reduce government revenue, while increasing the need for fiscal support to stabilize growth. In such circumstances, expectations for closer coordination between fiscal and monetary policy may rise. Although the Bank of Thailand operates with strong legal independence and a clear inflation-targeting mandate, navigating these pressures will require careful balancing to preserve long-term policy credibility.

As the U.S. pushes the boundaries of its institutional credibility, the world is watching. America’s fiscal-monetary experiment will send shockwaves beyond its borders. For Thailand, the path forward is clear to protect central bank independence, uphold fiscal discipline, and resist the lure of populist quick fixes. In a world tilting toward fiscal dominance, countries that maintain strong institutions and policy discipline will be better positioned for a smoother landing.

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Published in the 'The Opinion' column on the Nation Thailand website on September 2, 2025.