U.S. stocks and the dollar are falling, but U.S. bond yields are soaring. Why does The Economist say this is an extremely dangerous signal?

The Economist released a new film this week in which experts point out that the recent turmoil in financial markets is not just a sell-off in the stock market. The deeper warning is that investors appear to be generally withdrawing from U.S. assets, a trend that could pose a serious threat to the dollar's status as the world's reserve currency. (Synopsis: Unexploded bomb this summer: Trump has the right to "fire Powell" after May to control the US Federal Reserve to cut interest rates? (Background supplement: Ball crushed interest rate cut hopes + Huida chip was regulated, bitcoin fell back to 84,000, and U.S. stocks sold off sharply again) U.S. General Trump's recent tariff policy has led to a decline in global risk markets, including U.S. stocks, bond yields, and a decline in the dollar. And the simultaneous occurrence of all three events is a red flag for economists, is Trump causing permanent damage to the US economy? The Economist released a new interview this week, in which Economist editor Henry Curr shares his concerns that the dollar's roots as a global reserve currency are eroding, potentially creating systemic risks, highlighted below: Why is the reaction of financial markets to Trump's tariffs worrying? Henry points out that the recent turmoil in financial markets is not just a sell-off in the stock market. The deeper warning is that investors appear to be generally withdrawing from U.S. assets, a trend that could pose a serious threat to the dollar's status as the world's reserve currency. You know, the current stability of the global financial system, and even the functioning of the global economy, is largely based on this special status of the dollar. Since US President Donald Trump announced the so-called "reciprocal tariffs" in early April, global stock markets have experienced a sharp decline, which is well known. A more worrying signal, however, is that US Treasuries are selling off at the same time as the dollar. Usually, when the yield on U.S. Treasury bonds rises, the dollar exchange rate rises because holding dollars for buying U.S. bonds yields higher returns. But now the situation is this: the yield on government bonds has soared, but the dollar has not risen but fallen. This anomaly shows a general sell-off and loss of confidence in U.S. assets, a sign of an "escape." This dynamic is more often seen in emerging markets, or as in the case of the catastrophic "mini-budget" triggered by former British Prime Minister Liz Truss' brief term. This strongly suggests that investors may have begun to demand a "risk premium" on U.S. assets. Foreign investors, mainly in the private sector, hold up to $8.5 trillion in U.S. Treasuries, and if they start selling, it will further push up U.S. borrowing costs. Fiscal deficit adds fuel to the fire In addition to the trade war, another factor that has added to market concerns is that the US Congress is preparing to ease finances further. Congress not only intends to continue the tax cuts of Trump's first term, but may even increase them. According to the Committee for a Responsible Federal Budget, the budget framework it adopted is extremely aggressive in terms of fiscal easing, and could be larger than Trump's tax cuts, Covid stimulus measures and Biden's stimulus plan combined. At present, the fiscal deficit in the United States has reached 7% of GDP, which is a very unusual figure in strong economic times, and such high deficits usually occur only in times of economic crisis. Such a massive fiscal expansion is enough to cause high alarm in the bond market and dollar investors. Inexplicably, despite the market alarms, the Trump administration does not seem to be entirely concerned about this, and even senior officials are skeptical about the dollar's reserve currency status. The chairman of the White House Council of Economic Advisers has publicly stated that a strong dollar is like a tax on manufacturing workers because it makes U.S. exports more expensive. Senator J.D. Vance has expressed similar sentiments. In MAGA circles, there is indeed a voice that holds the huge cost to the United States of reserve currency status. The government's high-level public questioning of the decades-long US official stance of "welcoming a strong dollar and treating the United States as a safe haven for international investors" is undoubtedly shaking market confidence. Nightmare Scenario: A Runaway Chain Reaction If the current initial signs continue to deteriorate, the most immediate consequence will be that US Treasury yields continue to climb. Because the U.S. has a huge national debt (about 100% of GDP), every percentage point increase in yields will eventually force the government to pay additional interest costs by raising taxes equivalent to 1% of GDP or cutting spending. This would create a vicious circle that would force Congress to take urgent steps to stabilize markets, perhaps on a scale and urgency comparable to those of the global financial crisis. The question, however, is whether the current highly polarized American political system is capable of quickly reaching consensus to implement necessary but painful austerity (e.g., cuts in social benefits)? If the president vetoes the bill, does Congress have the power to override it by a two-thirds majority? The fact that the United States has used its reserve currency status to accumulate high debt in the past and maintain staggering deficits even when the economy is strong means that the magnitude of the policy corrections required in the event of a crisis will be enormous and a severe test of the political system. At the same time, the role of the US Federal Reserve System (Fed) has become complicated. While the Fed will almost certainly want to step in to stabilize bond markets, the current environment is different than it was during the global financial crisis. Inflation wasn't a major threat at the time, but now, partly due to tariffs, U.S. inflation is heating up and consumer inflation expectations are rising sharply. In addition, the Fed is also under pressure from the Trump administration to cut interest rates, and the appointment of the Fed chairman will expire next year. Even more disturbing is a court case pending that could weaken the Federal Reserve Council's protection from dismissal. All of these factors could weaken the Fed's ability to respond to crises on its own, stabilizing markets while avoiding giving the impression of "paying for congressional deficits." After the dollar, who is in charge of the ups and downs? If the dollar does lose its reserve currency status, who can replace it? Henry believes that over the past few decades, people have been talking about whether the renminbi will replace the dollar. However, given the current state of China's economy, capital controls, lack of independent rule of law, and the impact of the trade war, it is difficult for the renminbi to gain the full trust of global investors in the short term, nor does it have the legal and market infrastructure needed to become a reserve currency. The reality is that many alternatives to the dollar exist, but none can fully match the United States in terms of security, liquidity, and size of the economy. The euro is backed by a large economy, but lacks a unified and deep capital market and co-issued assets like US Treasuries. The Nordic countries have stable currencies but too small economies. Japan itself is heavily indebted. Switzerland is also limited. In addition, there are traditional safe-haven assets such as gold, and even cryptocurrencies may play a role. However, a world without a clear dominant reserve currency would be a much more volatile world. Part of the security of a reserve currency comes from the clustering effect of "everyone thinks it's safe." Once this consensus breaks down, markets will become more fragmented and more prone to runs and disruptive capital flows from one currency to another. This would be a huge loss for the global financial system, built on the "rock-solid" belief in the dollar and U.S. Treasuries. We may face a transitional financial crisis that ends up in a world where there are more options for asset parking, but overall safety and stability decline. Although the crisis has not yet fully erupted, there is still an opportunity for the US government to adjust its policies (such as retreating...