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Yves here. I seldom take issue with Satyajit Das’ submissions, but here I need to clear my throat a bit. As we have said, just about all finance-schooled professionals wind up being fiscally orthodox and only some unlearn that. But because Das does not appreciate that the spending constraint on a currency issuer like the US Federal government is inflation, and not needing to appease the Bond Gods. The US can create inflation both by spending too much relative to real economy resources and spending badly, as in unduly on rentierism, he worries that the US will adopt capital controls
Mind you, I am not saying the US will not have an economic and potentially a financial crisis. Due to 2008 being the one in recent memory, many are presupposing an epic meltdown. As we explained in ECONNED, that outcome resulted from spectacular leverage created by particular CDO structures and that already-not-well-capitalized, systemically important finance firms gorged on that bad cooking. We do have signs of double leverage but a poor idea of how much and where it sits. However, it appears to be much less concentrated at banks and more at fund managers like hedge funds, credit funds, sovereign wealth, pension funds and endowments.
Thus even if (more like when) the US has a crisis, the result could be zombification, or alternatively, a stock market crash that is not tantamount to a crisis (see the dot com unwind) along with zombification due to excess private debt.
Keep in mind that there are also good odds that as bad as things could get in the US, they are likely be even worse in many other places facing more acute energy and food crunches, such as the UK, the EU, India and many exposed countries in the Global South. So even in a crisis, the US could remain the least dirty shirt in the laundry.
I quizzed some banking and plugged-in economic experts. They see no sign that anyone in policy or finance circles is considering capital controls and saw them as highly unlikely (save ones intended to further punish immigrants).
Of course, Trump is fabulously erratic and his team seems unduly fond of out-of-paradigm moves. However, Trump does not even seem to be considering an economic restriction that would boost Republican midterm prospects, that of banning or putting a cap on diesel exports. Experts agree that US diesel prices would drop markedly in a couple of weeks were Trump to take that step. By contrast, any sort of capital control would be more radical and would rouse opposition from banks and powerful financiers, with less prospect of near-term upside.
By Satyajit Das, a former banker and author of numerous technical works on derivatives and several general titles: Traders, Guns & Money: Knowns and Unknowns in the Dazzling World of Derivatives (2006 and 2010), Extreme Money: The Masters of the Universe and the Cult of Risk (2011) and A Banquet of Consequences (2016 and 2021). His latest book, The Everything Bubble: A Guide to the New Age of Financial Speculation and Phantom Wealth,> will be released in 2027. He has also written on ecotourism – In Search of the Pangolin (2006) (with Jade Novakovic) and Wild Quests: Journeys into Ecotourism and the Future for Animals (2024). This is a version of a piece published in the print edition of the New Indian Express
Having won ‘bigly’ against Iran, a bored President Trump is refocused on his unfinished and chaotic economic wars. Many US tariffs, especially on food and strategic imports, remain unimplemented. Restricted by the loss in the Supreme Court, the administration is using tenuous arguments about forced labour and unfair trade practices to try to reimpose tariffs, ranging from 10 to 50 percent.
Tariffs, President Trump’s favourite word, have not corrected the trade deficit, which remains at over 3 percent of GDP. American importers and consumers have borne around 96 percent of the cost with foreign exporters absorbing only 4 percent.
Tariffs revenues, which have consistently been below projections, may generate around $181 billion in 2026, below the record $264 billion in 2025. This amount is only 9 percent of the expected 2026 budget deficit of $1.9 trillion and will not deliver the promised $2,000 dividend to citizens or make possible the elimination of income tax. Over the next decade, tariffs could raise $1.8 trillion but will reduce US GDP by approximately 0.5 percent, before foreign retaliation and restructuring of supply chains, offsetting much of the benefits of the new tax cuts while not paying for them.
The economic battlefront is shifting to US government debt which is near $40 trillion (130 percent of GDP). Budget deficits, fuelled by tax cuts, an aging population and defence expenditures to support increased military activism, is expected to add a further $3-4 trillion over the next decade. The country’s debt-servicing costs are due to double over the next 10 years. There is concern around the use of short-term borrowing to reduce interest costs and decrease pressure on long-term bond yields. US debt maturing within 12 months is around 30 percent, the second highest after Japan, and the average maturity is 6 years, one of shortest in the world.
A significant proportion of US government debt is now not held by long-term investors like central banks, pension funds, or insurance companies. Instead, hedge funds own around $2.5 trillion funded by large borrowings primarily to take advantage of short-term arbitrage opportuinities.
The need to fund its twin (trade and budget) deficits makes America vulnerable to withdrawal of foreign capital. Overseas investors hold around $17 trillion (18 percent) of US equities, $8.5 trillion (24 percent in US Treasury securities), and substantial amounts of corporate and agency debt. Outside of equities, foreign investment has declined with overseas ownership of US Treasuries falling to around 25-30 percent from above 50 percent.
To further its policies, the administration may focus on increasing revenue from foreigners and capital controls. Taxes on overseas entities would be electorally popular. Possibilities include penalties of (up to) a maximum of 20 percent above the existing rate on entities from countries deemed to levy discriminatory taxes on American businesses, changes in tax treatment of foreign sovereign wealth funds, or additional tax on foreign remittances, and port fees. Seizures of foreign assets, such as Venezuelan energy resources, are another option.
But the main measures will focus on preventing capital flight and wiping out its debt or deferring repayment into the never-never. The Mar-a-Lago Accord proposed by Stephen Miran, Chairman of the US Council of Economic Advisers, proposed exchanging some US Treasury securities for longer dated low- or zero-coupon debt (a de facto default), requiring foreign holders to pay a user fee for government securities (a withholding tax) and foreigners holding securities in a limited access escrow account (asset seizure). Controls on foreign investment, de-listing of foreign companies and restricting export of funds are further options.
In effect, America may adopt financially repressive policies penalising foreign companies and investors to reduce its debt and deficits, an approach that Treasury Secretary Bessant has openly acknowledged. This will be accompanied by parallel domestic financial repression through borrowing fuelled budget deficits and lower interest rates to create nominal growth and inflation to reduce US debt levels in real terms. The approach follows President Trump’s business strategies where he borrowed heavily to grow, declaring bankruptcy several times. Possible changes to US government bond terms resemble debt-to-equity conversions used in corporate restructurings.
For foreigners, the shift is problematic because the US, in Trump jargon, holds “all the cards”. The dollar and US Treasury bonds are more important than America’s position in global trade. A capital war, especially if implemented in the erratic manner of the tariffs, risks financial Armageddon. Volatility in asset, interest rate and currency markets would be on a different order of magnitude to the “yipes” after the Liberation Day Tariff announcement. It would trigger a global financial and economic crisis.
Foreign investors with existing significant US dollar investments are trapped. Having followed mercantilist policies, building up massive foreign exchange reserves invested in dollars, many nations now find themselves facing the spectre of serious economic and political ruin. Europe is thought to hold around $8 trillion is US assets. Major Asian holders have US investments of around $3.7 trillion. Japan is the largest holder of US government debt, holding nearly $1.1 trillion while China holds about $689 billion in US Treasury securities. If they try to divest on the required scale provided buyers can be found, they face large losses as asset prices and the US currency would fall under the selling pressure. If foreign investors maintain their exposure, then they would suffer as the values of their savings are trapped or destroyed.
In the trade wars, foreign states, especially those lacking the economic power of the US, have been restrained behaving tactically to try to preserve the status quo as much as possible. In the capital wars, that will be more difficult, at least in the short term. Bypassing the US dollar, creating new payment systems and developing alternatives to fund and invest independently of America will take years. The only option may be for creditors to join forces and threaten wholesale divestment of their holdings which would force the collapse of the dollar, higher US interest rates and funding difficulties for US companies. The risk of European investors selling part of holding of US government bonds was most likely a factor in the backdown over Greenland. But this game of mutually assured destruction requires investors to risk catastrophic losses.
Having ignored the obvious fact that outsourcing your physical and financial security to another party leaves you at their mercy, many foreign countries now have limited options, unfortunately.
Any hopes of a return to calm and more orthodox times are misplaced at least in the near term.
© 2026 Satyajit Das All Rights Reserved
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