The world’s financial system is highly vulnerable to Trumpism

In 2025, the world entered a new era of American unilateralism. The Trump administration is breaking norms, assailing public institutions and upturning laws.

This is all part of a change program aimed at systemic disruption (see the Department of Government Efficiency, known as DOGE), ideological adventurism (see diversity, equity and inclusion programs, universities and migration) and private gain (see the $TRUMP meme coin and Trump’s pressure on law firms).

The economic impacts of Trump’s program are starting to become clear.

These include slumps in business investment and international trade. The shelves may soon be empty at Walmart.

But potential impacts on our financial system have received less attention – even though they should be a priority concern for governments around the world, including newly elected ones in Australia and Canada.

Fragile money

The role of physical coins and banknotes is rapidly shrinking. ‘Bank money’ is by far the dominant form of modern cash.

According to a widespread idea, a positive bank account balance corresponds to a stock of durable, unitised, ‘fiat currency’ stored somewhere for the account holder.

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In reality, there is no official money sitting behind the bank balance; the balance is all there is. It’s a contractual, ledger-based record of purchasing power.

To function, this dominant form of money depends simultaneously on the integrity of banks, the legal system and the payments system.

So, modern money is inherently fragile.

It works on the understanding that governments will play predictable and principled roles.

But currently, the US government is intervening in the financial system and the payments system in unpredictable ways and with potentially dangerous consequences.

As English economist and philosopher John Maynard Keynes famously observed: “There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency.”

Even more fragile money

The founding idea of cryptocurrency was to create digital tokens as a decentralised alternative to the official currency units that sit behind bank account balances.

But as these units do not actually exist, the founders of crypto were chasing a phantom.

Despite having no fundamental value, cryptocurrencies have attracted many followers, including Trump.

Promising to bring crypto in from the financial fringe, he has especially embraced stablecoins, whose value is notionally pegged to the value of the US dollar or an asset like gold.

Integrating stablecoins into America’s financial system poses huge risks because, among other things, they vary widely in their creditworthiness.

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A JP Morgan-issued stablecoin is not equivalent to one from a fintech start-up, for example.

The result will be a system of internal ‘exchange rates’ between different versions of the US dollar – a surefire route to chaos.

More generally, the mainstream embrace of cryptocurrencies could encourage fraud, cause arbitrary transfers of wealth and weaken the system as a whole.

Official digital money

Contrary to a widespread belief, ordinary bank money is not digital – except that the ledgers that maintain the deposit records are computerised.

If central banks were issuing truly digital currency, it would involve the creation of tokens that enjoy central bank backing, therefore avoiding the problems of credit risk and internal exchange rates.

Around the world, central banks have embarked on Central Bank Digital Currency (CBDC) experiments, but Trump campaigned against a US CBDC on the grounds it would give the government ‘absolute control’ over people’s money.

In a January 2025 Executive Order, he prohibited federal agencies from establishing CBDCs.

If Trump changes his position, there will be new types of risk, including ones arising from the digital control he railed against on the campaign trail.

The issuer of a CBDC can limit how the tokens may be spent. A Trumpian CBDC could punish companies that promote diversity, equity and inclusion, or trade with countries that are out of favour.

The potential for ideological adventurism – and perverse outcomes – is unlimited.

A fragile banking system

The US Fed oversees a two-tier financial system of ordinary bank money and exchange settlement account (ESA) balances which private banks hold with the Fed.

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ESAs are a vital but little-known feature of the modern financial system. Performing the function that gold played in the former Bretton Woods system, they are used to settle payments among banks as well as between banks and the government.

ESAs are crucial to banks’ ability to withstand a ‘run’ – which is when customers seek to withdraw their deposits en masse.

Today, a bank can afford to run out of deposits – but not ESAs.

As the Fed controls American ESAs, it has the power to step in and prevent bank runs. But as runs tend to move quickly, remedial action requires speed and freedom to act.

If the Fed is neutered or restricted under the activist, cost-cutting Trump administration, there will be more bank failures.

Plunder and pillage

Though ESAs are not gold they are still a glittering prize – the keys that unlock the payments system, bank viability and money creation.

They are also essential to another prime target for plunder.

At the heart of the current system of foreign exchange trading there is a little-known mechanism that generates billions of dollars in risk-free profits annually.

New York-based CLS Bank settles most foreign exchange transactions between the banks of the major Western economies.

Using the ESAs of the respective countries’ central banks, CLS can settle as much as $US15 trillion in forex trades per day.

For the 70 or so ticket-clipping banks that own CLS, foreign exchange settlement is vastly lucrative. Will Trump discover this river of free money?

‘Bail-in laws’ provide another route

A ‘bail-in’ is the counterpoint of a ‘bail-out’.

The 2010 Dodd-Frank legislation put an end to large bank bail-outs, instead shifting the burden to banks’ owners and creditors.

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A bank in distress can convert some of its liabilities – including deposits above a guaranteed level – into equity.

A ‘bail in’ like this is bad news for depositors who must swap their position as creditors for inferior status as co-owners of a failing bank.

In a Trumpian world, the bail-in rules are a pathway to pillaging customer assets held by financial institutions.

A tangled web

In principle, a country that controls its own currency need not borrow from private capital markets to fund a budget deficit. But the Federal Reserve’s structure and mandate force the US government to continue to borrow from those markets.

The government’s debt has now surpassed $US36 trillion.

This debt is not a disaster. It represents all the money spent into the economy by the US Government that has not yet been taxed out. It is an artefact of fiscal stimulus.

In ways that attract little comment, the debt also benefits private financial institutions, which earn risk-free returns and re-use government bonds to create a plethora of other products.

Though the debt is not disastrous, Trump is flirting with disastrous ways to make it go away.

At the moment, he is raising taxes (mainly through a chaotic tariff regime) and seeking to cut government expenditure across programs including social security, defence and education.

Given that the debt is largely benign, the idea of reducing it through radical cuts to social security is indefensible. And so is the concept of a debt default.

Trump has floated that idea as well as de facto defaults like paying out the debt with cryptocurrency or ultra-long-dated, low-return bonds.

The effects of these actions would be huge and probably irreversible.

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The next financial crisis?

For Americans, the stability of banks and the integrity of the dollar are at risk from a US government with no respect for sound public policy or institutional norms.

And for the rest of the world, urgent action is needed to guard against another US-induced global financial crisis.