The paradox of power for America vis-à-vis the dollar-based financial architecture which grew out of, around and alongside the broader, US-centric post-War order, is this: Its capacity to coerce is inversely correlated to the frequency of US coercion.

As examples of America wielding the “exorbitant privilege” for geopolitical gain pile up, other countries increasingly question the value proposition on offer from participating in the system. Any individual defection is meaningless, but they add up over time. And the flip side of Treasury sanctions is a compelled defection.

Mark Carney hinted at this in his much-discussed Davos speech this month. “Great powers have begun using economic integration as weapons, tariffs as leverage, financial infrastructure as coercion, supply chains as vulnerabilities to be exploited,” he said. “You cannot live within the lie of mutual benefit through integration when integration becomes the source of your subordination.”

In political science terms, that’s called “weaponized interdependence.” The key scholarship on the idea comes from Henry Farrell and Abraham Newman who in 2019 wrote that, “[E]conomic globalization creates its own set of international structures and thus generates new forms of state power.”

Donald Trump’s first 12 months (back) in the Oval Office were defined on the international relations front by the most aggressive such weaponization in the (relatively short) history of the dollar-based global financial order.

Trump argues, not entirely irrationally, that the US should be getting more out of the deal than it does — that the benefits which accrue naturally to America from the system, encapsulated by the term “exorbitant privilege,” aren’t enough. And that allies shouldn’t be exempted from coercion.

Whatever the merits of that argument, operationalizing it comes at considerable risk. Again: If too many people defect — or are forced to defect — from the system, America’s leverage wanes. “De-dollarization” is another word for defections.

With that in mind, consider that gold, which had already run ~150% higher over two years, is now up 15% in just eight days.

That’s among the largest gains over such a compressed time frame in half a century, eclipsed only in the early 1980s, late-1999, September of 2008 (i.e., in and around Lehman’s collapse) and in the wake of “Liberation Day” last year.

Trump’s feeding that rally in (at least) three ways. First, he’s creating a haven bid by stoking all manner of chaos.

Second, he’s pursuing a weaker dollar for the purposes of export competitiveness which is a factor in the administration’s apparent participation with Tokyo in a bid to stabilize the free-falling yen.

Third — and this is the point I want to drive home here — he’s incentivizing people to think outside the box, which is to say to get out of inside money. Gold’s the ultimate outside money.

Trump thinks he knows what he’s doing. A weaker dollar’s good for export competitiveness and he reckons he can have his cake and eat it too by simultaneously stoking dollar weakness and compelling countries, under all sorts of threats, to invest in the US.

Maybe he’s right, but as the figure below shows, we’re now looking at the third significant episode of acute dollar weakness in less than a year.

Trump’s unconcerned. “I think it’s great,” he said late Tuesday, when queried on the currency. “I think the value of the dollar — look at the business we’re doing,” he went on. “The dollar’s doing great.”

As usual, analysts are split over what this means. Put as a question: Have we transitioned into a terrifying new world or are such fears overblown, as they’ve always been until now?

I still lean towards the latter (i.e., concerns are likely overdone, at least as it relates to the dollar’s reserve currency status), but as one Sydney-based strategist put it in remarks carried by Bloomberg, “Markets are reopening the question of whether the US is asking investors to accept a lower standard of stability, and therefore demanding a higher price for bearing US risk.”

In a note published Wednesday, ING’s Chris Turner sounded a similarly cautious tone. “If the buy-side has decided to raise its dollar hedge ratios on US policy risk and a sense that Washington wants a weaker dollar, it makes no sense to stand in the way,” he wrote, of the drop.

I’ll leave you with an excerpt from the above-linked academic journal article on weaponized interdependence penned during Trump’s first term by Farrell and Newman. It should be read in the context of my opening remarks on the paradox of American power and also with a mind towards Carney’s speech in Davos last week. To wit:

When interdependence is used by privileged states for strategic ends, other states are likely to start considering economic networks in strategic terms too. Targeted states — or states that fear they will be targeted — may attempt to isolate themselves from networks, look to turn network effects back on their more powerful adversaries, and even, under some circumstances, reshape networks so as to minimize their vulnerabilities or increase the vulnerabilities of others. Hence, the more that privileged states look to take advantage of their privilege, the more that other states and non-state actors will take action that might potentially weaken or even undermine the interdependent features of the preexisting system. Piecemeal worries over adversaries and resulting actions may erode global networks over the long-term. More rapid change may occur if US actions lead allies to seriously reconsider their exposure to global networks that they rely on far more heavily than China and Russia, but have not to this point seen as a threat vector. [T]he most plausible path to such a transition would involve the defection of US allies, if they decided that the United States was abusing weaponized interdependence in ways that conflicted with their core interests.