America's debt crisis and the temptation to break fiscal taboos: The de facto expropriation of creditors

If the US superpower wants to expropriate its creditors

The United States is facing one of the greatest fiscal challenges in its history. At the end of September 2024, the national debt reached approximately $35.5 trillion, and by October 2025, it had already risen to nearly $38 trillion. This now corresponds to approximately 123 percent of American economic output, a level that exceeds even the debt burden at the end of World War II. This dramatic development is unfolding at a pace that alarms even experienced financial experts. Within just a few months, the debt level has increased by more than $1 trillion, a sum that seemed unimaginable just a few decades ago.

What makes these bare figures even more worrying is the speed at which the dynamics are deteriorating. Between 2021 and today, the United States' annual interest payments have more than doubled, from approximately $533 billion to well over $1.16 trillion. In concrete terms, this means that the American government spends approximately $3 billion a day on debt service alone. For the first time in the country's history, these interest payments even exceed total defense spending, the expenditure category traditionally considered sacrosanct and underpinning the military's claim to global supremacy.

The Congressional Budget Office predicts an even more drastic development for the coming years. By 2035, the publicly held national debt is expected to rise from the current level of approximately $30 trillion to $52 trillion, which would correspond to a debt-to-GDP ratio of 118 percent of economic output. According to these estimates, interest expenditures will climb from the current 2.4 percent of gross domestic product to 3.9 percent in 2034, significantly exceeding the historic highs of the late 1980s and early 1990s. However, these projections are based on the assumption that interest rates remain moderate over the long term and that the Federal Reserve consistently achieves its inflation target of 2 percent. Both assumptions are highly uncertain given the structural deficits and the political unwillingness to implement fiscal consolidation measures.

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The perfidious plan and its inventor

In this threatening scenario, one economic advisor has made a name for himself, whose ideas have caught the attention of the international financial world. Stephen Miran, a 41-year-old economist with academic pedigree from Boston University and Harvard, where he earned his doctorate under the renowned economist Martin Feldstein, published a paper in November 2024 that forms the basis for what is known as the Mar-a-Lago Accord. Miran, who served as an advisor at the Treasury Department during Trump's first term and subsequently worked at the investment firm Hudson Bay Capital Management, was appointed by Trump as chairman of the Council of Economic Advisers and has also served on the Federal Reserve Board of Governors since August 2025.

The concept devised by Miran bears the sonorous name of Trump's residence in Florida, and its rhetoric is based on historical precedents such as the Plaza Accord of 1985 and the Bretton Woods Agreement of 1944. But while those agreements actually represented multilateral coordination attempts to stabilize the international monetary system, the Mar-a-Lago Accord is something fundamentally different: a plan to relieve the burden on the American budget through the de facto partial expropriation of foreign creditors.

The core of the idea is strikingly simple and at the same time disturbing. Foreign governments that currently hold significant amounts of US government bonds are to be persuaded through political and economic pressure to exchange their short- to medium-term bonds for so-called Century Bonds. These hundred-year bonds would bear significantly lower interest rates than current securities, which would substantially reduce the US's annual interest burden. The offer to creditors is a thinly disguised blackmail: Those who voluntarily exchange their bonds will receive lower tariffs or better access to the US domestic market. Those who refuse face trade sanctions and possible exclusion from the world's most lucrative market.

The illusion of voluntariness

What Miran and his followers portray as a free-market arrangement would, in reality, be nothing more than a backdoor default. Harvard economist Kenneth Rogoff, one of the world's leading experts on sovereign debt crises, summed it up in a conversation for the Financial Times podcast: This is a default. If a country declares to its creditors that it will no longer comply with the agreed terms and instead dictates new, significantly less favorable conditions, then this is legally and economically a debt haircut, regardless of how it is packaged.

Historical research on sovereign debt restructuring clearly shows that the decisive criterion for default is not the nominal reduction of debt, but the reduction in present value from the creditors' perspective. For example, for Greek government bonds restructured in 2012, the so-called haircut ranged between 59 and 65 percent, depending on the calculation method. For Cypriot bonds in 2013, it averaged 36 percent. Although these haircuts were formally described as voluntary, considerable political and regulatory pressure was exerted to encourage the affected banks and institutional investors to participate.

What Miran proposes for US government bonds would follow the same logic. Foreign central banks would have to exchange their existing bonds, which may mature in a few years and bear market interest rates of three to four percent, for hundred-year bonds with interest rates well below two percent. The loss in present value for creditors would be immense and would accumulate over decades. Assuming a discount rate of four to five percent, as is typical for government bonds with solid credit ratings, the haircut for many affected bonds would be between 40 and 60 percent.

The geopolitical dimension of the debt trap

The United States' vulnerability due to its dependence on foreign creditors is considerable. More than 30 percent of US Treasury securities in circulation are held by foreign investors, representing approximately nine trillion dollars. Leading the list are Japan, with holdings of approximately 1.15 trillion dollars, and China, with approximately 730 billion dollars. The United Kingdom, Luxembourg, Belgium, Switzerland, and the Cayman Islands collectively hold additional significant sums. Interestingly, many of these financial centers are less independent investors than conduits for international capital flows, as they are home to major depository institutions such as Euroclear and Clearstream.

Japan finds itself in a particularly delicate position. The country has accumulated US government bonds for decades, partly for reasons of currency stability and partly as an expression of its close security ties to Washington. These holdings are of enormous importance to Japanese institutional investors, particularly pension funds and insurance companies, as they balance their portfolios and ensure predictable returns. A forced exchange into low-yielding Century Bonds would cause significant losses and could destabilize the entire Japanese financial system. Furthermore, such a measure would severely test the alliance between the two countries, especially at a time when Japan is indispensable as a counterweight to China in the region.

China, on the other hand, has already begun reducing its holdings of US government bonds in recent years. Chinese reserves have fallen to their lowest level since 2008, partly reflecting strategic diversification considerations, but partly also distrust of US fiscal policy. Beijing has invested heavily in gold and sought to establish alternative currency channels to reduce its dependence on the dollar. The threat of a forced debt restructuring would only accelerate this process and could encourage other countries to also reduce their dollar reserves.

The Triffin Dilemma in the 21st Century

The problem Miran purports to solve is by no means new. Back in the 1960s, the Belgian-American economist Robert Triffin described the fundamental dilemma of a reserve currency. A country whose currency serves as a global reserve currency must provide the world with sufficient liquidity to facilitate international trade. This structurally requires trade deficits, as the country must import more than it exports to satisfy demand for its currency. At the same time, these permanent deficits undermine confidence in the currency and the country's ability to service its debts in the long term.

Miran argues that the United States is caught in precisely this trap. Global demand for dollars and dollar-denominated safe haven assets, especially Treasuries, is leading to a structural overvaluation of the dollar. This overvaluation makes American exports more expensive and imports cheaper, which has eroded the country's industrial base. At the same time, reserve currency status allows the United States to borrow almost unlimitedly abroad because the demand for Treasuries is inelastic. However, this exorbitant privilege, as it was once formulated, comes at a price: American industry has been weakened, dependence on foreign capital has grown, and the debt burden threatens to become unsustainable.

The modern version of the Triffin dilemma, however, is more complex than its original formulation. In the 1960s, the issue was the gold backing of the dollar and whether the United States possessed enough gold to redeem all the dollars in circulation. This problem was resolved in 1971 by abolishing gold convertibility. Today, the issue is no longer about gold, but rather about confidence in the United States' ability and willingness to service its debts properly. Miral's reformulation is that the costs of reserve currency status are borne disproportionately by American industry and American workers, while the benefits are concentrated in the financial system.

Critics of this view, including economists such as Michael Bordo and Robert McCauley, point out that the current situation has less to do with a systemic dilemma than with American fiscal irresponsibility. The US could certainly reduce its twin deficits, the budget deficit and the current account deficit, if it were willing to cut spending and increase revenue. The problem is not the dollar's role as a reserve currency per se, but the fact that the US is using this role to finance excessive consumption spending rather than productive investment.

The historical parallels and their limits

Proponents of the Mar-a-Lago Accord point to two historical precedents: the Bretton Woods Agreement of 1944 and the Plaza Accord of 1985. Both agreements are cited as examples of successful international coordination to reorganize the monetary system. However, a closer look reveals fundamental differences that make a simple application to today's situation impossible.

The Bretton Woods system established the dollar as the central reserve currency, pegged to gold at a fixed rate of $35 per ounce. All other currencies were pegged to the dollar at fixed exchange rates. This system worked as long as the United States maintained a dominant economic position and the world had confidence in the stability of the dollar. It collapsed in 1971 when the US gold reserves were no longer sufficient to cover all dollars, and Nixon abolished gold convertibility. Bretton Woods was ultimately an example of the failure of a fixed monetary system in the face of structural imbalances.

The Plaza Accord of 1985 attempted to weaken the overvalued dollar through coordinated interventions by the G5 countries. Within two years, the dollar fell by 40 percent against the yen and the Deutsche Mark. In the short term, this intervention achieved its goal: the dollar weakened, and the American trade deficit began to narrow. In the long term, however, the consequences were ambivalent. In Japan, the rapid appreciation of the yen contributed to the creation of the asset price bubble of the late 1980s, the bursting of which ushered in the infamous lost decades. American trade imbalances returned a few years later because the structural causes—low savings rates and high government spending—were not addressed.

What fundamentally distinguishes the Mar-a-Lago Accord from both historical examples is its one-sidedness and extortionate nature. Bretton Woods and the Plaza Accord were multilateral agreements that, despite all their power asymmetries, were at least formally based on mutual consent. The Mar-a-Lago Accord, on the other hand, would be a dictate from the United States to its creditors, underpinned by the threat of economic sanctions. This would not only destabilize the international monetary system but also fundamentally undermine confidence in American financial markets.

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The role of tariffs in the geopolitical chess game

A central component of Miral's strategy is the massive use of tariffs as a means of pressure and a source of revenue. Trump has already used this tool extensively in his second term. April 2, 2025, which he called Liberation Day, marked the beginning of a new era of protectionist trade policy. On that day, comprehensive reciprocal tariffs went into effect, targeting virtually all of the United States' trading partners. Tariffs of 20 percent were imposed on the European Union, 34 percent on China, and 24 percent on Japan. A base tariff of at least 10 percent applies to all other countries.

The logic behind this tariff policy is multifaceted. On the one hand, the tariffs are intended to generate direct revenue that contributes to financing the federal budget. On the other hand, they are intended to encourage American companies to relocate their production back to the USA, which would create jobs and strengthen the industrial base. Third, the tariffs serve as a bargaining chip: Countries willing to reallocate their treasury reserves or meet other American demands can hope for lower tariffs.

Miran argues that tariffs don't necessarily have an inflationary effect if the dollar appreciates in response. A stronger currency would make imported goods cheaper, thus offsetting the price effect of the tariffs. However, this theory of currency offset is highly controversial. Experience shows that companies generally pass tariff costs on to consumers, which increases prices. A simultaneous appreciation of the dollar would make imports cheaper but also make American exports more expensive, thus further weakening competitiveness. The net result would be highly uncertain and could lead to both inflation and recession.

The idea that high tariffs could trigger a comprehensive reindustrialization of the USA also seems dubious. While construction investment in the manufacturing sector nearly quadrupled between 2020 and 2024 under the Biden administration, this was primarily the result of massive government subsidy programs such as the Inflation Reduction Act and the Chips and Science Act. Trump has halted or curtailed many of these programs and is instead relying exclusively on tariffs. Whether companies will actually return is questionable. Building new production facilities takes years, requires massive investments, and competes with established locations in Asia and Europe that have skilled workers, efficient supply chains, and modern infrastructure.

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The erosion of the dollar as a reserve currency

One of the greatest dangers of the Mar-a-Lago Accord lies in its potential impact on the dollar's status as a global reserve currency. This status is the foundation of American financial hegemony and enables the US to borrow at low interest rates, effectively enforce sanctions, and exert geopolitical influence. But this status is by no means inherent or inviolable. It is based on the trust of international investors in the stability, liquidity, and legal certainty of American financial markets.

Data already shows a gradual decline in the dollar's dominance. The dollar's share of global foreign exchange reserves has fallen from approximately 70 percent in 2000 to around 57 percent in 2024. This decline has accelerated since the increasing use of the dollar as an economic policy weapon. The sanctions against Russia following the invasion of Ukraine, which led to the freezing of approximately $300 billion in Russian central bank reserves, have shown many countries how vulnerable they are when holding their reserves in dollars. In response, central banks around the world are diversifying their reserves, buying gold on a massive scale, and experimenting with alternative currencies for bilateral trade.

The threat of a forced debt haircut through the Mar-a-Lago Accord would dramatically accelerate this process. If the US signals that it is willing to ignore the rights of its creditors and use political pressure to impose unfavorable terms, then rational investors will reconsider their allocation to US assets. Alternative investments, particularly gold, European and Japanese government bonds, and increasingly also Chinese renminbi assets, would become more attractive. The apparent advantage of short-term interest rate savings would be more than offset by higher long-term refinancing costs, since the US would have to pay significantly higher risk premiums without reserve currency status.

Martin Wolf, the respected chief economist of the Financial Times, has aptly described this dynamic. He argues that excessive debt policy, combined with brazen creditor blackmail, is poison for the stability of global financial markets. Confidence in the dollar, once justified, is now reckless. This assessment is shared by a growing number of international observers. Even traditional US allies are beginning to critically question their dependence on the dollar.

The economic reality behind the political promises

The fundamental weakness of the Mar-a-Lago Accord lies in its attempt to solve a structural problem with a one-time gimmick. America's debt problems are not the result of excessively high interest rates, but of chronic budget deficits. Even if the forced exchange into Century Bonds succeeds in reducing interest costs in the short term, this would not change the fact that the US spends significantly more than it earns year after year.

The United States' structural budget deficit has been at five to six percent of economic output for years. The main drivers are rising social spending, particularly for Medicare and Social Security, as well as growing interest payments. Revenues do not even cover half of the expenditures for these areas. Without fundamental reforms, either through benefit cuts or tax increases, this dynamic will not change. However, Trump has no intention of taking such unpopular measures. On the contrary, his tax cuts and spending promises will further increase the deficits.

The Congressional Budget Office projects that budget deficits will average 5.6 percent of economic output over the next decade. This corresponds to cumulative new debt of approximately $22 trillion. Even if the interest burden were temporarily reduced through the Mar-a-Lago Accord, the United States would be forced to continually incur new debt. However, this new debt would have to be issued at market conditions, and given the massive loss of confidence caused by creditor blackmail, interest rates would be significantly higher than today. The perceived benefit of the accord would therefore quickly evaporate.

Furthermore, the plan ignores the dynamic effects on the economy. A massive tariff increase, such as the one Trump has implemented, makes imports more expensive and raises production costs for American companies that rely on imported inputs. This leads either to higher consumer prices, which reduces purchasing power and slows growth, or to profit losses for companies, which puts a strain on investment and employment. Both reduce tax revenues and worsen the budget situation. The hoped-for tariff revenues could be more than offset by declining income and corporate tax revenues.

The risk of a global financial shock

Perhaps the greatest danger of the Mar-a-Lago Accord lies in its potential to trigger a global financial shock. The US Treasury market, with a volume of approximately $37 trillion, is the largest and most liquid bond market in the world. It serves as a benchmark for the valuation of countless other securities and is an integral part of the global financial system. A disruption to this market would have far-reaching consequences far beyond the United States.

If the announcement of a forced haircut leads to a sudden loss of confidence, investors might try to dump their Treasury holdings. Such a sell-off would cause bond prices to plummet and push yields higher. Rising Treasury yields, in turn, would increase refinancing costs for businesses and households, putting downward pressure on equity markets and triggering a recession. In a highly interconnected global economy, these shocks would quickly spread to other countries.

Historical experience with sovereign debt crises shows that the window between the initial announcement of a problem and the complete loss of confidence can be very short. The Greek debt crisis of 2010 escalated within a few weeks after it became known that the country's fiscal situation was significantly worse than officially communicated. The Russian financial crisis of 1998 surprised many observers with its severity and speed. While the United States is not comparable to Greece or Russia, these examples demonstrate that even large economies are not immune to sudden crises of confidence.

In such a scenario, the Federal Reserve would face an insoluble dilemma. On the one hand, it would have to intervene to stabilize the Treasury market, which would require massive bond purchases. On the other hand, this would greatly expand the money supply and create inflation risks, especially at a time when inflation is already under upward pressure from tariff policy. The central bank's credibility, painstakingly built over the past decades, would be undermined. The Fed's ability to steer the economy through interest rate changes would be significantly limited.

The political economy of failure

From a political-economic perspective, the Mar-a-Lago Accord reveals a fundamental failure of the American political system. The United States has become incapable of making necessary but unpopular decisions. Instead of addressing the budget deficit through spending cuts or tax increases, it is seeking supposed shortcuts that will solve the problem without requiring sacrifices from voters. The attempt to expropriate international creditors is a desperate attempt to externalize the costs of its own fiscal irresponsibility.

This strategy is not only morally questionable, but also economically short-sighted. Trust is the foundation of functioning financial markets. Once destroyed, trust is very difficult and slow to rebuild. The short-term benefits of a forced debt haircut would be far outweighed by the long-term disadvantages. The United States would jeopardize its privileged position in the international financial system without resolving the structural problems that led to the debt crisis.

Trump himself seems either to fail to understand these risks or to deliberately ignore them. His repeated statements that tariffs are a wonderful thing and can solve all problems are evidence of economic naiveté or populism. His own business experience, in which he repeatedly pressured creditors through bankruptcies and debt restructuring, appears to shape his approach to public finances. What may be possible for individual companies in the private sector, however, does not work for the world's largest economy, which forms the foundation of the global financial system.

Failure is inevitable, and the consequences will be devastating. If the US actually pursues the path of creditor blackmail, it will mark the end of its financial hegemony. The world will turn away from the dollar, not because there are better alternatives, but because the risk has become too great. In a multipolar monetary system without a clear reserve currency, global economic coordination will become more difficult, transaction costs will rise, and vulnerability to financial crises will increase. The US will emerge as the biggest loser from this development, losing its exorbitant privilege while remaining confronted with the same structural problems that brought it to this situation.

The only viable solution would be comprehensive fiscal consolidation combined with structural reforms to increase productivity and competitiveness. This, however, would require political courage, long-term thinking, and a willingness to speak unpopular truths. Instead, the current administration is relying on illusions, blackmail, and protectionism. History will judge these decisions as one of the greatest self-inflicted economic catastrophes of modern times.

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