Is US Dollar Flirting With A 'Liz Truss Moment' Amid Tariff Chaos?

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The US currency, he explains,“has been falling even as the interest differential has risen. This combination - a falling currency even as rate differentials rise - is deeply worrying. It harkens back to 2022, when the UK experienced what was essentially a debt crisis, with rising yields and a falling pound.”

That infamous episode followed then-UK Prime Minister Truss in September 2022 trying to sneak a sizable unfunded tax cut past the so-called“bond vigilantes.” It did not go well. As the gilt market crashed, a UK tabloid began live-streaming a head of lettuce next to a framed Truss photo to see if it could outlast her premiership. The lettuce won .

The idea that a similar unraveling might befall the US has been contemplated myriad times post-2008. That was one of the hinge points for the explosion of the US national debt that occurred since then. The fallout from the“Lehman shock” has Washington ramping up fiscal stimulus aggressively.

The resulting debt buildup led to S&P's earthquake-generating decision in 2011 to yank away Washington's AAA rating. Then came the Covid-19 crisis that turbocharged US borrowing programs. When S&P acted 14 years ago, the US debt was just US$14 trillion .

In August 2023, when Fitch Ratings downgraded Washington to AA+, the national debt was US$31.4 trillion. As Fitch said at the time, the downgrade“reflects the expected fiscal deterioration over the next three years, a high and growing general government debt burden, and the erosion of governance” relative to peers.

Most recently, in mid-May, Moody's pulled the trigger, revoking the pristine US rating it had maintained since 1919. As Moody's analysts put it,“successive US administrations and Congress have failed to agree on measures to reverse the trend of large annual fiscal deficits and growing interest costs.”

Stanford University economist Darrell Duffie called it a wake-up call for Congress“to discipline itself, either get more revenues or spend less.”

The opposite happened this week as Congress added the equivalent of two Russian economies to the federal deficit.

Spencer Hakimian, CEO of hedge fund Tolou Capital Management, tells Reuters that Moody's spotlighted the“continuation of a long trend of fiscal irresponsibility that will eventually lead to higher borrowing costs for the public and private sector” in the US.

Economist Philip Luck at the Center for Strategic and International Studies argues that this most recent downgrade was“more than a technical market event - it represents an emerging consensus that the United States' mounting debt burden has shifted from an abstract risk to a strategic constraint on US power and leadership.”

As borrowing costs rise and fiscal space narrows, Luck says,“the nexus between debt and national security becomes increasingly salient. As interest payments surpass defense spending, global growth slows and demographic pressures accelerate, the United States faces difficult choices.”

Luck says that without reform, debt is projected to reach 156% of GDP by 2055, threatening to erode US power in an era of intensifying great power competition and validating 18th-century economist Adam Ferguson's centuries-old warning that nations may mortgage their liberty through excessive borrowing.

“In the years ahead,” Luck notes, the US will face stark choices about spending, taxation, and the burdens of global leadership . Perhaps the most dangerous threat is not economic but psychological: the false belief that dollar dominance insulates the US from the consequences of fiscal recklessness.”

As the federal debt climbs toward 160% of GDP and interest payments consume a growing share of the budget, Luck warns, critical investments in defense, diplomacy and domestic priorities are increasingly at risk.