Former U.S. Treasury Secretary Lawrence Summers warns that the U.S. Dollar may no longer be the sanctuary that investors from across the globe once counted on.
What Happened: While speaking on The Call, a podcast by the U.S. Chamber of Commerce last week, Summers pointed to the recent shift in market correlations as evidence of trust erosion in American assets, with investor psychology around it fundamentally changing.
“If you look at the pattern,” Summers says, “they’ve gotten much more like the emerging market pattern than they have like the traditional American pattern,” citing the example of Latin American countries.
Historically, any spike in global uncertainties led to a rise in U.S. Treasuries and the dollar, as investors fled to safety. Things are different this time around, as all asset classes start dropping in tandem, which, according to Summers, is a phenomenon commonly seen in fragile economies, not the world’s largest.
Summers attributes this to “iatrogenic volatility,” a medical term used to describe the illness that you catch at the hospital, or via medical activity.
“Latrogenic volatility in financial markets,” he says, is when policymakers, whose job is to keep the markets stable and confident, end up “undermining that stability and confidence” themselves.
With the dollar’s share of global reserves declining from 85% in 1974 to 57% last year, Summers said the trend may be accelerating as the U.S. loses credibility. He concludes by saying that whether the U.S. can repair that trust depends on how policymakers respond to the growing alarm.
Why It Matters: Just a few days after the “Liberation Day” tariffs were announced, analysts at Deutsche Bank AG raised the same concern, referring to the simultaneous collapse of U.S. equities, treasuries, and the dollar as a “full spectrum collapse,” and an “uncharted territory” for the global economy.
A vocal critic of President Donald Trump and his tariff policies, Summers recently issued a warning on Trump’s tax cut and spending bill, dubbed the “One Big, Beautiful Bill,” which he referred to as the prescription for a “Deadly, Dangerous Decline.”
Summers has also asked Trump to walk back on the tax bill, as he did with the tariffs, saying that the “country risk trade is back,” following signs of rising economic fragility.
Economist Paul Krugman has since echoed similar concerns, warning of an “emerging-market-type crisis” for the United States in his newsletter last week, referring to a “sudden stop in foreign inflows” that could crash the economy, sink the Dollar, and unleash stagflation.
Price Action: The U.S. 10-Year Treasury yields now trade at 4.416%, followed by the 20-Year and 30-Year notes at 4.953%, and 4.95%, respectively. The U.S. Dollar Index (DXY) currently trades at 99.196, down 0.14% for the day.
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