- The US economy is in for a “wild ride” with Donald Trump back in office, Kenneth Rogoff says.
- The Harvard economist told the World Economic Forum that the dollar faces a slew of challenges.
- Rogoff spoke about tariffs, inflation, interest rates, currency wars, and the national debt.
Kenneth Rogoff says the US economy is in for a “wild ride” now that Donald Trump is back in charge — and the dollar may come under pressure.
The Harvard University economist flagged several challenges ahead during a session focused on the dollar at the World Economic Forum’s annual meeting in Davos, Switzerland on Tuesday.
Rogoff said the idea that interest rates will steadily fall is a “pipe dream at this point.” The Federal Reserve raised its benchmark rate from virtually zero to as high as 5.5% within an 18-month period to curb post-pandemic inflation, and has only cut them by a percentage point.
The former chief economist of the International Monetary Fund raised the alarm on the US national debt, which has more than tripled over the past two decades to more than $36 trillion.
“I think the debt does push up interest rates,” he said, nodding to the idea that the federal government may have to pay more interest on its bonds to keep attracting buyers, and its competition with the private sector and state and local governments for funds could drive up rates.
Debt debate
Rogoff pointed to the 1970s as a cautionary tale. The dollar “lost a lot of territory” as inflation spurred the Fed to raise rates to nearly 20%. There could be similar fallout “if things get out of control again,” he warned.
Both US political parties “think debt is a free lunch,” Rogoff said, adding that he believed they’re “wrong” and one likely consequence will be elevated rates.
A record debt pile and rising rates have increased the federal government’s annual interest payments, which exceeded $1 trillion or more than its entire military budget last year, he noted.
“At some point, this is one of the potential triggers for having more inflation,” Rogoff said. “That’s going to undermine the dollar” as it did in the 1970s, he predicted, as there’s “potential for a lot of instability” stemming from America’s debt pile.
Rogoff said the impact of Trump’s planned tariffs on interest rates and global exchange rates is likely baked into markets already, but how other countries retaliate is not.
The academic said Trump’s first-term tariffs caused the Fed to worry about inflation and whether rates were high enough, and that could happen again, pushing back the timeline for further rate cuts.
Dollar doubts
Rogoff also addressed concerns about de-dollarization and declining dollar dominance as other countries explore alternatives to the world’s reserve currency.
The greenback is very strong by historical standards, setting it up to weaken simply due to a likely reversion to the mean, he said.
Trump’s warnings to other nations to keep using the buck might also backfire. “I would guess it’s not good for the dollar; you want people to use your currency,” Rogoff said. “If you’re being threatened, I think that only reinforces the incentive to try and diversify into doing other things.”
He also touched on how the dollar comes into its own during moments of distress such as the global financial crisis and pandemic. Other nations realize the value of being in the Fed’s good books and having access to dollars during crises.
However, Rogoff also cautioned that the dollar’s unusual strength might prove short-lived: “Whoever it is that’s being put up on the pedestal by the world, they’re the ones that are first in line perhaps to have a crash coming.”
Rogoff wondered out loud whether Davos attendees might be discussing the dollar’s weakness and the US economy’s collapse a couple of years from now.
