Volatility ahead, inauguration, ceilings, dollar
TL;DR
This week promises to be a whirlwind of market activity, with two major events poised to drive volatility. First, the inauguration of President Trump tonight (January 20th) marks the beginning of a new regime, dubbed "Trump 2.0."
Just a day later, the debt ceiling will take centre stage, highlighting the ballooning federal debt of $36.1 trillion. While markets have partially priced in Trump’s return, and the $680 billion buffer available in the Treasury General Account—the true scope of any accord reached on the debt ceiling going forward as well as fiscal and monetary policies and their impact under Trump 2.0 will unfold in the coming weeks and months.
On the debt ceiling front, some say the situation is precarious. But they always say that. The fact is that government spending, ongoing deficits, and past debts will continue to roll forward, creating a "snowball effect," with interest payments accumulating—but as in the past, it won’t matter as long as credibility and confidence in the U.S. dollar (USD) and Treasury, continues. And that makes the incoming Treasurer, Scott Bessent’s job, possibly the most influential job on the planet (moreso, than Elon).
Why does this matter?
The USD role as the global reserve currency hinges on confidence in the country's financial stability. A default on U.S. debt would shatter that confidence, but historically, such a scenario has been avoided. Thanks to the power of the Federal Reserve's "money printer," a U.S. default remains unlikely. Yet, funding the government amid Trump’s inflationary, tariff-driven, anti-immigration, and deregulation-focused policies presents a few challenges.
Enter Scott Bessent, the new Treasury Secretary, tasked with having to balance funding the government at more affordable rates than the prevailing interest rate, while managing the twin pressures of rising interest costs and refinancing the massive stack of past debts and deficits. His choices will ripple through markets, shaping the strength of the USD and the global economy.
Why is this the case? Because the world is addicted to and runs on dollars. It is the dominator in almost all international trade, and eventually, all loans can be traced back to USD origination given the proven method of posting U.S. Treasuries as collateral.
The world is hooked on the USD reserve standard. And it’s the demand and supply of it that dictates the global ebbing and flowing of liquidity, as well as the affordability of commodities and inputs—and that’s also why it affects business cycles across multiple countries, particularly importing nations.
Pretty much a major deal, no?
Two paths forward
To roll debt and avert a low probability default, Bessent has a few strategies to consider. I’ll cover only two.
One option is to buckle to the eventual political pressure he will get from Trump and opt for quantitative easing (QE) and lobbying for rate cuts—assuming Jerome Powell or another Fed chair is willing to play along. QE would allow the government to refinance its debt at lower short-term rates, and at the same time weaken the USD, which is probably what Bessent would want. Plus, it’s only a matter of time before we see QE again, regardless of what acronym it is given.
Another, more targeted approach, might involve yield curve control (YCC) which I’ve written about here, on many occasions. By buying all available paper at a specific maturity he can manipulate (down) the cost of capital at a specific point on the yield curve—thus lowering borrowing costs at that point on the curve—enabling the issue of new paper at the new favourable rate, while rolling over older, more expensive obligations. Yeeha!
Unlike broad QE, YCC could maintain a stronger dollar vis-a-vis full tilt boogie QE, avoiding a wholesale increase in liquidity.
In both scenarios, the American economy continues to power along, the envy of the world—at least until the next debt roll—yet the implications the USD has on economic growth/business cycles outside the U.S., differ considerably.
Dollar Vader?
A weaker dollar would provide a boost to economies outside the U.S., making commodities and inputs cheaper while stimulating a raft of interdependent business cycles.
Conversely, a strong dollar, bolstered (which is to say, at least not weakened) by targeted strategies like YCC or similar, could stifle growth abroad, delaying recoveries in dollar-dependent nations.
Will that mean a Dollar Vader scenario, i.e., a dollar that’s still so strong that rebel sovereigns (i.e., every weak economy outside the U.S.) simply cannot withstand and therefore growth stops because it’s too expensive?
While we don’t quite know, we do know that it would in its first iteration delay economic recovery for weaker currency importing nations.
For Trump, the dollar’s strength is a paradox. While doubling down on the dollar as the reserve standard reinforces U.S. economic and geopolitical dominance (his two favourite scorecards) his preference for low interest rates and high-risk asset prices creates conflicting pressures.
Currency debasement policies might satisfy short-term political goals but could stoke inflationary fires through wealth effects, while tariffs could stoke inflationary fires at the goods and services consumption level, further complicating Bessent and Powell’s efforts.
And to further explore the issues and paradoxes Powell is facing, you can read last week’s blog where I posed a scenario that Fed Chair Powell might be ‘taking the piss’ on his war against inflation that stopped well before we knew that Trump would be re-elected PROTUS.
Check out that blog if you want to see what’s behind this chart 👇👇👇
From, “Hey Jay, bonds are screaming, can you hear them?” copyright 2025, nextlevelcorporate. All rights reserved.
A tightrope for Bessent and Powell
This week will set the tone for markets, the dollar, and global growth under Trump 2.0. The interplay between fiscal and monetary policy, led by Scott Bessent and Jerome Powell, will be pivotal in shaping investor sentiment and economic momentum.
Whether the dollar strengthens and slows emerging market recoveries or weakens to ignite a global commodities-led rebound, one thing is clear—volatility is guaranteed. Expect major moves by mid-week as markets recalibrate to the new regime and its policy priorities.
Stay sharp—this week could define the trajectory of 2025.
Mike
With decades of success across six continents, NextLevel Corporate Advisory expertly navigates the intersection of M&A, financial advisory, and business strategy—bringing you exceptional corporate development outcomes.
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