Macroscope | Trump’s ‘big stick diplomacy’ won’t go far in today’s world system

Conflicting monetary goals and budget constraints will undermine the administration’s ability to exert influence from a position of strength

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American and South Korean soldiers salute during a change of command and change of responsibility ceremony at a US military base, in Seoul, South Korea, in 2017. Photo: AP

Published: 4:30pm, 15 Feb 2025

“Speak softly and carry a big stick”, a phrase attributed to former US president Theodore Roosevelt, is often cited as advice on the art of diplomacy. By contrast, Donald Trump speaks loudly but it may not be long before financial markets undermine his ability to wield a “big stick”.

Maintaining a dominant military presence around the world, as the US has done for decades, is an expensive proposition and when financing it is dependent largely upon borrowing, the indebted country’s hold on the big stick can easily become weaker.

For the US government, whose indebtedness to international bond markets and sovereign investors such as Japan and China has now reached a record US$36 trillion, this is a real concern. Could this by why there is now a suggestion that the Trump administration could consider a revaluation of America’s huge gold holdings – to help balance the national balance sheet on the asset side? Some contemporaries of US Treasury Secretary Scott Bessent are speculating on the possibility of revaluing US official gold reserves, according to a recent Financial Times article. Bessent has pledged to “monetise the asset side of the US balance sheet”.

The US Treasury keeps about half of its gold, some 147.3 million ounces, at Fort Knox. These reserves are currently valued at just US$42.22 an ounce in US national accounts. This gives the total holdings of about 280 million ounces a notional value of about US$11 billion. But the current market price of gold is around US$2,800 an ounce, which implies that the US holdings could be worth more than US$780 billion.

A revaluation from notional to market value of US holdings would hardly dent the gargantuan size of US national debt but it could take some of the pressure off the size of short-term borrowing requirements. Amid stresses in the Treasury market, that is important as Trump waves his big stick ever more aggressively.

Meanwhile, if US interest rates decline amid rising Japanese rates, the interest rate differential between the US dollar and the Japanese yen could diminish. The hefty capital outflows from Japanese financial institutions into US Treasury securities might decrease, putting more pressure on the bond market.

A man walks past an electronic board showing the foreign exchange trading price of the Japanese yen against the US dollar on a street in central Tokyo on January 21. Photo: AFP