Last week saw an unusual intervention by the American government in the Japanese currency market to ‘prop’ up what looked like a Yen in free fall for far too long. Why does the US bother? Apparently, Japan with rising inflation stoked by a depreciating currency not wanting to raise interest rates had to defend its currency by selling dollars. But it had to sell US Treasuries first to get the dollars. With US Treasury yields soaring to 20year highs amid rising government debt, the US could not afford its biggest holder of bonds to start dumping. Furthermore, the US government seems to have prodded the Fed to open a facility for Japan to borrow against its US treasury holding rather than sell them to defend its currency in future. This doesn’t look normal nor does it look to subside given there is little sign of the US fiscal deficit reducing. How did America find itself in this situation? Grant Varner gives us a primer.
He begins by giving a brief history of global reserve currencies and how the US dollar took the baton from the British pound sometime between the two world wars. He then invokes Wagner’s law to explain how the dollar’s reserve currency status allowed the US to run large deficits. “In 1863, the German economist Adolph Wagner first observed something interesting in his homeland: public expenditure tends to increase as national income rises.
His observation suggests that welfare states evolve from free-market capitalism because the population votes for ever-increasing social services as income grows.
Starting in the 1920’s, and until after WWII, the British government dramatically boosted spending on social services. This led the UK to spend less on education, causing them to fall behind most Western Economies by the 1970’s.
In 1961, Peacock and Wiseman made a key addition, by positing that public expenditure does not grow smoothly, but rather in spikes during social disturbances like wars and pandemics.
Since the 18th century, Wagner’s Law holds true in America.”
He illustrates this with a chart. However, he shows that “Since 1980s, debt began to soar once again — but during peace time.” He ascribes it to an ageing population resulting in growing social security and healthcare costs and rising interest costs resulting from the growing debt. But since Nixon took the dollar off the gold standard, the dollar’s reserve currency status has been underpinned by its military might. The author quotes Ken Rogoff: ““The dollar and the military are inseparably linked — military power underpins trust in the currency, while the dollar’s privileges make it easier to finance that power.”
So, what changed? “In 2023, when the U.S. froze $300 billion of Russian assets during the Ukraine War, Middle Eastern energy producers began to hedge against total dollar dependence. Some nations like the UAE began accepting the Chinese Yuan for some transactions….And by 2030, nations like Brazil, Russia, India, China, South Africa, and the UAE – collectively known as BRICS – will represent 50%+ of global GDP by 2030.
The Middle East is already de-dollarizing. If Iran successfully takes control of the Strait of Hormuz in 2026, that could be a huge blow to global confidence in the United States’ military, from whom the U.S. dollar’s value is derived.
Domestically, the trend lines of confidence in the U.S. dollar isn’t much better. In May 2025 Moody’s downgraded the United States’ credit rating. The share of gold in official reserve assets has more than doubled from sub-10% in 2015 to over 23% now.”
So, what’s the out? The author suggests a rather controversial option of eliminating social security benefits and healthcare subsidies. “Anything the government subsidizes goes up in price. The federal government spends $2+ trillion on social security, Medicare, and health care annually. Because we ran a $1.8 trillion deficit in 2025, eliminating those expenses alone would put us in the green. And I believe it’d make healthcare more affordable because prices wouldn’t be propped up by federal government spending.” He cites a Mark Cuban essay that shows the inefficiencies in healthcare thanks to government subsidies.
On social benefits: “Teenagers — encouraged by their parents — are investing in stocks in droves. While not planned, the tax-advantaged retirement accounts — 401(k) (1978), Roth IRA (1997), and HSA (2003) are paving the way to eventually eliminate social benefits. I’m not alone in thinking this. Half of my fellow Gen Z brethren also think rolling back social security is the best way to handle the budget deficit.”
But he acknowledges it is easier said than done and also provides contrarian perspectives
If you want to read our other published material, please visit https://marcellus.in/blog/
Note: The above material is neither investment research, nor financial advice. Marcellus does not seek payment for or business from this publication in any shape or form. The information provided is intended for educational purposes only. Marcellus Investment Managers is regulated by the Securities and Exchange Board of India (SEBI) and is also an FME (Non-Retail) with the International Financial Services Centres Authority (IFSCA) as a provider of Portfolio Management Services. Additionally, Marcellus is also registered with US Securities and Exchange Commission (“US SEC”) as an Investment Advisor.
MORE FROM Aug WEEK 3
