The Reputational Bankruptcy of the American Dollar
You can read this article in Spanish here or Russian here.
Today I'm sharing part 2 of my spring letter to IMA clients, answering two questions: the fate of the US dollar and why our president keeps pushing crypto. You can read the full letter here.
The Reputational Bankruptcy of the American Dollar
I am in an unenviable position. The policy coming out of the White House has a significant impact on economics, more than ever before in my career. If I say anything positive about that policy, I’ll be put in the MAGA camp. If I criticize it, I’ll be accused of suffering from Trump derangement syndrome.
I am hired by you to make the best investment decisions possible. Rather than see me as engaged in political commentary, I’d ask that you view my remarks as purely analytical.
Let me give you this analogy. I live in Denver. Let’s imagine I am a huge Broncos fan, and the Broncos are playing the Chicago Bears. If I am betting a significant amount of money on this game, I should put my affinity for the Broncos and hatred of the Chicago Bears aside and analyze data and facts. The Broncos are either going to win or lose; my wanting them to win has zero impact on the outcome. The same applies to my analysis here.
My motto in life is Seneca’s saying, “Time discovers truth.” I just try to discover it before time does.
When it comes to politics, I also have a significant advantage. I was not born in this country. From a young age, I was brainwashed about communism, not about team Republican versus team Democrat. The failure of the Soviet Union de-brainwashed me fast concerning the virtues of communism and converted me into a believer in free markets.
As a result, I never bought into either party’s ideology, and thus in the last four presidential elections I voted for a Republican, an independent, a Democrat, and wrote in my youngest daughter, Mia Sarah (not necessarily in that order). In my articles I have criticized the policies of both Biden (student loan forgiveness, unions) and Trump (Bitcoin reserve).
I remind myself that in times like these you have to be a nuanced thinker. Some of Trump’s policies are terrific, others… not so much (I am being diplomatic here).
Scott Fitzgerald once said “The test of a first-rate intelligence is the ability to hold two opposed ideas in mind at the same time, and still retain the ability to function.” In 2025 we are taking this “first-rate intelligence” test daily.
What will happen to the US dollar?
The US dollar will likely continue to get weaker, which is inflationary for the US.
Let me start with some easily identifiable reasons:
We have too much debt. We ran 6-7% budget deficits while our economy was growing and unemployment was at record lows. Now we have $36 trillion in debt. Our interest expenses exceed our defense spending, and these costs will continue to climb. If/when we go into recession, we may see something we have not seen in a long time – higher interest rates. Our budget deficits will balloon to between 9–12%, and the debt market, realizing that inflation (i.e., money printing) is inevitable, will say, “Pay up!”
New competition from Bitcoin. President Trump’s approval of Bitcoin as a potential reserve currency is one of the most self-serving and anti-American things I’ve seen any president do. The US dollar is the world’s reserve currency. We still have little competition for that title. China could be a contender, but it is not a democracy and has capital controls. This policy has no upside for America, only downside.
A stronger Europe. Ironically, we may inadvertently create a stronger Europe by threatening to abandon NATO. I don’t want to insult European clients (or my European friends), but the following analogy describes the US-Europe relationship on some level: Europe gradually evolved into a trust fund kid (when it came to security) and the US turned into its sugar daddy. The trust fund kid was incredibly dependent on the sugar daddy. It criticized its parent for being a barbarian and money-driven, but it relied heavily on that parent to protect it from bullies.
President Trump cut off Europe’s allowance by threatening that the US might not protect Europe from Russia. This has forced Europe to spend more money on defense. Outside of Germany (which has little debt), few European economies can afford that. This may force Europe (or at least some European countries) to become more pragmatic – to cut social programs and bureaucracy. If this leads to a stronger Europe both economically and militarily, the euro will be competing with the US dollar. This is a big if.
Our new foreign policy. When people describe President Trump’s foreign policy as “transactional,” they’re highlighting a fundamental shift in how America engages with the world – one with profound implications for our global standing, national interests, and the US dollar. The shift affects both types of capital – financial and reputational.
Reputational capital isn't at risk in 'one-shot' transactions like house selling. Imagine you're selling your primary residence and moving elsewhere. Do you disclose every flaw, or let the buyer figure things out? Your incentive is to maximize short-term profits. You'll likely never meet this buyer again, and therefore there are incentives not to care what they'll think of you afterward. You'll be transactional, seeking the highest price possible for your biggest asset. This exemplifies a 'one-shot' system where future interactions aren't expected.
Contrast this with a relationship- and trust-based system. Now imagine you are a homebuilder in a small town. Your suppliers only extend credit if you have a reputation for paying on time. Your employees do quality work only if you treat them fairly. Your buyers tell friends about their experience with you. The incentives naturally create a relational approach. In this trust-based system, incentives skew toward maximizing long-term profits, where reputational capital becomes the glue creating continuity.
Reputational capital radiates predictability – you know how someone will behave based on their history – but operating with low or negative reputational capital is difficult and expensive. People won’t enter long-term contracts with you or will demand external guarantees. Many potential partners will simply refuse to deal with you.
Building reputational capital works like adding pennies to a jar – each good deed incrementally adds to your standing. Yet reputational capital can collapse instantly by removing the jar’s bottom. A single breach of trust doesn’t just remove one penny; it can wipe out your entire balance and plunge you into reputational bankruptcy. The math is brutally asymmetric: good deeds might add a point or two, while bad deeds subtract by factors of 50 or 100.
This doesn’t mean transactions shouldn’t be profitable. If you’re accumulating reputational capital while consistently losing money, you’re probably in the wrong business. Each deal should be evaluated considering both long-term financial and reputational capital.
Individual transactions can sacrifice some profit but cannot afford to lose reputational capital. A “one-shot” transactional approach used in a trust-system environment may provide greater short-term profitability, but if this success comes at the expense of reputational capital, the long-term consequences for America’s global position could be devastating.
This brings us to our current foreign policy.
Relationships between nations are a trust-based system. I’d argue it’s a super-relational system because it’s multigenerational, lasting beyond the life of any one human. Reputational capital is paramount here.
Part of the US’s strength has been the soft power – the reputational capital – it exerted. We had a lot of friends, which helped us to be more effective in dealing with our foes. We keep telling ourselves that America is an “exceptional” nation. This exceptionalism didn’t just come from our financial and military might – it accumulated based on our reputational capital.
Though we don’t always succeed, we are a people who try to do the right thing. Our exceptionalism has been earned through our actions. We are the country that helped rebuild Europe and gave it six decades to repay lend-lease. We toppled communism.
I don’t know the nuances of the Ukraine mineral deal, but initially it had the optics of extortion. Though I think the renegotiated and signed version appears to be fair to both sides, forcing repayment while Ukraine is dodging Russian missiles made the US look transactional.
Actions by President Trump over the last month have undermined our reputation. We are quickly becoming a “one-shot” transactional player in a trust-based environment. Imposing tariffs on Canada on a whim to try to get it to become the 51st state erodes American reputational capital. So does not ruling out America invading Greenland. This puts us on the same moral plane as Russia invading Ukraine.
The conversation about tariffs has many nuances. For instance, I don’t know anyone who opposes reciprocal tariffs – they seem fair and don’t consume any reputational capital. But tariffs that are used as weapons in a trade war in order to annex another country erode reputational capital. Threatening to leave NATO and not protect countries that don’t spend enough on their defense diminishes reputational capital. Maybe the only way to get European countries to spend on defense was to threaten not to defend them – you can agree or disagree with the rationale behind each of Trump’s decisions, but what can’t be argued is that they undermined our reputational capital.
As we lose soft power, our influence will diminish, and thus so will perceptions of our power. The world will start looking at us not from the perspective of the continuity of generations but of presidential cycles. The word of the American president will have an expiration date of the next presidential or mid-term election.
There are two negotiation styles – Warren Buffett’s and Donald Trump’s. Both have their advantages and disadvantages. Buffett will give you one offer and one offer only. Once the deal is agreed to, even just verbally, that is the deal. Critics would say that there is downside to that predictability, as foes know how you are going to respond. Donald Trump’s style is to be unpredictable, which has its own advantages when you deal with foes – it keeps opponents guessing. But it destroys trust with your allies.
In a world of fiat currencies, all currency is a financial and reputational promise. President Trump, with the help of DOGE (and maybe even tariffs) may increase our financial strength. I hope he does, but it will likely come at a very high cost to our reputational capital, and therefore US global influence and the US dollar will continue its decline.
How are we positioned for this?
About half of our portfolio is foreign companies whose sales are not in dollars. They will benefit from a weaker dollar. We also have exposure to oil, which is priced in the US dollar and usually appreciates when the dollar weakens.
A weaker dollar means our imports will become more expensive, which is inflationary. We own many companies with pricing power and also companies that have claims on someone else’s revenues. Take Uber for example: they get about 20% of each ride. If the cost of the ride goes up, so does their dollar take.
Why does President Trump keep pushing crypto?
In July 2019, Trump said the following: “I am not a fan of Bitcoin and other cryptocurrencies, which are not money, and whose value is highly volatile and based on thin air.” Five years later he promised to establish the US Crypto Reserve, and in 2025 he did.
What changed? There is no logical reason for an American president to endorse crypto. None. Here is the honest answer: Crypto bros made mega-contributions to his campaign.
To top it off, three days before he took office he issued $TRUMP – a shitcoin. Believe it or not, “shitcoin” is a technical term in the crypto community (any coin other than Bitcoin is called a shitcoin by Bitcoin “maximalists”, folks who believe Bitcoin is the one and only digital currency). The future sitting president literally issued – I don’t want to call it a currency, so I guess shitcoin is the right name – that will at some point decline to zero in value. In other words, he’ll fleece his loyal followers who purchase $TRUMP of billions of dollars.
I previously referenced both reputational capital and soft power. These types of acts by a sitting president subtract from both.
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I received a lot of feedback on my last rant about tariffs. Some folks accused me of being pro-Trump, while others reading the same email thought I was anti-Trump. I smiled.
Two clarifications:
First, no—we were not literally told to drink bleach during the pandemic. My previous comment was facetious. Trump suggested investigating the possibility of injecting disinfectant. I was ranting, and it sounded funny.
Second, the Smoot-Hawley tariffs were implemented after the crash of October 1929. A few months later, unemployment stabilized briefly at around 9.3%, but then rose significantly afterward precisely because of these tariffs, peaking at 25.2% in 1933. President Hoover had good intentions with these tariffs; he aimed to "protect" American workers. Unfortunately, the opposite happened—unemployment worsened dramatically. Tariffs exacerbated the economic situation. We should always judge politicians not by their intentions but by the outcomes of their policies.
I recommend watching this short video featuring Thomas Sowell on the subject.
We are hosting a breakfast Q&A session in Omaha's Old Town on May 2nd. If you're interested in attending, please fill out this form. This is not a marketing event - I simply want to meet my readers and enjoy answering your questions. Feel free to invite friends, but everyone needs to register individually. Space is limited, so register soon!
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I'd love to hear your thoughts, so please leave your comment and feedback here. Also, if you missed my previous article "Tariffs, Debt, and a Recession by Design", you can view it and leave a comment here.
Vivaldi's Concerto for Strings in G Minor
Today I am going to share with you “Vivaldi Variation,” an excerpt from Italian composer Antonio Vivaldi’s Concerto for Strings in G Minor arranged for piano by Florian Christl, a contemporary German composer.
Let’s start with the excerpt from the actual Vivaldi concerto.
Click here to listen.
Vitaliy Katsenelson is the CEO at IMA, a value investing firm in Denver. He has written two books on investing, which were published by John Wiley & Sons and have been translated into eight languages. Soul in the Game: The Art of a Meaningful Life (Harriman House, 2022) is his first non-investing book. You can get unpublished bonus chapters by forwarding your purchase receipt to bonus@soulinthegame.net.
Please read the following important disclosure here.