He cites Dornbusch’s Law:
The crisis takes a much longer time coming than you think, and then it happens much faster than you would have thought.
He’s been looking at this for at least a month, and has this to say about the present moment:
So a U.S. sudden stop still looks quite possible, indeed considerably more likely given the grotesquely cruel and irresponsible budget bill Republicans are trying to ram through. It doesn’t help that key players are being utterly dishonest about what they’re doing: House Republicans have been denying that the bill will increase the budget deficit, while Trump claims that “We’re not touching anything” on Medicaid, just eliminating waste, fraud and abuse (and somehow taking away health care for millions in the process.) Low-information voters may be fooled for a little while, but bond markets won’t.
What exactly would it look like? We can cover the debt that’s being run up with trade deficits because the U.S. looks like a good place for foreigners to safely invest, and that keeps money coming in — or did. What happens if the U.S. no longer looks like a safe place to park money?
A sudden stop to capital flows into America would mean that there would no longer be money to cover those big trade deficits — and this would mean a sharp drop in the foreign exchange value of the dollar. On the eve of its 2001 sudden-stop crisis Argentina had a trade deficit, as a share of GDP, similar to that of the United States now — and when the crisis hit the peso lost more than half its value. A U.S. sudden stop would probably be less severe because our foreign debts are overwhelmingly in dollars, which insulates us from some of the fallout Argentina faced. Still, this could be ugly.
Interest rates would go up — long term rates are heading that way. Higher interest rates would likely cause a housing crash, leading to a recession. The dollar would get weaker, driving up inflation — which would also force interest rates higher.
So a sudden stop would be a very ugly experience for America — a recipe for lots of economic pain and a bout of stagflation. And recovery would be difficult. The Fed’s hands would be tied by stagflation. And to recover the world’s confidence, American policymakers wouldn’t just have to become far more responsible than they are, but they’d have to convince the world that they’d changed, a very tall order.
Krugman notes that this has never happened to the U.S. before — but then we’ve never had a criminally incompetent regime like the current one before either.
Meanwhile:
Trump’s up and down, on again-off again, tariffs are making it impossible for businesses to plan. Small businesses in particular are questioning if they’ll still be in business a year from now.
Jamelle Bouie at The NY Times takes a broader look at the destruction being caused by Trump and the Republican Party.
…This war has four theaters of conflict. In the first, Trump is waging war on constitutional government, with a full-spectrum attack on the idea of the United States as a nation of laws and not men. He hopes to make it a government of one man: himself, unbound by anything other than his singular will…
…In the second theater of conflict, the MAGA movement is waging war on the nation’s economic future, rejecting two generations of integration and interdependency with the rest of the world in favor of American autarky, of effectively closing our borders to goods and people from around the world so that the United States might make itself into an impenetrable fortress — a garrison state with the power to dictate the terms of the global order, especially in its own hemisphere. In this new world, Americans will abandon service-sector work in favor of manufacturing and heavy industry…
…Not content to leave Americans without a meaningful democratic future or one of broad economic prosperity, the White House is also fighting a pitched battle against a sustainable climate future.
In the same way that Trump and his allies have rejected the obligation to pass the nation’s tradition of self-governance on to the next generation, they have also rejected the obligation to pass a living planet on to those who will inherit the earth…
[Duplicate paragraphs removed, correct ones added. 8:03 est 5/23/25]
…The fourth and final theater of the MAGA movement’s war on the future is adjacent to the third one: an assault on the nation’s capacity to produce scientific, technological and medical breakthroughs.
Whether under the guise of ending diversity efforts or in disciplining institutions of higher education or commandeering the federal administrative state for the president’s corrupt purposes, the White House has taken a buzz saw to billions of dollars in federal grants for research in medicine and the hard sciences…
And, while all this is going on, Trump is trashing any good will we might have left with our traditional foreign partners. ETTD: Everything Trump Touches Dies.
Circling back to Krugman for the closer, his take on the budget bill is about the Attack of the Sadistic Zombies.
As I see it, right-wingers’ rhetoric about the budget deficit is a lot like their rhetoric about antisemitism. It’s not something they actually care about. It’s just a club they can use to bash their opponents.
But in that case, why the cruelty toward less-fortunate Americans? Well, as I see it the cruelty, as opposed to the dollars saved, is actually the point. Inflicting harm on the vulnerable isn’t something they do with regret, it’s something they do with a sense of satisfaction.
OK, I’ll probably get a lot of grief for saying that — but maybe not as much grief as I would have gotten a few months ago. For does anyone doubt that the people now running America are bullies completely lacking in any kind of compassion?
And why do bullies beat up people who can’t defend themselves? Because they can.
As I have said elsewhere, the Republican Party has become a death cult demanding human sacrifice. They aren’t even trying to hide it.
Remember when everyone was holding their breath over Y2K? We survived that because people did a huge amount of work to fix things before it arrived, and it worked. Too bad too many of us didn’t acknowledge the threat building on the Right for decades and act to head it off..