Trump’s New Currency Plan Just Set Off A Treasury Time Bomb (YouTube link)
In the video above, the discussion revolves around the U.S. dollar’s role as the global reserve currency, its cyclical strength, and potential policy shifts under a Trump administration, as outlined in the GOP platform.
Key Points
Here’re the key points:
U.S. Dollar as Global Reserve Currency:
- The GOP platform emphasizes maintaining the U.S. dollar as the world’s reserve currency, a position explicitly supported by Trump and his proposed Treasury team.
- Despite this, there’s an acknowledgment of trade imbalances, which are linked to the dollar’s reserve status. Addressing trade deficits while preserving the dollar’s dominance presents a complex challenge, as these are interconnected issues.
Key Figures and Policy Insights:
- Stephen Miran is highlighted as a key economic adviser who understands the nuances of dollar policy. His work suggests that some proposed policies might initially strengthen the dollar but could lead to deliberate weakening later.
- The distinction is made between the dollar’s cyclical strength (short-term fluctuations driven by economic conditions) and its structural role as the global reserve currency.
Dollar Policy and Trade-offs:
- Trump has previously criticized other currencies for being "unfairly cheap," suggesting a focus on exchange rate differentials in trade negotiations. This could involve intentional dollar devaluation to address trade imbalances.
- Policies like tariffs and trade concessions might precede a deliberate dollar weakening to boost U.S. exports, but this risks inflation due to higher import and energy prices.
- There’s discussion of disincentivizing foreign holdings of U.S. assets (e.g., Treasuries), which artificially inflate U.S. asset values and the dollar’s exchange rate. Reducing foreign demand could weaken the dollar but disrupt markets.
Economic and Political Challenges:
- Reversing long-standing economic trends (e.g., trade deficits and dollar strength) would create winners and losers. Sectors benefiting from a strong dollar (e.g., finance, importers) might resist, while exporters and manufacturers could gain.
- The complexity of reversing these trends lies in the trade-offs: weakening the dollar could ease global debt burdens (especially for emerging markets with dollar-denominated debt) but risks domestic inflation and market turbulence.
- Politicians, including Trump’s team, may downplay these downsides, promising benefits (e.g., trade balance) while minimizing costs (e.g., inflation, deficits), a common political strategy.
Global Economic Context:
- The U.S. has benefited from a unipolar world since the Soviet Union’s collapse, fostering international cooperation but allowing trade imbalances to grow (e.g., U.S. trade deficits, Eurozone issues).
- The world is shifting toward a multipolar system, with countries or blocs acting more independently. Trump’s team aims to mitigate policy downsides by pushing costs onto other nations, though some domestic fallout is likely.
Dollar Cycles and Historical Precedents:
- The dollar has experienced three major cycles since the Bretton Woods system ended in 1971: strong in the 1980s (leading to the Plaza Accord), strong in the late 1990s, and strong since around 2014.
- The current strong dollar cycle (since 2014) has been prolonged by global factors, including:
- Weak growth in other regions (e.g., Canada’s energy policy limitations, Europe’s loss of Russian gas, China’s property bubble and tech crackdowns).
- Investors see the U.S. as the "only game in town" due to these "own goals" by other economies.
- The Plaza Accord (1985) is cited as a precedent for intentional dollar weakening to address trade imbalances, driven by Japan and Taiwan’s competitive exports. A similar move (e.g., a “Mar-a-Lago Accord”) could be considered to reset the current cycle.
Market Dynamics and Risks:
- A strong dollar reduces foreign demand for U.S. debt, as seen in the past decade, with foreign central banks holding fewer Treasuries. Private-sector buying hasn’t fully offset this.
- In 2020, a dollar spike during the COVID crash caused a Treasury market breakdown, requiring Federal Reserve intervention (QE and swap lines). This illustrates the risks of a strong dollar environment.
- Globally, $13 trillion in dollar-denominated debt outside the U.S. creates demand for dollars, but a strong dollar strains borrowers, slows global growth, and can lead to asset sales (e.g., Treasuries), causing U.S. market volatility (e.g., 2020, 2022).
Potential Outcomes:
- A deliberate dollar weakening could ease debt burdens for emerging markets, boost their economies, and indirectly support U.S. asset prices and growth.
- However, this risks “sticky” inflation due to higher import and energy costs, a trade-off that may not be fully acknowledged by policymakers.
- Post-election dollar surges (e.g., after Trump’s election) reflect expectations of lo ‘looser fiscal policy and higher inflation, potentially requiring a hawkish Fed response, which could temporarily strengthen the dollar further.
Speculative Future Moves:
- Trump’s focus on currency differentials suggests negotiations may include currency components alongside tariffs.
- A major cycle-ending move, like the Plaza Accord, could initiate a new 10-15-year dollar cycle, potentially stabilizing trade but requiring careful management to avoid excessive inflation or market disruption.
Conclusion
In summary, the discussion highlights the tension between maintaining the dollar’s reserve status and addressing trade imbalances. Trump’s team, led by figures like Stephen Miran, may pursue policies that initially strengthen the dollar but later involve deliberate weakening to boost exports, with risks of inflation and market pushback. Historical precedents like the Plaza Accord suggest such moves are feasible but complex, with global and domestic economic implications. The shift to a multipolar world complicates these dynamics, and policymakers may minimize the costs of these trade-offs to sell their agenda.
