Trump is sowing the seeds of the dollar’s demise

Forty years ago, the Plaza Hotel in New York entered financial legend. On 22 September 1985, in what became known as the “Plaza Accords”, the US government persuaded Britain, Japan, Germany and France to jointly devalue the dollar in an attempt to boost the economic competitiveness of the United States. Is this about to happen again, but in Mar-a-Lago, Florida?

According to many financiers and those on the inside of the Trump administration, there is intense speculation that this is exactly what President Donald Trump and his advisers are planning to do later this year at his sprawling Floridian resort. It has even been dubbed the “Mar-a-Lago Accord”.

What would be the point? At the core of the thinking is a paper by Stephan Miran, Trump’s chair of the Council of Economic Advisors. He argues that the flip side of having the global reserve currency – which means you can run budget deficits ad infinitum without worrying about the theoretically limitless demand for Treasury bonds – is a curse. Growing demand for dollars as a reserve asset can only be supplied by persistent US current account deficits.

Contrary to what one might expect, he argues that this actually results in an overvalued dollar, as the demand for those who simply need to hold the dollar as a store of value or indeed a unit of international trade is greater than the equivalent for a non-reserve currency.

The effect of this, according to Miran, is the destruction of the “Main Street” of the US; the squeezing of corporate USA, the outsourcing of manufacturing, the job losses across the Rust Belt. There is an inherent trade-off here; the upside of having the reserve currency, which produces infinite possibilities for cheaper finance and international leverage, is balanced against the social and fundamental costs of a weak manufacturing sector.

And here, as with most things, Trump wants to have his cake and eat it.  He wants both to protect domestic manufacturing and maintain the dollar’s global role. The solution mooted is to weaken the dollar, as was done at the Plaza Accords.

US bondholders would be unilaterally forced to swap their short-term Treasury bills into ultra-long-term borrowing, for example, “perpetual” bonds. This would allow the US greater room to pursue its desired combination of loose fiscal and loose monetary policy.

Why would any bondholders accept such a proposal? Which sane investor, holding a risk-free short-term security, would willingly exchange it for an indefinite-term IOU? As with most things Trump-related, this simply comes down to the supposed negotiating strength of the US. The upside of accepting such a proposal would simply be that your nation will be viewed by the US as a friend. If not, you will be seen as a foe.

From the perspective of the New York property tycoon, international finance simply becomes a type of protection racket.