No. of Recommendations: 5
I would not bet the rent on it, but if the high US tariffs last then I would expect the direction of the US dollar to be up, not down as we saw as a first reaction. Along with the more obvious results of a weakening US economy, rising inflation, and falling equity prices.Jim, if the Mar A Largo accords are followed, then tariffs, currency, security protection are all linked.
As far as I can tell, this is not random blustering but a detailed plan, a sort of global economic and geopolitical Project2025.
From Stephen Miran's paper (currently head of the Council of Economic Advisors) "A Users Guidet to Restructuring the Global Trading System"
https://www.hudsonbaycapital.com/documents/FG/huds...a bit about how tariffs, and currency, and security zones can be linked. It seems like this plan, like the Project2025 plan, is getting implemented by the people Trump put in place e.g. Miran, Bessent, etc
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Instead, recall that President Trump views tariffs as generating negotiating leverage for making deals. It is easier to imagine that after a series of punitive tariffs, trading partners like Europe and China become more receptive to some manner of currency accord in exchange for a reduction of tariffs. As currency accords are typically named after resorts where they are negotiated, like Bretton Woods and Plaza, with some poetic license I'll describe the potential agreement in the Trump Administration as others have done as the prospective "Mar-a-Lago Accord." However, there are many differences between the economy today and that of the 1980s. For one thing, gross U.S. debt as a share of GDP is now in excess of 120%, relative to roughly 40% when the Plaza Accord was agreed. That drives concerns about the consequences for the debt market that didn't exist in the 1980s.
One suggestion put forth in Poszar (2024) is for any accord to incorporate a duration agreement. Poszar's hermeneutics of the remarks of likely economic policy leaders in a second Trump Administration explicitly links the U.S. provision of a security umbrella to the international financial system, and infers that efforts to reduce interest rates can help finance the security zone. He synthesizes the following Mar-a-Lago Accord from potential policymakers' remarks:
"1) security zones are a public good, and countries on the inside must fund it by buying Treasurys;
2) security zones are a capital good; they are best funded by century bonds, not short-term bills;
3) security zones have barbed wires: unless you swap your bills for bonds, tariffs will keep you out."
To strengthen their own currencies, reserve managers must sell dollars. As their currencies appreciate, the United States will receive a competitiveness advantage helping our tradeable and manufacturing sectors. To help mitigate potential unwanted financial consequences (like higher interest rates), reserve selling can be accompanied by term-out of remaining reserve holdings. Increased demand for long-term debt by reserve managers will help keep interest rates down, even if there is overall selling of USD fixed income as a result of the currency adjustment. Reserve owners hold fewer USD reserves, pushing their currencies higher, but the reserves they do hold are longer duration, helping contain yields. If the term-out is into special century bonds as suggested by Poszar, then the funding pressure on the U.S. taxpayer for financing global security is significantly alleviated. The U.S. Treasury can effectively buy duration back from the market and replace that borrowing with century bonds sold to the foreign official sector. Such a Mar-a-Lago Accord gives form to a 21st Century version of a multilateral currency agreement. President Trump will want foreigners to help pay for the security zone provided by the United States. A reduction in the value of the dollar helps create manufacturing jobs in America and reallocates aggregate demand from the rest of the world to the U.S. The term-out of reserve debt helps prevent financial market volatility and the economic damage
that would ensue. Multiple goals are accomplished with one agreement.
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Notably, he says elsewhere
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It is worth repeating that many of these policies are untried at scale, or haven't been used in almost half a century, and that this essay is not policy advocacy but an attempt to catalogue the available tools and analyze how useful they may be for accomplishing various goals.
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