Steven Kamin was previously Chief of International Finance in the Federal Reserve and is now a senior member of the American Enterprise Institute. Mark Sobel was previously Chief of International Finance at the United States Treasury and is now president of the United States, OMFIF.
In recent weeks, the buzz has been increasing on a new American plan, a “sea agreement to lake”, to turn the global monetary system. We can only expect that it is still an idle talk.
In summary, based on a detailed discussion document of the nominee to the president of CEA Stephen Miran, the agreement would make the United States business partners weaken the dollar and commit to provide low -cost finance financing to the United States government, applied by the threat of higher rates or the elimination of security guarantees.
Interestingly, there has not been an advertisement of the Trump administration or even a TWEET of Trump, but Miran’s newspaper, along with several statements by the Treasury Secretary, Scott Besent, have taken Wall Street observers to believe that such an initiative is really in sight.
And that is a pity, because a Mar-A-Lago agreement would be useless, ineffective, destabilizing and would only lead to the erosion of the preeminent role of the dollar in the global financial system.
The Mar-A-Lago agreement is based on the opinion that the global domain of the dollar is bad for the United States. The anti -fold demand has caused a serious overvaluation. This in turn has led to a reduction in export competitiveness, persistent commercial deficits and the erosion of American manufacturing. In response, an agreement would require the United States and its commercial partners to intervene in currency markets to sell dollars for foreign currency in an attempt to reduce the dollar.
However, given that foreign sales of treasures and perspectives of losses in dollars could increase the interest rates of the United States and endanger the financing of federal budgetary deficit, foreign governments would have to increase the duration of their remaining holdings of treasure bonds, even buying 100 -year zero bonds of the government, in essence, free financing for a century! And because they could not expect them to voluntarily, they would be threatened with higher rates or the loss of US military support if they did not comply.
So what is wrong with all that?
First, contrary to Mira’s opinion that the global dollar role is harmful to the United States, it is actually a net advantage, facilitating our commercial activities abroad, reducing the cost of capital and the increase in our geopolitical reach. And even if the plan managed to reduce the dollar, it would do nothing to help the US economy or its workers.
Much of our commercial deficits reflect a floating economy and large fiscal deficits, not the strong dollar. In addition, our commercial deficits are not really a problem per se. Despite them, the economic growth of the United States has exceeded that of our main commercial partners, and the unemployment rate is only 4 percent, very low for historical standards.
In fact, there is no logic in the notion that all countries should have a balanced trade. We need commercial deficits to provide an expenditure output that would otherwise appear as economic overheating and inflation.
In addition, the strong dollar is clearly not the cause of the reduced part of US workers in manufacturing (now less than 10 percent of total employment). The same trend has been working around the world, in countries with commercial surpluses and deficits, due to the rapid growth of productivity in this sector.
Second, the plan would not succeed. As innumerable studies have demonstrated, boosting the dollar on a sustained basis would require the Federal Reserve to decrease interest rates and foreign central banks increase rates; But with the inflation of the United States, overcoming the objective economies of 2 percent of the Fed and foreign economies, that will not happen.
Similarly, if foreign governments were busy selling treasure bonds to depress the dollar, it is unlikely that increasing the duration of their remaining dollars could be sufficient to prevent the interest rates of the United States from increasing. And although the threats of greater tariffs and expulsion from the security umbrella could force Japan and Europe to play ball, China, which should be the main concern of the United States, will be less willing to Kowtow for Trump.
Third, a Mar-A-Lago agreement runs the risk of undermining the global domain of the dollar. This domain is based not only on the security and liquidity of the United States Treasury Bonds, but also on the long -standing historical prudence of the formulation of US economic policies and their support for a stable financial and global trade system and global trade and based on rules.
Failure to our allies, break trade agreements and undermine support for global institutions, as is now, will only encourage other countries to look for alternatives to the dollar. Trump has threatened countries with tariffs if they leave the dollar, but nothing could accelerate this process more effectively than reckless actions against our business partners.
Finally, an effort to force a Mar-A-Lago agreement in resistant commercial partners could trigger a global financial crisis. The stock market is already in free fall due to Trump’s capricious tariff policies. Consider what would happen if Trump threatens our allies with the expulsion of the United States security umbrella, a “user rate” in Treasury payments abroad, or a selective freezing of treasure payments completely, as they look at has suggested in his Opus Magnum.
The same goes for “reprofile” in coupon bonds zero to 100 years. As the safest and most liquid assets in the world, the US Treasury Bonds. They are the basis of the global financial system: if they suddenly became less safe and less liquid, a financial panic similar to the Lehman brothers and the crisis of Coronavirus could arise, reducing the economies of the United States and global with it. The dollar could fall, but not in a way that Trump would like.
In total, a Mar-A-Lago agreement would represent a great risk of approximately zero profits.
It is doubly surprising that Trump’s officials seem to attract when there is another policy that could simultaneously reduce the dollar, reduce our commercial deficit, reduce interest rates and put the federal budget on a sustainable path in the coming years: reduce spending, increase in a responsible way and reduce fiscal deficit.
On the other hand, we get elves, tariffs with a half -life of 1 1/2 hours, threats to our closest allies and the garbage of the credibility of the United States. It will be four years long.
