He wants both a weaker dollar so as to make American goods more competitive and thereby reduce the trade deficit. But at the same time, he wants to preserve and enhance the dollar’s global reserve currency status, and its parallel position as the predominant international means of exchange.
To list but the most important of them, the benefits of dollar hegemony include enabling the US to borrow more cheaply in world markets, the exercise of geopolitical influence through the imposition of sanctions, and encouraging foreign investment in the US.
A weaker dollar furthers Trump’s protectionist goals by making imports more expensive and exports cheaper.Credit: AP
It is not at all clear that Trump can maintain what France’s one-time president, Valery Giscard d’Estaing, called America’s “exorbitant privilege” while at the same time pursuing strategies, such as inflationary monetary policy, that might weaken its currency.
We know what Miran’s thoughts on the matter are, since he wrote about them in a paper published shortly before Trump’s re-election as president. His musings might be seen as an extended job application.
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The dollar has long been persistently overvalued from a trade perspective, he argued, and that’s in large part because dollar assets “function as the world’s reserve currency”.
Can you have one without the other, both reserve currency supremacy and a much weaker dollar?
Not according to Miran, who suggests that foreigners could be taxed on their holdings of US Treasuries to lessen their attractions to overseas investors, never mind that this would be both a technical and legal default.
If that happened, then the dollar would indeed lose the commanding position it now holds; it’s hard to imagine a policy less likely to make America great again, and essentially amounts to quack economics.
As it happens, Trump already seems to be getting his way on a weaker dollar, and that’s without even trying. Conventional economics would suggest that if you raise tariffs significantly, the dollar would appreciate to compensate, negating at least part of the impact of tariffs on prices.
In the event, it’s actually gone the other way, depreciating by nearly 10 per cent on a trade-weighted basis since it first became apparent that Trump was deadly serious about tariffs.
A weaker dollar furthers Trump’s protectionist goals by making imports more expensive and exports cheaper.Credit: Bloomberg
Growing policy uncertainty, including precisely where the president stands on the strong dollar policy, is a large part of the explanation.
There has been a significant rotation out of dollar assets among international investors, which no doubt has further to run if inflationary monetary policy is pursued.
White House attacks on the integrity of the Fed – and the data, whenever they show the economy in a poor light – have further fuelled the loss of confidence. A withholding tax on US Treasuries might well turn this into a rout.
US policymakers are nonetheless confident that they can preserve and even enhance the dollar’s core position in the world’s financial system while at the same time inducing a more competitive exchange rate.
As on most other aspects of Trump’s economic agenda, the president’s “vision” for the dollar is a mass of contradictions and apparently incompatible goals.
Their big hope rests on stablecoins, privately issued digital tokens which are already beginning to make inroads into global payments.
These use distributed ledger and blockchain technologies to make payments faster and cheaper than current systems.
Backed dollar-for-dollar by US Treasuries, central bank reserves and other supposedly risk-free assets, stablecoins are promoted by the Trump administration as a market-led way of defending and further promoting the internationalisation of the dollar.
They also potentially provide a major alternative source of demand for US Treasuries.
I’ve written before about the long-term threat that poorly regulated stablecoins might pose to financial stability. It’s not just about ensuring that the assets that secure the stablecoins’ value are reliable.
It’s also about making such tokens immune to cyber attack, theft and digital terrorism. Advances in supercomputing make the public keys and digital certificates on which ownership rights rest look much more vulnerable than they used to be.
Privately promoted stablecoins could easily become subject to self-reinforcing runs if their integrity is in any way challenged or ownership rights are called into question.
Some readers may be familiar with Robert Harris’s novel The Second Sleep, in which the author imagines a world far into the future where humanity has returned to almost medieval levels of advancement.
The calamity that has befallen society is never explicitly spelt out, but the most likely explanation is eventually traced to a complete collapse of the digital economy. Something I didn’t know until I read the book is that London is just three meals away from anarchy.
Such a collapse could, of course, occur without the addition of stablecoins; the vast majority of commerce these days is just zeros and ones on a computer.
But at least with fiat money, you know that the full force of the sovereign state and its central bank stand behind it. There may be no such guarantor with stablecoins.
Any strategy for sustaining the power and reach of the mighty dollar that depends solely on the advance of stablecoins would seem peculiarly high risk.
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There’s no telling how Miran might behave if granted the privilege of running the US Federal Reserve. Most go native, and quickly forget any iconoclastic leanings they might have had, once the responsibilities of high office start to weigh. Witness Powell, who – though it now seems incredible – was Trump’s pick for the position.
In any case, Trump jeopardises the strong dollar policy at his peril. Down the decades, it’s generally served the US well, and is a vital part of America’s wider geopolitical power. If it ain’t broke, why break it?
Telegraph, London
