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December 17, 2024 - 11:50am
Wall Street is having a hard time trying to figure out the incoming Trump presidency. After the election, the US dollar rallied based on the idea that the new administration would unleash a wave of tariffs. This would drive up inflation, which in turn would provoke the Federal Reserve to raise interest rates. The strong dollar trade is now reversing, however, with Wall Street firms saying they expect the currency to decline by anywhere between 2% and 7% in 2025.
What has happened? Analysts no longer seem convinced that Trump will engage in a trade war. While he has consistently stated his intention to ramp up tariffs — two weeks ago he took aim at Mexico and Canada — chatter behind the scenes suggests that this might just be rhetoric aimed at softening up the other side to negotiate a deal.
There are a few public indications that this might be the case. The first is the nomination of Scott Bessent to the position of secretary of the Treasury. Bessent is a hedge fund manager who used to work for George Soros, but has since become a regular staple around Mar-a-Lago and MAGA world more generally. Although he has made some protectionist noises in the past, he is far from a typical tariff advocate. Over the summer, he stated in an interview that rather than pushing the world into a trade war, the United States and its partners should focus on creating a new monetary system similar to the Bretton Woods system that emerged after the Second World War.
Related to this is the suggestion, floated by Trump himself, that China’s Xi Jinping should attend January’s inauguration. This is a highly unusual gesture, as it is rare for foreign leaders to attend American presidential inaugurations — and unheard of that a leader from a country with relatively poor bilateral ties would attend. But the invitation has led some to speculate that Trump might be working on getting “the mother of all deals” with the Chinese.
Depending on what the end product looks like, a new monetary system could be revolutionary in its implications. At the more moderate end of the spectrum, the deal might resemble the Plaza Accords agreed between Japan and the United States in the Eighties. At the time, Japan was running far too large a trade surplus with the United States and so the two countries agreed that they would manage a decline in the value of the US dollar relative to the yen to iron out the trade imbalances. A new Plaza Accord would help close the American trade deficit and rebalance the two economies.
On the more radical end of the spectrum would be a genuinely new monetary architecture likely integrating John Maynard Keynes’s concept of the bancor, essentially a global bank and currency. Keynes proposed the bancor arrangement at the 1944 Bretton Woods conference, but it was rejected in favour of a gold-backed dollar because the Americans recognised the power of the dollar as a reserve currency. The bancor was set up so that it would force automatic adjustments on countries that ran imbalanced trade, whether that was a trade surplus or deficit.
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SubscribeHard to see what’s in it for the US. At the moment they get to buy everything with a currency they can just print when they need more of it.
Seriously though, you can stop doing that whenever. Working class Americans at least would probably welcome it. Most of us don’t approve of how our government is spending all that printed money any more than you do. Further, the global reserve currency dynamic keeps the value of the dollar high relative to other currencies, making imports cheap and making manufacturing and many other productive activities unprofitable here in the US, so by all means feel free to stop doing that whenever you feel like it. It will probably make life difficult for idiot politicians whose only idea for fixing anything is to dump money into a gigantic appropriately labeled bucket and let some appropriately labeled bureaucrat or ‘expert’ spend it, and that’s a good thing that will make whatever short term sacrifices worthwhile.
A new global monetary system… really? You can almost hear the denial. They still don’t get it. Having been defeated in the election, the free traders are now engaged in pure wishful thinking, hoping Trump will somehow do the exact opposite of what he said he’d do during his first term and consistently throughout the campaign, a policy that, by the way, proved so politically popular that it was expanded by the Biden administration. They’re grasping at straws, trying to parse meanings from the last decade of quotes from one cabinet appointment, never you mind that Trump goes through advisors like he goes through hair dye and spray tan. Threatening Mexico, Canada, or Europe with tariffs might be a bluff and a negotiating tactic to extract other concessions, but not China. There isn’t much Trump could do to alienate his own voting base, but making nice with the Chinese and signing some treaty that hands them permanent, official, and codified influence over the American economy might well do it. Half the reason there is broad bipartisan support for trade sanctions against China is that they are popular with the American people (the military industrial complex being the other half). Biden would have faced serious political repercussions for removing Trump’s China tariffs. The fact that he didn’t remove them even in the face of politically disastrous inflation numbers suggests that somebody judged the political consequences of appearing soft on China would actually be worse in the next election cycle.
At any rate, the inflation that Trump voters care about isn’t for appliances, smart phones, or drones. They’re worried about the prices of basic necessities like food, electricity, gasoline, housing, child care, medicine, and so on. The US doesn’t import any of these things from China. The inflation on these commodities was a result of irresponsible stimulus spending post-COVID (which in fairness Trump participated in) and the Biden administration’s climate change policy that increased energy prices, not trade imbalances or tariff policy. Putting tariffs on China will raise the price of basically everything from toasters to televisions but people don’t buy those things all the time. They can do without and many already are anyway.
You know who actually feels most of the pain from people buying fewer of those things and less often, and maybe repairing the old ones rather than buying new? The companies that sent the factories to China in the first place so they can make cheap junk that breaks easily and has to be replaced with more cheap junk, the Wall Street bankers and traders getting rich without producing anything by shuffling money all over the planet, and the professional managers, lawyers, accountants, etc. who orbit around those companies, banks, and activities. Basically, all the people who have gotten rich off globalism are going to do the struggling for a change. What’s happening here, and what should happen, is a complete economic realignment. The time for making minor adjustments is long since over. The people want change, and one way or another, they’ll have it.
The author does get one thing right. The old post WWII economic system is failing and there needs to be a reset. It’s just nothing like the one this author imagines. It’s a shift away from disposable cheap stuff we don’t need and renewed focus on the fundamentals, like food, energy, healthcare, etc. The economy has to be shifted away from focusing on international trade and finance towards the production of actual goods and services that are needed by the people. We need massive transfers of investment and human resources away from these non-productive wealth accumulating rent-seeking industries towards things that actually matter to actual people and have beneficial side effects rather than capturing all profits in corporate bank accounts. I have little doubt the process will be painful. I expect that there are economic hard times ahead. We may be looking at a second Great Depression. What this author and so many others fail to grasp is that a lot of Americans are already in the new depression. I doubt they’ll have much sympathy for the bankers, accountants, traders, and managers that might now get to experience it with them.
I hate to tell you this, but the Trump administration will be even more elitist than the previous Biden gang, but elites of the worse kind, this is a billionaire takeover of America, and these people are there to profit from any changes, the average American be damned, people will be so disappointed in 4 years time after more tax cuts for the rich and the national debt approaching 50 trillion. The crypto show is just the tip of the iceberg, I must admit it’s quite the ponzi scheme, until it collapses.
There will definitely a Bitcoin reserve to back the dollar, Trump already confirmed that would be the case, so America will mark the dollar to this decentralized digital currency. So that’s good for freedom.
The fact is that the sanction thing is out of hand, and has to go, especially since BRICS has already created the mBridge system as an alternative to the Swift system that the Biden admin wielded as a weapon against Russia.
So, that mBridge digital payment resolution thing is a CBDC (Central Bank Digital Currency) based platform. This means its over for central banks. It’s over for the USD. In fact the USD will no longer be the worlds reserve currency by 2030, so Trump has to create a new way forward that preserves the dollar, and it looks like he is going with Bitcoin backing.
The other thing is Ethereum is going to be the way you do loans, and so central banks are going to either be radically altered moving forward, or many will be absorbed into digital payment resolution systems. Trump is not only a fan of Crypto, he understands it. He is going to need to at least make Ethereum immune to capital gains. Removing capital gains tax off of crypto is going to turn it into cash. That all seems to be the direction things are headed.
There might even be a creative way to pay off the USD debt this way, because the USD will be heavily devalued and paid off with nearly worthless dollars.
A Few Key Points for Analysis:
The Plaza Accord was a disaster for Japan and is called the “lost decade”.
Why would China consider adopting a Bancor-like system now? Perhaps 20 years ago was the right moment. China is not in the same position as Japan…it is much more advanced.
More importantly, why did the Bancor fail in the first place? Here’s a reminder:
After World War II, the U.S. had the world’s strongest economy and wanted the dollar, not a neutral bancor, to dominate the global monetary system.While Keynes’s Bancor proposal was more equitable and balanced for global trade, it was politically unacceptable to the U.S. at the time.The word “equitable” is not a word or concept that squares with U.S. hegemony.
Looking ahead, the BRICS nations might pursue a similar system, but likely without U.S. involvement.
IMHO, America’s biggest export is its culture…and they may be better off igniting that with technology but the financial power is not their strength anymore.
Well something will have to give. How can anyone buy a bond with 5% yield year over 10 year period. Property goes up by that in a (bad) year, the stock market in an ( average) month and btc in a ( good) day !