I had AI summarize the article for us. For full disclosure this is the Google AI.
@firegiver since you seem to be concerned about Trump and inflation.
Okay, here's a detailed briefing document summarizing the key themes and ideas from the provided source, "A User’s Guide to Restructuring the Global Trading System":
Briefing Document: Restructuring the Global Trading System
Author: Stephen Miran, Senior Strategist at Hudson Bay Capital (formerly senior advisor at the U.S. Department of the Treasury)
Date: November 2024 (as indicated in the disclosure)
Purpose of Document: This essay aims to analyze potential policy tools for reshaping the global trading system, without advocating for any specific approach. It seeks to understand the financial market consequences of significant shifts in trade or financial policy. It is a guide for evaluating the consequences in the economy and financial markets that might result from a range of possible policies. It is explicitly
not policy advocacy.
Key Themes and Ideas
- The "Triffin World" and the Roots of Economic Discontent:
- Problem: The current global system, where the U.S. dollar is the primary reserve currency, creates an imbalance. The demand for dollars and U.S. Treasuries (USTs) as global reserve assets leads to a structural overvaluation of the dollar. This overvaluation hurts the U.S. export sector and incentivizes imports, resulting in persistent current account deficits.
- "In Triffin world, the reserve asset producer must run persistent current account deficits as the flip side of exporting reserve assets. USTs become exported products which fuel the global trade system."
- Triffin Dilemma: This system risks a “tipping point” where large deficits lead to credit risk in the reserve asset, potentially causing a loss of reserve status and global instability.
- Key Insight: The U.S. runs large current account deficits not because it imports too much, but because it must export USTs to provide reserve assets and facilitate global growth. This view has been discussed by prominent policymakers from both the United States as well as China.
- U.S. Relative Decline: As the U.S. share of global GDP declines, the tension between the Triffin equilibrium (reserve currency demand) and the trade equilibrium intensifies. The system becomes more difficult for the export sector.
- Manufacturing Decline: The paper links the US share of global GDP and manufacturing employment, suggesting the Triffin distortion in trade drives the state of the tradeable sector.
- Historical Context: The U.S.'s current low tariff rates are a legacy of its post-WWII policy to promote global growth.
- Uneven Playing Field: The author notes that non-tariff barriers, IP theft, and other forms of trade distortions compound the issue.
- Consequences of Reserve Currency Status:
- Modest Borrowing Advantage: While being a reserve currency may reduce borrowing costs, the benefit is likely to be smaller than factors such as central bank policy outlooks, growth and inflation forecasts, and equity market performance. The advantage is better described as reduced price sensitivity to borrowing.
- "In other words, we don’t necessarily borrow substantially cheaper, but we can borrow more without pushing yields higher."
- Overvalued Currency: The persistent demand for dollars drives up its value, making U.S. exports more expensive and imports cheaper.
- Financial Extraterritoriality: The U.S. can exert significant financial control globally through sanctions and restrictions on access to the U.S. financial system. This allows the US to achieve foreign and security goals cheaply using financial force.
- "America can, and does, sanction people all over the globe in a variety of ways... the U.S. exerts its financial might to achieve foreign policy ends of weakening enemies without having to mobilize a single soldier."
- Core Tradeoff: The benefit of financial power is balanced against the burden of an overvalued currency that harms the export sector.
- Policy Tools for Reshaping the System:
- Broad Categories: The paper explores both unilateral and multilateral approaches, focusing on tariffs and currency adjustments.
- "There are, broadly speaking, unilateral and multilateral approaches, and approaches focused on tariffs or currencies."
- Unilateral vs. Multilateral: Unilateral solutions can lead to market volatility, while multilateral solutions are more stable but difficult to implement. Unilateral policies provide greater flexibility to rapidly shift policy, but multilateral policies allow you to recruit foreign policymakers to help reduce volatility.
- National Security Intertwined with Trade Policy: Interventions will be targeted at industrial plant critical to security, which will become more broadly conceived.
- "Moreover, because many in the Trump camp see trade policy and national security as inextricably intertwined, many interventions will be targeted at industrial plant critical to security, to the extent they can."
- Tension between the Dollar's Reserve Status and Manufacturing Sector: While the dollar's reserve status weighs heavily on US manufacturing, the paper notes President Trump's support for the dollar's status as a global reserve currency. The author anticipates this will be resolved by policies that preserve the status of the dollar, while improving burden sharing with our trading partners.
- "Although the Triffin effects have weighed on the manufacturing sector, there will be attempts to improve America’s position within the system without destroying the system."
- Tariffs as a Policy Tool:
- Currency Offset: A key focus is on how currencies adjust to offset tariffs. When currencies offset tariffs, the after-tariff price of imports in dollars changes minimally, leading to minimal inflationary consequences for the tariff-imposing country (though not necessarily the exporting country).
- "Tariffs provide revenue, and if offset by currency adjustments, present minimal inflationary or otherwise adverse side effects, consistent with the experience in 2018-2019."
- Inflation Impact: If tariffs are currency-offset, they have minimal inflationary consequences for the tariffing nation, with evidence from 2018-2019 that currency moves can largely offset price increases for the consumer.
- Revenue Generation: Tariffs can provide government revenue and help with burden-sharing for reserve asset provision.
- Incidence: The ultimate burden of tariffs is on the exporting nation, whose real purchasing power and wealth decline.
- Implementation: Tariffs can be implemented gradually, with rates varying by product and trading partner, potentially based on national security concerns and trade practices. The paper discusses graduated implementation over time, graduated scales based on a nation's behavior, and the concept of leveraging tariffs as a negotiating tool.
- Re-export Diversion: The paper acknowledges the role of re-exporting to evade tariffs, which can bias microdata studies of tariff effectiveness. It emphasizes that goods still directly exported to the US are likely those with the greatest ability to pass on price increases.
- Optimal Tariff Rates: The paper discusses the concept of an "optimal" tariff rate, where initial increases in tariffs can be welfare-enhancing. Tariffs can also address pre-existing distortions due to other nations' trade policies.
- Fiscal Devaluations: It notes the equivalence of tariffs and currency devaluations, i.e. the economic effects of devaluation in the exchange rate can be replicated by import tariffs combined with export subsidies.
- Currency Policy as a Tool:
- Multilateral Approaches: Historically, the U.S. has pursued multilateral currency adjustments, but the paper notes that unilateral approaches are also possible.
- Unilateral Approaches:IEEPA: The International Emergency Economic Powers Act (IEEPA) could be used to target reserve accumulation.
- User Fees: The Treasury could impose a "user fee" by withholding a portion of interest payments on foreign official holdings of Treasury securities, creating an incentive to diversify away from dollar assets. The paper emphasizes starting small and differentiating among countries.
- Reserve Accumulation: The U.S. could also accumulate foreign exchange reserves, selling dollars to increase the value of other currencies, but notes the challenges associated with this approach (e.g. inflationary consequences, investment risk).
- "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."
- Mar-a-Lago Accord: The paper discusses the possibility of a "Mar-a-Lago Accord," a multilateral currency agreement, that includes the term-out of reserve debt into longer duration U.S. debt. Foreigners would help pay for the security zone provided by the US, and a reduction in the dollar's value would benefit domestic manufacturers.
- Market and Volatility Considerations:
- Sequencing: The author expects tariffs to be used first to generate negotiating leverage. It's important to understand that the dollar will likely strengthen before it reverses, if it does so.
- Financial Volatility: Currency moves can cause significant financial market volatility.
- "Financial market volatility from currency moves may far exceed the volatility from total passthrough of tariffs into consumer prices."
- Gradualism: The author emphasizes the importance of gradual policy implementation to minimize market disruptions.
- Central Bank Role: The Fed's cooperation is important in managing volatility. It could mitigate the impact of policies by capping interest rates. The Fed also has a statutory mandate to consider interest rates, as well as price stability and full employment.
- Other Steps: The paper outlines some tools the administration might use to fight off volatility if it pursues a more aggressive, unilateral approach: activist Treasury issuance, use of the Exchange Stabilization Fund, and policies focused on deregulation, cheap energy, and fiscal consolidation.
- Impact on Global Markets: Policies implemented could create a stronger demarcation between friend, foe, and neutral countries, potentially increasing risks for countries outside of the security umbrella and increasing volatility expectations in currency markets.
- Other Key Points:
- Trump's Legacy: The author suggests that a second Trump term would be focused on implementing these types of policies. Because President Trump will be unable to run for another term, he can focus on his legacy and achieving his core goals.
- Deregulation: Structural policies focused on deregulation and cheap energy could help reduce inflation, and support equity markets and growth.
- "Moreover, because reducing inflation is critical to helping alleviate bond market concerns as well as allowing the Fed to pursue a deeper cutting cycle, a Trump Administration is likely to prioritize structural policies that reduce inflation via supply side liberalization. That means aggressive deregulation, and a concentrated effort to reduce energy prices."
Conclusion:
The document emphasizes that the U.S. has tools available to affect currency values, contrary to some Wall Street consensus, and that a second Trump administration might employ those tools. It also notes that such policies would come with the risk of increased market volatility. The author suggests that tariffs would be the first step toward the overall goal of reconfiguring the international trading and financial system. The ultimate aim of these potential changes appears to be the improvement of international competitiveness for the US and an increased burden sharing for the US provision of global defense and reserve assets.
This briefing document should be useful in understanding the complexities and potential market consequences of the policy options presented in Miran's essay.
