Making sense of all that trumpery: trying to escape from Triffin’s dilemma?

Within its first two months, the new Trump administration has attacked US institutions, alienated trade partners and allies, decimated consumer and investor confidence, and sent the stock market plummeting. The flurry of announcements, executive orders, and policy changes on economic issues like tariffs and government spending have rolled markets and driven up uncertainty to record high levels. The whiplash from tariffs especially – the threats, announcements, impositions, suspensions, exemptions, re-impositions – and the multiple, often competing, apparently arbitrarily set and constantly moving objectives from the administration have bewildered both pundits and policymakers. Thus, it is probably all too easy to characterise US economic policy so far as pure trumpery and nothing else. Still, it may be useful trying to distil some underlying rationale from all these apparently inconsistent, if not chaotic, behaviour. Against this background, participants in the Bureau conversation were invited to extract possible elements of a coherent strategy driving Trump’s economic agenda, if any existed, even at the risk of eventually boiling down to a sane-washing exercise of the President’s ideas.

In his initial remarks, the lead speaker quipped that he has now a better understanding how Henry Clay must have felt when famously admonished by Montagu Norman about the role of economic advisers.

“You are not here to tell us what to do, but to explain to us why we have done it.” (Sir Montagu Norman, 1933, reprimanding Henry Clay, the Bank’s first professional economist))

He then proceeded to suggest interpreting Trump’s economic agenda as a befuddled attempt to deal with a modern-era Triffin dilemma. In 1959, Robert Triffin predicted that the nascent USD-gold standard was unsustainable because of an insurmountable dilemma: if America stopped providing other countries with US dollars, global trade would stagnate, tipping the world into a contractionary spiral. But if it continued, America’s foreign liabilities would exceed its gold stock, eroding confidence and eventually leading to a run on US gold. As a corollary, the exorbitant privilege of the US dollar as the dominant global reserve currency implied persistent net exports of capital and the readiness to absorb the savings and current account surpluses in other countries.

The lead speaker recalled the demise of the Bretton Woods system and pointed towards some uncomfortable similarities between the circumstances then and now. He argued that the monetary expansion of the United States in the late 1960s associated with the Viet Nam war, combined with lax fiscal policies associated with President Johnson’s domestic reform agenda of the “Great Society”, resulted in high inflation and a deterioration of the current account.  Imbalances on the balance of payments (as measured by reserve losses) led to a much greater general political sensitivity within the United States to trade issues, because payments problems were often traced back to trade flows and then blamed on nationalist and protectionist trading practices of other states. The new U.S. administration led by Richard Nixon that entered office in January 1969 spoke exclusively the language of national power and national advantage. International cooperation appeared to be suspect, international agencies futile.  Increasingly cantankerous disputes about trade accompanied the slide of the Bretton Woods parity system into chaos. In August 1971, President Nixon "closed the gold window," that is, he no longer allowed foreign central banks to exchange dollars for the U.S. Treasury’s gold. Notably, the New Economic Program also included, inter alia, a 10 per cent temporary surcharge on imports. While the flaws of Bretton Woods and the Federal Reserve’s monetary policy had certainly played a role in the situation, Nixon also blamed the U.S. balance-of-payments deficits on unfair trading practices and other countries’ unwillingness to share the military burden of the Cold War. He wanted foreign currencies to appreciate against the dollar, and indeed, at the Smithsonian meeting in December 1971, the United States succeeded in coercing other countries to revalue their currencies relative to the dollar; in exchange, the US offered to drop the import surcharge and to peg the dollar at $38/ounce of gold. The net effect was roughly an 11 percent average devaluation of the dollar against the other key currencies. However, the agreement proved too little, too late. Within fifteen months, the Bretton Woods system collapsed. (Harold James (1996), International Monetary Cooperation Since Bretton Woods, https://doi.org/10.5089/9781475506969.071)

The lead speaker invited participants in the conversation to draw parallels to present days’ circumstances, where mind-sets and actions of the current US administration in several areas seem to be directly taken out of “Tricky Dick’s’” playbook. This includes the condemnation of “pathetic European free-loading” on defence (with Ukraine and the protection of international shipping lanes serving as prominent examples), the slapping of punitive tariffs on trade partners accused of unfair practices, and overall, a confrontational, transactional foreign policy that has little regard for the post-World War II rules-based international system.

Specifically, the lead speaker argued that the US still faces a modern-era Triffin dilemma between satisfying the increasing demand for safe US dollar assets by the rest of the world and maintaining their safety. Highlighting this challenge is the widening gulf between US international financial liabilities and assets. By default, the rest of the world comes last in Trump’s America First policies, heightening the risk of America abusing its exorbitant privilege, and amplifying the dilemma. Indeed, as the US share in world GDP continues to trend down and the global financial wealth outside the US keeps growing, this raises questions about whether foreign holders of US debt securities will continue to be treated fairly.

He recalled that Scott Bessent, Trump’s Treasury secretary, has mulled the possibility of converting five- and 10-year bonds held by foreign investors into 100-year securities bearing low interest rates, whether these investors like it or not. During the 2024 presidential campaign, Trump advisers such as Robert Lighthizer mooted the idea of taxing foreign purchases of US treasuries as a way of driving down the dollar and enhancing the competitiveness of US exports. This plan has been dubbed the “Mar-a-Lago accord”, harking back to the September 1985 Plaza Accords under which the US negotiated a depreciation of the dollar with its main trading partners.

Trump’s nominee to head his Council of Economic Advisers, Stephen Miran, in his earlier role as investment strategist, endorsed such a policy and described how it might be implemented. https://www.hudsonbaycapital.com/documents/FG/hudsonbay/research/638199_A_Users_Guide_to_Restructuring_the_Global_Trading_System.pdf)

Miran proposed slapping a “user fee” on foreign official holdings of treasury securities by withholding a portion of their interest payments. Labelling the measure a user fee instead of a withholding tax would avoid violating international tax treaties. Still, it would be equivalent to a partial default on foreign-held US debt and, thus, surely undermine the dollar’s international status. The lead speaker concluded that dollar devaluation and dollar dominance are not necessarily mutually exclusive. But, in his view, the approach to weakening the dollar that the Trump administration is apparently considering would almost certainly spell the end of the US dollar’s reign as the dominant international currency.

In the ensuing lively debate, participants welcomed the historical perspective, and they found the framing of the debate against the background of Triffin’s dilemma quite useful. Several participants wondered whether Miran’s views were actually influencing policy. It was argued that the erratic announcements and policy actions do not support the Trump administration being guided by sophisticated ideas and a deep strategy when it comes to international economics. However, the narrative of a Mar-a-Lago Dictate (rather than accord, as it would hardly be consensual) may be compatible with an approach of exercising brutal coercive power to unilaterally change all the basic parameters of the world economy. Participants’ views diverged whether Trump’s onslaughts are bound to destroy the dollar’s primacy, but there was widespread agreement on the need to brace for probably very high volatility and turbulent times in currency and bond markets.

The chairman opted to conclude with a quote from a recent comment by Adam Tooze:

“None of us really knows where this clown car is headed and what drives it on its crazy course. It seems like a mystery even to many on board. Quite reasonably we look for elements of rationality. We ask: who inside MAGA 2.0 is thinking and what are their thoughts? We then relate that to our own efforts to diagnose America’s history and the history of the world economy. At the very least we need to explain how Trump 2.0 happened. Sometimes we will find a match between a strand of policy from inside MAGA and our own analysis and it is tempting to label that as “MAGA for thinking people” and to look for continuities with the Biden team etc. That mode of analysis is reasonable. To historically minded people it is appealing for obvious reasons. But it puts us at risk of is underestimating the radicalism of the break marked by the Trump administration. In search of historical context, we miss what is most historically significant. We avoid facing the conclusion that the vision of a Mar-a-Lago Accord may have more in common with grift, a protection racket or a facelift pandering to the ignorant vanity of an old man than with economic policy as we have hitherto known it. Faced with Trump, the risk is that conventional realism is a form of escapism.“

Chartbook 363 Stockholm syndrome in Mar-a-Lago: The belief that "something must be done" and the sanewashing of economic policy in the age of Trump

Editor's addendum: Donald Trump's "liberation day" tariff blitz has sent shock waves through the global economy; the combination of blanket 10 per cent duties and bilateral charges will, once implemented, in effect take the tariff rate on all US imports back to its highest level since 1909. The jury is out whether this can still be seen as a transactional approach to extract concessions in other areas, whether on trade or to serve other power objectives, as was the case during the Nixon administration in 1971. However, as the 10 per cent universal rate does not look open to negotiation, we may well be in for a truly transformational phase in global economic relations with the ensuing turbulence probably higher than after the fall of Bretton Woods; in particular a weakening dollar dominance in trade and financial transactions may be associated with high FX volatility, together with a larger role for new payment systems, including crypto and a digital euro. The EU has vowed a united response to US tariffs warning of further countermeasures if negotiations fail. Indeed, the EU will have to stand together to address the immense economic consequences and to uphold its position in a newly emerging world order.