(archive link)

Curious for input from comrades more versed in economics than myself. Thoughts on this ‘plan’? Is Yanis Varoufakis forgetting anything?

Faced with President Trump’s economic moves, his centrist critics oscillate between desperation and a touching faith that his tariff frenzy will fizzle out. They assume that Trump will huff and puff until reality exposes the emptiness of his economic rationale. They have not been paying attention: Trump’s tariff fixation is part of a global economic plan that is solid — albeit inherently risky.

Their thinking is hard-wired onto a misconception of how capital, trade and money move around the globe. Like the brewer who gets drunk on his own ale, centrists ended up believing their own propaganda: that we live in a world of competitive markets where money is neutral and prices adjust to balance the demand and the supply of everything. The unsophisticated Trump is, in fact, far more sophisticated than them in that he understands how raw economic power, not marginal productivity, decides who does what to whom — both domestically and internationally.

[…]

His chief complaint is that dollar supremacy may confer huge powers on America’s government and ruling class, but, ultimately, foreigners are using it in ways that guarantee US decline. So what most consider to be America’s exorbitant privilege, he sees as its exorbitant burden.

Trump has been lamenting the decline of US manufacturing for decades: “if you don’t have steel, you don’t have a country.” But why blame this on the dollar’s global role?

[…] foreign central banks do not let the dollar adjust downwards to the “right” level — at which US exports recover and imports are restrained.

[…] It is just that the dollar is the only safe international reserve [foreign central banks] can get their hands on. It is only natural for European and Asian central banks to hoard the dollars that flow to Europe and Asia when Americans import things. By not swapping their stash of dollars for their own currencies, the [various foreign central banks] suppress the demand for (and thus the value of) their currencies. This helps their own exporters boost their sales to America and earn even more dollars. In a never-ending circle, these fresh dollars accumulate in the coffers of the foreign central bankers who, to gain interest safely, use them to buy US government debt.

In short, [in Trump’s view] US manufacturing has been in decline because America is a good Samaritan: its workers and middle class suffer so that the rest of the world can grow at its expense.

But the dollar’s hegemonic status also […] enable the US government to run deficits and pay for an oversized military that would bankrupt any other country. And by being the linchpin of international payments, the hegemonic dollar enables the President to exercise the modern-day equivalent of gunboat diplomacy: to sanction at will any person or government.

This is not enough, in Trump’s eyes, to offset the suffering of American producers who are undercut by foreigners whose central bankers exploit a service (dollar reserves) America provides them for free to keep the dollar overvalued. For Trump, America is undermining itself for the glory of geopolitical power and the opportunity to accumulate other people’s profits. These imported riches benefit Wall Street and realtors but only at the expense of the people who elected him twice: Americans in the heartlands who produce the “manly” goods such as steel and automobiles that a nation needs to remain viable.

And that’s not the worst of Trump’s concerns. His nightmare is that this hegemony will be fleeting.

[…]

For when US deficits exceed some threshold, foreigners will panic. They will sell their dollar-denominated assets and find some other currency to hoard. Americans will be left amid international chaos with a wrecked manufacturing sector, derelict financial markets and an insolvent government. This nightmare scenario has convinced Trump that he is on a mission to save America: that he has a duty to usher in a new international order.

And that’s the gist of his plan: to effect in 2025 a decisive anti-Nixon Shock — a global shock that cancels out the work of his predecessor by terminating the Bretton Woods system in 1971 which spearheaded the era of financialisation.

Central to this new global order would be a cheaper dollar that remains the world’s reserve currency — this would lower US long-term borrowing rates even more. Can Trump have his cake (a hegemonic dollar and low-yielding US Treasuries) and eat it (a depreciated dollar)?

He knows that the markets will never deliver this of their own accord. Only foreign central banks can do this for him. But to agree to do this, they need to be shocked into action first. And that’s where his tariffs come in.

This is what his critics do not understand. They mistakenly think that he thinks that his tariffs will reduce America’s trade deficit on their own. He knows they will not. Their utility comes from their capacity to shock foreign central bankers into reducing domestic interest rates. Consequently, the euro, the yen and the renminbi will soften relative to the dollar. This will cancel out the price hikes of goods imported into the US, and leave the prices American consumers pay unaffected. The tariffed countries will be in effect paying for Trump’s tariffs.

But tariffs are only the first phase of his masterplan. With high tariffs as the new default, and with foreign money accumulating in the Treasury […] That’s when the second phase of Trump’s plan kicks in: the grand negotiation.

[…]

Trump’s ideal world is a hub and spokes model. [Trump feels with the threat of tariffs and the threat of withholding US military support or using it against he can get most countries to acquiesce]

To [what? To] appreciating their currency substantially without liquidating their long-term dollar holding. He will not only expect each spoke to cut domestic interest rates, but will demand different things. From Asian countries that currently hoard the most dollars, he will demand they sell a portion of their short-term dollar assets in exchange for their own (thus appreciating) currency. From a relatively dollar-poor eurozone riddled with internal divisions that increase his negotiating power, Trump may demand three things: that they agree to swap their long-term bonds for ultra-long-term or possibly even perpetual ones; that they allow German manufacturing to migrate to America; and, naturally, that they buy a lot more US-made weapons.

When a foreign government acquiesces to his demands, he will have chalked up another victory. And when some recalcitrant government holds out, the tariffs stay put, yielding his Treasury a steady stream of dollars which he can dispense with any way he deems fit (since Congress controls only tax revenues).

Once this second phase of his plan is complete, the world will have been divided into two camps: one camp shielded by American security at the cost of an appreciated currency, the loss of manufacturing plants, and forced purchases of US exports including weapons. The other camp will be strategically closer perhaps to China and Russia, but still connected to the US through reduced trade which still gives the US regular tariff income.

In my mind this certainly resonates with other US plans like Ukraine which have accelerated de-industrialization of Europe and made it noncompetitive.

He closes with some caveats:

The depreciation of the dollar may not be sufficient to cancel out the effect of tariffs on prices US consumers pay. Or the sale of dollars may be too great to keep long-term US debt yields low enough.

And he concludes with some threats which you can read.