"Houston, we have a problem..."
The entire world has a major problem, with a "loose cannon"
attempting to control the whole world.
It is no mystery what Dear Leader is planning to do next - just
d/l this article
"A User's Guide to Restructuring the Global Trading System"
by Stephen Miran, in PDF.
"In any case, because President Trump has shown tariffs are a
means by which he can successfully extract negotiating
leverage-and revenue-from trading partners, it is quite likely
that tariffs are used prior to any currency tools.
"Because tariffs are USD-positive, it will be important for
investors to understand the sequencing of reforms to the
international trading system. The dollar is likely to strengthen
before it reverses, if it does so. There is a path by which the
Trump Administration can reconfigure the global trading and
financial systems to America's benefit, but it is narrow, and
will require careful planning, precise execution, and attention
to steps to minimize adverse consequences.
Would you (or any country) be coerced into buying a century- or "perpetual"- UST securities? Or pay a "user fee" for holding them? In order to help pay the cost of the US "security umbrella" that it provides for you? Or would you rather have Peace, not forever-wars?
"Consensus on Wall Street is that there is no unilateral
approach that the Trump Administration can take for strengthening
undervalued currencies. These economists tend to point to the
Federal Reserve's policy rate as the main driver of the dollar
and then emphasize that the Fed will not cut rates merely because
the President wants to achieve a currency outcome.
This conclusion is wrong. There is a variety of steps an
Administration can take if it is willing to be creative, that do
not rely on the Fed cutting rates.
"For instance, the International Emergency Economic Powers
Act, signed into law by President Jimmy Carter in 1977, gives the
President sweeping powers over international transactions in
response to foreign-origin threats "to the national security,
foreign policy, or economy of the United States." (50 U.S.C.
§1701(a)). Such powers include the ability to limit or
prohibit transfers of credit, payments or securities
internationally. (50 U.S.C. §1702(a)1) The Act is an
important foundation of Treasury's sanctions powers and financial
extraterritoriality.
IEEPA can also be used to disincentivize the accumulation
of foreign exchange reserves, if the Administration wills it. If
the root cause of dollar overvaluation is demand for reserve
assets, Treasury can use IEEPA to make reserve accumulation less
attractive. One way of doing this is to impose a user fee on
foreign official holders of Treasury securities, for instance
withholding a portion of interest payments on those
holdings.
Reserve holders impose a burden on the American export sector,
and withholding a portion of interest payments can help recoup
some of that cost. Some bondholders may accuse the United States
of defaulting on its debt, but the reality is that most
governments tax interest income, and the U.S. already taxes
domestic holders of UST securities on their interest payments.
While this policy works through currencies as a means of
affecting economic conditions, it is actually a policy targeting
reserve accumulation and not a formal currency policy.
Legally, it is easier to structure such a policy as a user fee
rather than a tax, to avoid running afoul of tax treaties.
Such policy is not a capital control, since aiming it exclusively
at the foreign official sector targets reserve accumulation
rather than private investment.
(continuing on page 31):
"Of course, a user fee risks inducing volatility. Incentivize
too much reserve selling and there can be a rout in the dollar,
spikes in interest rates, and limits to our powers of financial
extraterritoriality. However, there are steps an Administration
can take to mitigate these risks: First, start small and take
small steps. By starting with a small user fee, say 1% of
interest remittances, Treasury can avoid provoking a deluge of
flows. If that's not sufficient to achieve the desired
devaluation, go up to 2%. And so on. With such a drastic change
in policy with enormous potential consequences, gradualism is
necessary. It'll take time to find the "right" level, but
patience will help reduce adverse consequences. To become even
more gradual, Treasury could explore imposing a fee only on new
issues, rather than old ones. (This might also help alleviate
any concerns about the constitutionality of this measure with
respect to the contracts clause.
"Second, as in tariffs, differentiate among countries. Presumably
the Administration would want to withhold remittances to
geopolitical adversaries like China more severely than to allies,
or to countries that engage in currency manipulation more
severely than to those that do not. The Administration would
likely want to give our allies the benefits of reserve currency
usage, not our adversaries. Tax rates experienced by different
nations on their reserve holdings can be a function of their
relationship with America. Treasury can implement the fees
through securities custodians and financial intermediaries; it is
well within Treasury's anti-money-laundering and financial
intelligence toolkits to do a good job identifying the beneficial
owners of most of Treasurys.
It seems we have here an author who while seeming very economically literate, is viewing world affairs through a very narrow, sheltered US perspective. To get what I consider a more informed view on reserve currencies, do read Jeff Rubin's book: A Map of the New Normal. Trump CANNOT obliterate the US trade deficit with almost all nations AND maintain the US$ as the world reserve currency. Thanks to Biden's sanctions, as Jeff Rubin says, that world no longer exists.
Nations of the world: Listen up! If you are exporting to USA, DO NOT ever accept US$ as payment! Only accept your own currency or gold. If you accept a US$, you have not accepted money, you have accepted a piece of debt - and in the other direction, you have just handed over another little bit of your sovereignty.
References:
https://www.hudsonbaycapital.com/documents/FG/hudsonbay/research/638199_A_Users_Guide_to_Restructuring_the_Global_Trading_System.pdf
https://www.penguinrandomhouse.ca/books/714717/a-map-of-the-new-normal-by-jeff-rubin/9780735246119
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