Steven Kamin was previously head of international finance at the Federal Reserve. Mark Sobel was previously head of international finance at the US Treasury.
In recent weeks, the buzz has been mounting about a new American plan — a “Mar a Lago Accord” — to upend the global monetary system. We can only hope it remains idle chatter.
In brief, based on a detailed discussion paper by CEA Chair nominee Stephen Miran, the accord would have America’s trading partners help weaken the dollar and commit to providing low-cost, long-term financing to the US government, enforced by the threat of higher tariffs or removal of security guarantees.
Intriguingly, there has been no announcement by the Trump administration or even a tweet by Trump, but Miran’s paper — along with various utterances by Treasury Secretary Scott Bessent — have led Wall Street observers to believe such an initiative is indeed in the offing.
And that’s too bad, because a Mar-a-Lago Accord would be pointless, ineffectual, destabilising, and only lead to the erosion of the dollar’s pre-eminent role in the global financial system.
The Mar-a-Lago Accord is premised on the view that the dollar’s global dominance is bad for America. Unnatural demand has caused gross overvaluation. This has in turn led to reduced export competitiveness, persistent trade deficits, and the erosion of US manufacturing. In response, an Accord would call for the US and its trading partners to intervene in foreign exchange markets to sell dollars for foreign currency in a bid to get the dollar down.
However, since foreign sales of US Treasuries and prospects of dollar losses could push up US interest rates and jeopardise the financing of federal budget deficits, foreign governments would have to increase the duration of their remaining holdings of Treasuries, even buying 100-year zero-coupon bonds from the US government — in essence, free financing for a century! And because they could not be expected to do this voluntarily, they would be threatened with higher tariffs or the loss of American military support if they failed to comply.
So, what’s wrong with all that?
First, contrary to Miran’s view that the dollar’s global role is harmful for America, it is actually a net plus, facilitating our business activities abroad, lowering the cost of capital, and increasing our geopolitical reach. And even if the plan succeeded in lowering the dollar, it would do nothing to help the US economy or its workers.
Much of our trade deficits reflect a buoyant economy and large fiscal deficits, not the strong dollar. Moreover, our trade deficits aren’t really a problem per se. Despite them, US economic growth has outstripped that of our major trading partners, and the unemployment rate is only 4 per cent — very low by historical standards.
In fact, there’s no logic to the notion that all countries should have balanced trade. We need trade deficits in order to provide an outlet for spending that otherwise would show up as economic overheating and inflation.
Moreover, the strong dollar clearly isn’t the cause of the shrinking share of US workers in manufacturing (now less than 10 per cent of total employment). The same trend has been at work the world over, in countries with both trade surpluses and deficits, on account of the rapid productivity growth in this sector.
Second, the plan would not succeed. As countless studies have shown, pushing the dollar down on a sustained basis would require the Federal Reserve to lower interest rates and foreign central banks to raise rates; but with US inflation stubbornly exceeding the Fed’s 2 per cent target and foreign economies languishing, that’s not going to happen.
By the same token, if foreign governments were busy selling Treasury bonds in order to depress the dollar, it’s unlikely that increasing the duration of their remaining dollar bonds could be enough to keep US interest rates from rising. And while threats of higher tariffs and ejection from the security umbrella might coerce Japan and Europe to play ball, China — which should be America’s main concern — is going to be less willing to kowtow to Trump.
Third, a Mar-a-Lago Accord risks undermining the global dominance of the dollar. That dominance is based not only on the safety and liquidity of US Treasuries, but also on the long-standing historic prudence of US economic policymaking and its support for a stable, rules-based global trading and financial system.
Mistreating our allies, breaking trade agreements, and undermining support for global institutions, as is now under way, will only encourage other countries to seek alternatives to the dollar. Trump has threatened countries with tariffs if they abandon the dollar, but nothing could accelerate that process more effectively than reckless actions against our trading partners.
Finally, an effort to force a Mar-a-Lago Accord on resistant trading partners could trigger a global financial crisis. The stock market is already in freefall on account of Trump’s capricious tariff policies. Consider what would happen if Trump threatened our allies with ejection from the US security umbrella, a “user fee” on Treasury repayments abroad, or a selective freezing of Treasury repayments altogether, as Miran has suggested in his magnum opus.
Ditto forcing others to “reprofile” into 100-year zero coupon bonds. As the safest and most liquid asset in the world, US Treasury bonds are the bedrock of the global financial system — if they suddenly became less safe and less liquid, a financial panic akin to the Lehman Brothers and coronavirus meltdowns could ensue, taking the US and global economies down with it. The dollar might indeed fall, but not in a way that Trump would like.
All told, a Mar-a-Lago Accord would represent huge downside risk for approximately zero upside gain.
It is doubly amazing that Trump officials seem to be drawn to it when there is another policy that could simultaneously lower the dollar, narrow our trade deficit, reduce interest rates, and put the federal budget on a sustainable path for years to come: cut spending, responsibly raise taxes, and reduce the fiscal deficit.
Instead, we get DOGE, tariffs with a half-life of 1 1/2 hours, threats to our closest allies, and the trashing of America’s credibility. It’s going to be a long four years.