Donald Trump wants to boost exports, to bring American jobs back to the United States and to reduce, to shrink the American trade deficit. For that he needs a lower value of the dollar. For that he needs a weaker dollar but at the same time Donald Trump wants a strong dollar and he will not brook any discussion of ending the exorbitant privilege, the centrality, the hegemony, the dominance of the American dollar in international transactions.
Can Donald Trump possibly have both?
Donald Trump’s first problem is that the tariffs that he has invested so much political capital in, in introducing, announcing and advocating for, will most likely boost the value of the dollar. Why? Primarily because every time there is global uncertainty, whenever there is a problem that emanates from the United States, whether that was the 2008 crisis or whatever crisis there is, there is a paradoxical rush of foreign money into the United States, boosting the dollar. So if Trump’s tariffs create global uncertainty the likely outcome will be an increased value of the dollar and that’s his first problem because if his tariffs succeed in creating a lot of of consternation across the world, in China, in the European Union, in Britain, the result will be that even if imports initially shrink as a result of these large tariffs the influx of money into the United States, of capital, is going to boost the value of the dollar, therefore countering whatever effects the tariffs had on limiting imports and enhancing American exports.
Donald Trump’s second problem is that if he proceeds with his very large tax cuts, especially for corporations and the oligarchs and the very rich in the United States, this is also going to attract into the United States foreign capital. And what will that do? Boost the value of the dollar, and therefore enhance the gap between American savings and investment with investment being much greater than savings, which is a root cause of the American trade deficit.
Trump’s third problem is the exorbitant privilege of the United States dollar. It is the reason why every time there is a crisis, especially one emanating from within the United States the dollar goes up and the US trade deficit gets worse, especially during periods of reduced demand, jobs and employment within the United States. So if Donald Trump were serious about shrinking the American trade deficit he would want to do away with the exorbitant privilege of the United States dollar. But of course, not only will he never allow himself to do that because his best friends, his tribe, other rentiers and the financiers who will be aghast if the United States loses the exorbitant privilege of its dollar. It is highly unlikely that Donald Trump will want to be the first American president after the second world war that loses the hegemonic power of the United States by losing the exorbitant privilege of the United States dollar some argue, and I think they do have a point. That maybe what he’s trying to do, what Donald Trump is trying to do, is, he is threatening the world, China and the European Union in particular with very large tariffs in order to come to an arrangement with them to accept a depreciation of the Chinese Yuan, of the Euro, of competing currencies in order for the United States to see its exports rise and its imports diminish, to cut a deal in other words, something along the lines of what Ronald Reagan did in 1985, the infamous Plaza accords, supposedly a multilateral meeting between the Europeans, the Americans, the Canadians, the Australians… But in reality what the plaza accords were about was an ultimatum by Washington on Tokyo: Appreciate the Yen massively or else I’m going to slap large tariffs on Japanese exports! The Japanese did as they were told. The reason why: Japan’s massive growth rates between 1950 and 1985 were eliminated and why Japan lost its verve, its dynamism was because they accepted those Plaza accords. Is China likely to accept a new Plaza accords? I assign a zero probability to that possibility! China is no Japan. Japan was an occupied country by the United States.
The United States wrote its Constitution, there are tens of thousands of American soldiers still occupying Okinawa. China, I will repeat this once more, is not Japan. It is highly unlikely that they will accept – at a time when the capital account of China, if anything would recommend from an economic point of view a depreciation of the yuan – they will never accept a massive appreciation of the kind that would make the difference for the United States trade deficit in the way that Donald Trump would like. So this is Pie in the Sky. No new Plaza accords between the United States and Beijing this time are on the horizon. In that sense it looks very unlikely that what Donald Trump wants, at least both his objectives of shrinking the US trade deficit and maintaining the exorbitant privilege of the dollar, that both these objectives will be satisfied at once in 2025 in the next four years. The great question however for 2025 and beyond concerns China’s dilemma: Will Beijing decide to stay put gaining time until the United States internal contradictions, Trump’s conundrum and dilemma, plays out or will Beijing make the choice which it has not made yet, they have not made up their minds yet, and I think, reasonably, will however at some point make the choice, make the decision to convert the BRICS area into a new version of Breton Woods, just as Breton Woods had at its heart the US dollar for the BRICS area to have the yuan at its heart with more or less fixed exchange rates between the yuan, the rupia and other currencies and with a view to recycle China’s surpluses within the BRICS area because that would be the greatest and most lethal danger for the exorbitant privilege of the dollar. This is not a decision that has been made as yet. Well, in 2025 or in the years following 2025, I think we shall know the answer. Till then be well.
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This is a short lecture by Professor Yanis Varoufakis, given on the DiEM25 channel.