December 17, 2024 - 11:50am
Wall Street is having a hard time trying to figure out the incoming Trump presidency. After the election, the US dollar rallied based on the idea that the new administration would unleash a wave of tariffs. This would drive up inflation, which in turn would provoke the Federal Reserve to raise interest rates. The strong dollar trade is now reversing, however, with Wall Street firms saying they expect the currency to decline by anywhere between 2% and 7% in 2025.
What has happened? Analysts no longer seem convinced that Trump will engage in a trade war. While he has consistently stated his intention to ramp up tariffs — two weeks ago he took aim at Mexico and Canada — chatter behind the scenes suggests that this might just be rhetoric aimed at softening up the other side to negotiate a deal.
There are a few public indications that this might be the case. The first is the nomination of Scott Bessent to the position of secretary of the Treasury. Bessent is a hedge fund manager who used to work for George Soros, but has since become a regular staple around Mar-a-Lago and MAGA world more generally. Although he has made some protectionist noises in the past, he is far from a typical tariff advocate. Over the summer, he stated in an interview that rather than pushing the world into a trade war, the United States and its partners should focus on creating a new monetary system similar to the Bretton Woods system that emerged after the Second World War.
Related to this is the suggestion, floated by Trump himself, that China’s Xi Jinping should attend January’s inauguration. This is a highly unusual gesture, as it is rare for foreign leaders to attend American presidential inaugurations — and unheard of that a leader from a country with relatively poor bilateral ties would attend. But the invitation has led some to speculate that Trump might be working on getting “the mother of all deals” with the Chinese.
Depending on what the end product looks like, a new monetary system could be revolutionary in its implications. At the more moderate end of the spectrum, the deal might resemble the Plaza Accords agreed between Japan and the United States in the Eighties. At the time, Japan was running far too large a trade surplus with the United States and so the two countries agreed that they would manage a decline in the value of the US dollar relative to the yen to iron out the trade imbalances. A new Plaza Accord would help close the American trade deficit and rebalance the two economies.
On the more radical end of the spectrum would be a genuinely new monetary architecture likely integrating John Maynard Keynes’s concept of the bancor, essentially a global bank and currency. Keynes proposed the bancor arrangement at the 1944 Bretton Woods conference, but it was rejected in favour of a gold-backed dollar because the Americans recognised the power of the dollar as a reserve currency. The bancor was set up so that it would force automatic adjustments on countries that ran imbalanced trade, whether that was a trade surplus or deficit.
If the Trump administration had the vision needed to push the bancor over the line, it could be a truly world-changing event. But these initial murmurings that the US might move away from destructive — and arguably failed — trade war policies and toward a more equitable, multilateral solution are worth keeping an eye on. It could provide us with the first glimmers of hope we have seen that the 21st century might be a peaceful and prosperous one.
Philip Pilkington is a macroeconomist and investment professional, and the author of The Reformation in Economics
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SubscribeHard to see what’s in it for the US. At the moment they get to buy everything with a currency they can just print when they need more of it.
Seriously though, you can stop doing that whenever. Working class Americans at least would probably welcome it. Most of us don’t approve of how our government is spending all that printed money any more than you do. Further, the global reserve currency dynamic keeps the value of the dollar high relative to other currencies, making imports cheap and making manufacturing and many other productive activities unprofitable here in the US, so by all means feel free to stop doing that whenever you feel like it. It will probably make life difficult for idiot politicians whose only idea for fixing anything is to dump money into a gigantic appropriately labeled bucket and let some appropriately labeled bureaucrat or ‘expert’ spend it, and that’s a good thing that will make whatever short term sacrifices worthwhile.
Most working class Americans have benefitted greatly from cheap imports with lower prices for goods they otherwise would not be able to afford, anyone who thinks that low cost manufacturing is coming back to the US is dreaming in technicolor. Besides most manufacturing is now fully automated and robotized, the capital investment and technology is the main cost, not labor costs. With AI and automated systems and supply chains , there will be even fewer manufacturing jobs in the future, and also fewer service sector jobs. All this nonsense from Trump is just that, nonsense.
His billionaire friends know it too, they don’t give a hoot about the working class, for them labor is just an expense to cut.
Sigh… Let me spell it out for those who lack imagination or any awareness of where we are as a nation and civilization. This argument isn’t working anymore. Low cost manufacturing isn’t coming back to the US. We know that. Who said anything about low costs? Americans have enough worthless junk, too much to fit in our homes in fact. We can do with less of it and would probably trade a lot of it for better jobs in non-service industries. Automation exists. We know. We still want the automated robot factories built on American soil.
It matters where the factory is built because whether the factory has five hundred employees or five, the power plants that provide energy will be here, the trucks moving product in and out of it will be here, the construction that builds the factory and the maintenance people who fix things will be here, and five is still greater than zero last time I checked. The value of those factories is not limited to the number of jobs they provide directly.
It matters where they are because people have a tribal sense of commonality. They are proud of the things they produce and the economic viability of their towns, cities, and states. You can whine about racism all you like, but most Americans care more about giving five jobs to Americans than five hundred to people in Indonesia or China or wherever else. That’s just human nature. If you don’t like it, you’re probably on the right track trying to build a civilization that runs entirely on AI and robots.
Further, it matters where they are if we have a conflict and go to war or impose economic sanctions because in addition to whatever else they produce, they can be used to produce guns, bombs, tanks, and other stuff one needs to fight wars, and they can’t be built overnight. I shouldn’t need to explain why one wants to produce more tanks, guns, and planes than a potential enemy. There’s plenty of military history for that. I won’t insult your intelligence by quoting Wikipedia the way free traders insult all of us by parroting platitudes about the economic benefits of trade, which brings us to my final point.
All this matters because there are things that are more valuable to people than money and economic efficiency. If you can’t get around to that realization, I don’t know what to tell you. Trump voters are not idiots and rubes who will be shocked by the skyrocketing price of iphones or daunted by the prospect of a recession. As far as many are concerned, we still haven’t recovered from the last one, or the one before it. If you told Trump voters that tariffs would make some stuff cost more, I imagine they’d agree, and a good number would be smart enough to ask you what stuff exactly will cost more, because they actually know where their food and their energy and their lumber and basic necessities come from. They know because a lot of them live in the places its produced and are involved somehow in producing it. You’re not telling the populist crowd anything they don’t know and haven’t heard for decades.
Finally, if you want to discuss fantasies and technicolor dreams, selling people on the notion that we could all be one big happy planet and that free trade would end all war and conflict because of economic interdependencies is perhaps the most ridiculous idea ever to pass as a credible political philosophy. The reality of history and nature has been people banding together into familes, clans, tribes, and eventually nations and cultures to compete over the finite resources that exist at any given time. The only nonsense I see is the notion this nonsense that everyone benefits from trade, because two plus two is not five. Globalism has resulted in the wholesale transfer of wealth, note that wealth is not equivalent to money, goods, or stuff from the middle class of western nations to the populations of non-western low wage nations and the multinational elites and super wealthy capital class that presides over the system. They justify this by playing the race card and claiming to have ‘lifted millions of global citizens out of poverty’. People know how the scam works now, and won’t be fooled by the same money talk and shell games. Sooner or later, you folks are going to have to understand that this narrative is what people believe. It’s what got Trump elected, and it can get worse, a lot worse.
Well something will have to give. How can anyone buy a bond with 5% yield year over 10 year period. Property goes up by that in a (bad) year, the stock market in an ( average) month and btc in a ( good) day !
This is nonsense. Plenty of people are buying those bonds. And for good reasons – stable returns. This is investment 101 stuff.
A Few Key Points for Analysis:
The Plaza Accord was a disaster for Japan and is called the “lost decade”.
Why would China consider adopting a Bancor-like system now? Perhaps 20 years ago was the right moment. China is not in the same position as Japan…it is much more advanced.
More importantly, why did the Bancor fail in the first place? Here’s a reminder:
After World War II, the U.S. had the world’s strongest economy and wanted the dollar, not a neutral bancor, to dominate the global monetary system.While Keynes’s Bancor proposal was more equitable and balanced for global trade, it was politically unacceptable to the U.S. at the time.The word “equitable” is not a word or concept that squares with U.S. hegemony.
Looking ahead, the BRICS nations might pursue a similar system, but likely without U.S. involvement.
IMHO, America’s biggest export is its culture…and they may be better off igniting that with technology but the financial power is not their strength anymore.
A new global monetary system… really? You can almost hear the denial. They still don’t get it. Having been defeated in the election, the free traders are now engaged in pure wishful thinking, hoping Trump will somehow do the exact opposite of what he said he’d do during his first term and consistently throughout the campaign, a policy that, by the way, proved so politically popular that it was expanded by the Biden administration. They’re grasping at straws, trying to parse meanings from the last decade of quotes from one cabinet appointment, never you mind that Trump goes through advisors like he goes through hair dye and spray tan. Threatening Mexico, Canada, or Europe with tariffs might be a bluff and a negotiating tactic to extract other concessions, but not China. There isn’t much Trump could do to alienate his own voting base, but making nice with the Chinese and signing some treaty that hands them permanent, official, and codified influence over the American economy might well do it. Half the reason there is broad bipartisan support for trade sanctions against China is that they are popular with the American people (the military industrial complex being the other half). Biden would have faced serious political repercussions for removing Trump’s China tariffs. The fact that he didn’t remove them even in the face of politically disastrous inflation numbers suggests that somebody judged the political consequences of appearing soft on China would actually be worse in the next election cycle.
At any rate, the inflation that Trump voters care about isn’t for appliances, smart phones, or drones. They’re worried about the prices of basic necessities like food, electricity, gasoline, housing, child care, medicine, and so on. The US doesn’t import any of these things from China. The inflation on these commodities was a result of irresponsible stimulus spending post-COVID (which in fairness Trump participated in) and the Biden administration’s climate change policy that increased energy prices, not trade imbalances or tariff policy. Putting tariffs on China will raise the price of basically everything from toasters to televisions but people don’t buy those things all the time. They can do without and many already are anyway.
You know who actually feels most of the pain from people buying fewer of those things and less often, and maybe repairing the old ones rather than buying new? The companies that sent the factories to China in the first place so they can make cheap junk that breaks easily and has to be replaced with more cheap junk, the Wall Street bankers and traders getting rich without producing anything by shuffling money all over the planet, and the professional managers, lawyers, accountants, etc. who orbit around those companies, banks, and activities. Basically, all the people who have gotten rich off globalism are going to do the struggling for a change. What’s happening here, and what should happen, is a complete economic realignment. The time for making minor adjustments is long since over. The people want change, and one way or another, they’ll have it.
The author does get one thing right. The old post WWII economic system is failing and there needs to be a reset. It’s just nothing like the one this author imagines. It’s a shift away from disposable cheap stuff we don’t need and renewed focus on the fundamentals, like food, energy, healthcare, etc. The economy has to be shifted away from focusing on international trade and finance towards the production of actual goods and services that are needed by the people. We need massive transfers of investment and human resources away from these non-productive wealth accumulating rent-seeking industries towards things that actually matter to actual people and have beneficial side effects rather than capturing all profits in corporate bank accounts. I have little doubt the process will be painful. I expect that there are economic hard times ahead. We may be looking at a second Great Depression. What this author and so many others fail to grasp is that a lot of Americans are already in the new depression. I doubt they’ll have much sympathy for the bankers, accountants, traders, and managers that might now get to experience it with them.
I hate to tell you this, but the Trump administration will be even more elitist than the previous Biden gang, but elites of the worse kind, this is a billionaire takeover of America, and these people are there to profit from any changes, the average American be damned, people will be so disappointed in 4 years time after more tax cuts for the rich and the national debt approaching 50 trillion. The crypto show is just the tip of the iceberg, I must admit it’s quite the ponzi scheme, until it collapses.
So explain why most of the wealthy, the affluent, the super rich, and the corporations backed the Harris campaign in 2024, and Biden in 2020, and Hillary in 2016? Am I to believe they were eager to have someone raise their taxes to balance the budget and pay for wealth redistribution schemes? Did I miss the Harris campaign proposing a wealth tax as part of her platform and all the billionaires lining up behind it? No, that didn’t happen because words are not actions. Kamala can say she’ll make the billionaires pay but so long as they all donate to her campaign and she endorses the same policies that brought the global billionaires to power in the first place, nobody believes it, nor should they.
Why is it so necessary to talk in these binary terms. All politics is elitist – to some degree. There are generate and degenerate elites – and cycles. I think most would say western culture is on the downswing right now and has been for decades….Pelosi made 90 million bucks on the stockmarket insider trading FFS….We/they have been corrupted. However (contra Steve to some extent) Trump will be more centrist economically than some on the right hope, and the left fear; just as all the populist parties in Europe are right on culture and nation, but actually social democratic on economy /welfare system.
They haven’t articulated a coherent political economy that combines libertarianism for families (not Ayn Rand ubermensche individuals),communitarian mutual aid, new technology/4IR, traditional religion and non-materialist metaphysics/culture …the kind of neo-Christendom that we need. Rather it’s all defensive and in the end it will be self-defeating.
I don’t think a Neo-Keynesian revamp will work. Demography and biophysical limits are setting the ground for geo-political conflict…I’m glad Trump is there and not Biden; I hope Trudeau is fired soon – and pray that Nigel Farage will displace Starmer and the conservatives – not because he has all the answers. Farage in particular is much more an old school free trader than Trump and I think doesn’t really have a plan for the new world order. Britain should probably re-align with America and the anglophone world.
But all that is to say that ‘Orangeman good/bad’ is not really analysis. The near and medium term future will be much more complex, surprising and unscripted than that. I think Trump is going to be much less effective as a culture warrior for instance, than the right hopes and the left fears. He doesn’t really get it. And the right has yet to articulate a coherent post-liberal alternative to Enlightenment modernism….That may sound faux sophisticated… But Keynesian social democracy – which drove the entire post-war world was driven very clearly by an ideology and a metaphysics. Thatcherism – also..although much narrower and more economistic (her reading of Hayek was too dependent on Keith Joseph. She should have listened more to Roger Scruton. Sunday trading, no such thing as society – disastrous. She didn’t understand religion and culture at all). More recently ‘woke’ is an acceleration and intensification of the most ludicrous Enlightenment shibboleths of materialism, utopianism and a strange admixture of individualism and collectivism.
But where is the right/conservative/post-liberal version of distributism? Unherd – perhaps you could ask Michael Knowles and company at Daily Wire?
Thoughtful response. There will always be a certain amount of elitism in government. The exercise of power is never entirely benevolent. As you mentioned, it’s gone way too far to the point something has to be done about it. Further, I can tolerate a significant level of corruption and shenanigans from the ruling class if they’re basically competent and doing a reasonable job. They’re not. They’ve allowed a dangerous geopolitical rival to emerge out of a combination of greed and stupidity, pursued personal wealth at the expense of national wealth, and basically ignored the people’s complaints in what is supposed to be a democracy/republic. When ruling classes fail, there are consequences, and we’re seeing them. I wish we had some better option than Trump, but as you say, he’s better than Biden. In stumbling around randomly he might run into a couple policies that actually make sense and work, whereas we know the establishment will keep doing what they’re doing and tell us everything’s fine while digging the hole deeper. I agree completely on your succinct explanation of wokeness. I also agree that the solutions we need go beyond economics and materialism.
There will definitely a Bitcoin reserve to back the dollar, Trump already confirmed that would be the case, so America will mark the dollar to this decentralized digital currency. So that’s good for freedom.
The fact is that the sanction thing is out of hand, and has to go, especially since BRICS has already created the mBridge system as an alternative to the Swift system that the Biden admin wielded as a weapon against Russia.
So, that mBridge digital payment resolution thing is a CBDC (Central Bank Digital Currency) based platform. This means its over for central banks. It’s over for the USD. In fact the USD will no longer be the worlds reserve currency by 2030, so Trump has to create a new way forward that preserves the dollar, and it looks like he is going with Bitcoin backing.
The other thing is Ethereum is going to be the way you do loans, and so central banks are going to either be radically altered moving forward, or many will be absorbed into digital payment resolution systems. Trump is not only a fan of Crypto, he understands it. He is going to need to at least make Ethereum immune to capital gains. Removing capital gains tax off of crypto is going to turn it into cash. That all seems to be the direction things are headed.
There might even be a creative way to pay off the USD debt this way, because the USD will be heavily devalued and paid off with nearly worthless dollars.
What a joke your comments are, zero understanding of basic economics, the crypto ponzi scheme is just that, fake money created out of thin air based on pure speculation, if you think central banks created problems, wait until the crypto bubble collapses. If the Trump gang supports this nonsense they are traitors to their country, undermining their country ‘s currency and economy. What misery on the population that billionaire cabal will bring to the average person , they will milk the US government dry, and the vast majority will be left holding the bag.
A massive fraud and tax avoidance scheme will be perpetuated, it’s criminal what’s coming.
…some will indeed be left behind if they are like you Dave, and don’t understand network effects. But then that’s a bit more advanced than basic economics. The majority will however benefit from stable money.
Phillip, it’s bonus time on Wall Street. They aren’t confused. They’re doing whatever is necessary to meet the “one more year” diktat in those professions.
If it ain’t broke, don’t fix it … 🙂
If all that libertarian talk is based on anything besides rhetoric it should start with a different monetary system. Otherwise I see no difference with the neoliberalism and financial deregulation attempts of the 80s and 90s and I don’t see any reason to expect a different outcome either.