America's Trade War Strategy Threatens Dollar's Unparalleled Privilege
The White House has long believed that it can simultaneously pursue contradictory policies without negative consequences, often referred to as "magical thinking." However, when it comes to economic policymaking, this approach is nothing short of hazardous.
One policy the Trump administration appears to want to achieve is ending the US dollar's dominance in global finance. At least some members of the administration seem eager to see countries adopt the dollar outright. Nevertheless, another member, Stephen Miran, the chief economic adviser, thinks that maintaining the dollar's reserve status has become a significant burden on the United States, primarily due to the large trade deficit.
The current reality is that the US imports much more than it exports, necessitating the export of Treasury bonds to other countries in order to allow them to store their reserves. This leads to "persistent dollar overvaluation" that prevents the balancing of international trade, according to Miran's assertion.
While devaluing the dollar might provide short-term economic benefits, such as reducing the trade deficit, it would have a devastating impact on the US economy and the global financial system in the long run. The dollar is not only a valuable financial haven but also serves as insurance against global economic shocks. The value of the dollar affects the price of traded goods; when the dollar appreciates, its price increases.
Furthermore, the cost to undermining the dollar would be enormous for the US. Losing world influence and its primary tool for economic coercion – limiting enemies' access to the financial system – would have severe consequences. Moreover, the "exorbitant privilege" that allows the US to earn more on its foreign assets than foreigners earn on their US holdings would disappear.
In recent years, the dollar's reserve status has been eroding; it now accounts for 58% of global foreign exchange reserves, down from 74% at the turn of the century. The interest rate advantage Treasury bonds have over other debt is also shrinking.
The impact of Trump's trade war on the dollar's value and its role as a hedge against economic shocks should not be underestimated. By curbing US imports, the tariff wall will dampen the relationship between the dollar and the price of traded goods – reducing its value as a safety net for investors and countries.
Developing countries have been swapping out of dollar debt in recent months, opting instead for currencies with lower interest rates like the Swiss franc and the renminbi. The notion that the president's trade war might undermine the dollar's pre-eminence has indeed struck fear into markets, causing stocks, bonds, and the dollar to plummet.
While investors may have forgiven Trump for his incoherent policymaking so far, it is essential to remember that once blood is in the water, it can be difficult to regain financial stability. If the US were to lose its reserve status, other currencies might fill some of the slack, but global welfare would likely suffer.
Ultimately, if the Trump administration succeeds in devaluing the dollar, they will need to find an alternative solution that addresses the underlying economic issues driving the trade deficit. The costs of undermining the dollar's supremacy would be exorbitant indeed.
The White House has long believed that it can simultaneously pursue contradictory policies without negative consequences, often referred to as "magical thinking." However, when it comes to economic policymaking, this approach is nothing short of hazardous.
One policy the Trump administration appears to want to achieve is ending the US dollar's dominance in global finance. At least some members of the administration seem eager to see countries adopt the dollar outright. Nevertheless, another member, Stephen Miran, the chief economic adviser, thinks that maintaining the dollar's reserve status has become a significant burden on the United States, primarily due to the large trade deficit.
The current reality is that the US imports much more than it exports, necessitating the export of Treasury bonds to other countries in order to allow them to store their reserves. This leads to "persistent dollar overvaluation" that prevents the balancing of international trade, according to Miran's assertion.
While devaluing the dollar might provide short-term economic benefits, such as reducing the trade deficit, it would have a devastating impact on the US economy and the global financial system in the long run. The dollar is not only a valuable financial haven but also serves as insurance against global economic shocks. The value of the dollar affects the price of traded goods; when the dollar appreciates, its price increases.
Furthermore, the cost to undermining the dollar would be enormous for the US. Losing world influence and its primary tool for economic coercion – limiting enemies' access to the financial system – would have severe consequences. Moreover, the "exorbitant privilege" that allows the US to earn more on its foreign assets than foreigners earn on their US holdings would disappear.
In recent years, the dollar's reserve status has been eroding; it now accounts for 58% of global foreign exchange reserves, down from 74% at the turn of the century. The interest rate advantage Treasury bonds have over other debt is also shrinking.
The impact of Trump's trade war on the dollar's value and its role as a hedge against economic shocks should not be underestimated. By curbing US imports, the tariff wall will dampen the relationship between the dollar and the price of traded goods – reducing its value as a safety net for investors and countries.
Developing countries have been swapping out of dollar debt in recent months, opting instead for currencies with lower interest rates like the Swiss franc and the renminbi. The notion that the president's trade war might undermine the dollar's pre-eminence has indeed struck fear into markets, causing stocks, bonds, and the dollar to plummet.
While investors may have forgiven Trump for his incoherent policymaking so far, it is essential to remember that once blood is in the water, it can be difficult to regain financial stability. If the US were to lose its reserve status, other currencies might fill some of the slack, but global welfare would likely suffer.
Ultimately, if the Trump administration succeeds in devaluing the dollar, they will need to find an alternative solution that addresses the underlying economic issues driving the trade deficit. The costs of undermining the dollar's supremacy would be exorbitant indeed.
so america thinks it can just devalue its currency and everything will be fine? I don't think so... 
losing the dollar's reserve status would mean big trouble for the us economy and global trade, not to mention the impact on markets and investors. like, what's next? they'll just find some other currency to prop up or something? 
and let's not forget about the cost of undermining the dollar - it's huge! 
losing that 'exorbitant privilege' would be a big blow to america's economic influence and global leverage. and have you seen what's been happening with countries swapping out of dollar debt? 
this trade war is already causing ripples and I don't think devaluing the dollar will make things better... 
.
it's like playing a game of risk, but instead of money, they're risking global stability and the entire financial system. And what's the plan B? They don't have one? It's always "we'll just find another way to fix this"... yeah right, good luck with that...
America's Trade War Strategy could have major effects on its economy 
and global influence 
, and it might not be easy to adjust to 
. The value of the dollar is important for many countries around the world 
.
, but if that's not an option anymore, it might have to find new ways to be helpful 
. The costs of losing the dollar's reserve status would be huge 
no way dude.
. The global financial system relies on the dollar being this stable, safe haven - if that goes away, who knows what happens next? 
.
. I mean, I get it, the US wants to level the playing field and all that jazz, but it's not that simple 
. The global economy is like this huge web of relationships and interdependencies, and messing with one thread can cause the whole thing to unravel 
.
. They need to find a more diplomatic solution, maybe negotiate some trade deals that benefit everyone 
. So yeah, I'm keeping an eye on this situation 
.