Dollar devaluation and dollar dominance are not necessarily mutually exclusive. But the approach to weakening the greenback that US President Donald Trump’s administration is considering would almost certainly spell the end of the US dollar’s reign as the dominant international currency.
CAMBRIDGE – In 1985, US officials met with their counterparts from the other G5 countries at New York City’s Plaza Hotel to negotiate a coordinated intervention to bring down the value of the dollar. The successful Plaza Accord is now apparently serving as inspiration for US President Donald Trump’s administration, as it seeks ways to weaken the dollar and, it hopes, improve America’s trade balance. True to form, Trump and his devotees – notably Stephen Miran, the incoming chair of the Council of Economic Advisers – would call the arrangement the “Mar-a-Lago Accord,” as it would be negotiated at the president’s eponymous Florida resort.
One could imagine a sensible proposal for coordinated intervention among major economies to weaken the dollar. The United States would take steps to reduce its budget deficit, and large surplus countries like Germany would increase theirs, thereby addressing the fundamental driver of today’s international trade imbalances.
But the Mar-a-Lago Accord does nothing of the sort. Instead, it is a coercive vision that risks doing exactly what the Trump administration fears: hurting America’s ability to finance its deficits (and, in particular, to keep interest rates low) and undermining the US dollar’s status as the leading international currency.
Start with interest rates. An intervention by foreign central banks to weaken the dollar’s exchange rate would entail a reduction in their holdings of US Treasury bills. But falling demand for T-bills would lead to declining prices and rising interest rates. Think about it this way: if the trade balance improves when the economy is at full capacity, components of domestic demand (household consumption and business investment) have to be crowded out.
As for the dollar, its dethronement is, in a sense, integral to the vision animating the Mar-a-Lago Accord. The first person to use the term was reportedly the economist Zoltan Pozsar, who proposed a “Bretton Woods III” agreement which would replace the dollar-based global monetary system with a system based on central bank digital currencies (CBDCs), together with gold or other commodities. According to Pozsar, the US government would strengthen its balance sheet by revaluing gold.
But such an effort to devalue the US dollar could well lead to the greenback’s demise as the dominant global currency – a process that would be accelerated if monetary easing by the US Federal Reserve was part of the agreement. While Trump has pushed for a more accommodative monetary policy, he has also made clear that he wants to maintain the US dollar’s global primacy, even if he has to use tariffs to force countries (such as the BRICS economies) not to undermine it.
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To be sure, as Treasury Secretary Scott Bessent has noted, dollar devaluation and dollar dominance are not necessarily mutually exclusive. In the late 1990s, for example, the dollar simultaneously depreciated and accounted for a larger share of central banks’ foreign-exchange reserves. But there is a clear tension between the two objectives. If a Mar-a-Lago Accord discourages central banks from holding US Treasury securities, it is especially hard to see how the dollar’s global status would survive.
Yet that is precisely what Miran seems prepared to do. He proposes making foreign central banks hold 100-year US bonds without coupon payments instead of the T-bills they now hold. (This would amount to restructuring US debt, which is equivalent to default.) Alternative – or additional – provisions include the introduction of “user fees” charged to foreign central banks that hold US debt and a more general tax on foreign investment in the US (reminiscent of the Tobin tax on short-term currency transactions that was proposed in the 1970s).
The sovereign wealth fund (SWF) that Trump has ordered be created is apparently also supposed to play some unspecified role in the Mar-a-Lago vision. It is not clear where the money for this SWF would come from. Like developing economies, the US would be well advised not to start an SWF that it would have to borrow to fund owing to insufficient international reserves. It is also worth noting that SWFs work best when – unlike Trump’s proposed fund – they are invested in foreign, rather than domestic, assets.
Even setting aside the SWF, Miran’s proposal is not grounded in reality. Why would the world’s central banks and other investors accept 100-year bonds – which would pay no interest for a century – in place of good old T-bills? Why would they swallow new fees and taxes on their US debt holdings or investments?
Trump might say that the answer is simple: so they can avoid punitive tariffs. But he has brandished this weapon so relentlessly – in the name of so many objectives, with so many postponements and reversals – that it is quickly losing its impact. Far from sticking around to kneel before Tariff Man, countries are trickling toward the exits. If Trump pushes too hard, the trickle may well turn into a stampede away from the dollar.
Attempts to leverage US military and geopolitical power to coerce countries into accepting the terms of the Mar-a-Lago Accord would likely prove similarly ineffective. Yes, in the 1960s, Germany agreed to cover the costs of stationing American soldiers on its territory, in order to preserve the Bretton Woods system. And in 1991, Kuwait and Saudi Arabia covered a large share of the costs the US incurred fighting the Gulf War. But there is a critical difference between now and then: goodwill.
With his propensity for threats and coercion, willingness to betray friends and allies, and disregard for rules and norms, Trump has systematically destroyed whatever international political capital he inherited, decimating US global leadership in the process. The coercive Mar-a-Lago Accord – which harks back to the Roman Empire’s demand for tribute from territories its legions occupied – would only accelerate America’s decline. The Mar-a-Lago brand is best reserved for golf tournaments and rococo weddings.
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Dollar devaluation and dollar dominance are not necessarily mutually exclusive. But the approach to weakening the greenback that US President Donald Trump’s administration is considering would almost certainly spell the end of the US dollar’s reign as the dominant international currency.
exposes fundamental flaws in the US administration’s vision for weakening the greenback.
Despite the uncertainty surrounding global trade, there are some bright spots – namely, booming trade in services. And here, ironically, the United States is leading the way, running a services trade surplus with most major economies and generating millions of good jobs for American workers.
encourages the US government to acknowledge the country’s impressive success in exporting services.
CAMBRIDGE – In 1985, US officials met with their counterparts from the other G5 countries at New York City’s Plaza Hotel to negotiate a coordinated intervention to bring down the value of the dollar. The successful Plaza Accord is now apparently serving as inspiration for US President Donald Trump’s administration, as it seeks ways to weaken the dollar and, it hopes, improve America’s trade balance. True to form, Trump and his devotees – notably Stephen Miran, the incoming chair of the Council of Economic Advisers – would call the arrangement the “Mar-a-Lago Accord,” as it would be negotiated at the president’s eponymous Florida resort.
One could imagine a sensible proposal for coordinated intervention among major economies to weaken the dollar. The United States would take steps to reduce its budget deficit, and large surplus countries like Germany would increase theirs, thereby addressing the fundamental driver of today’s international trade imbalances.
But the Mar-a-Lago Accord does nothing of the sort. Instead, it is a coercive vision that risks doing exactly what the Trump administration fears: hurting America’s ability to finance its deficits (and, in particular, to keep interest rates low) and undermining the US dollar’s status as the leading international currency.
Start with interest rates. An intervention by foreign central banks to weaken the dollar’s exchange rate would entail a reduction in their holdings of US Treasury bills. But falling demand for T-bills would lead to declining prices and rising interest rates. Think about it this way: if the trade balance improves when the economy is at full capacity, components of domestic demand (household consumption and business investment) have to be crowded out.
As for the dollar, its dethronement is, in a sense, integral to the vision animating the Mar-a-Lago Accord. The first person to use the term was reportedly the economist Zoltan Pozsar, who proposed a “Bretton Woods III” agreement which would replace the dollar-based global monetary system with a system based on central bank digital currencies (CBDCs), together with gold or other commodities. According to Pozsar, the US government would strengthen its balance sheet by revaluing gold.
But such an effort to devalue the US dollar could well lead to the greenback’s demise as the dominant global currency – a process that would be accelerated if monetary easing by the US Federal Reserve was part of the agreement. While Trump has pushed for a more accommodative monetary policy, he has also made clear that he wants to maintain the US dollar’s global primacy, even if he has to use tariffs to force countries (such as the BRICS economies) not to undermine it.
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To be sure, as Treasury Secretary Scott Bessent has noted, dollar devaluation and dollar dominance are not necessarily mutually exclusive. In the late 1990s, for example, the dollar simultaneously depreciated and accounted for a larger share of central banks’ foreign-exchange reserves. But there is a clear tension between the two objectives. If a Mar-a-Lago Accord discourages central banks from holding US Treasury securities, it is especially hard to see how the dollar’s global status would survive.
Yet that is precisely what Miran seems prepared to do. He proposes making foreign central banks hold 100-year US bonds without coupon payments instead of the T-bills they now hold. (This would amount to restructuring US debt, which is equivalent to default.) Alternative – or additional – provisions include the introduction of “user fees” charged to foreign central banks that hold US debt and a more general tax on foreign investment in the US (reminiscent of the Tobin tax on short-term currency transactions that was proposed in the 1970s).
The sovereign wealth fund (SWF) that Trump has ordered be created is apparently also supposed to play some unspecified role in the Mar-a-Lago vision. It is not clear where the money for this SWF would come from. Like developing economies, the US would be well advised not to start an SWF that it would have to borrow to fund owing to insufficient international reserves. It is also worth noting that SWFs work best when – unlike Trump’s proposed fund – they are invested in foreign, rather than domestic, assets.
Even setting aside the SWF, Miran’s proposal is not grounded in reality. Why would the world’s central banks and other investors accept 100-year bonds – which would pay no interest for a century – in place of good old T-bills? Why would they swallow new fees and taxes on their US debt holdings or investments?
Trump might say that the answer is simple: so they can avoid punitive tariffs. But he has brandished this weapon so relentlessly – in the name of so many objectives, with so many postponements and reversals – that it is quickly losing its impact. Far from sticking around to kneel before Tariff Man, countries are trickling toward the exits. If Trump pushes too hard, the trickle may well turn into a stampede away from the dollar.
Attempts to leverage US military and geopolitical power to coerce countries into accepting the terms of the Mar-a-Lago Accord would likely prove similarly ineffective. Yes, in the 1960s, Germany agreed to cover the costs of stationing American soldiers on its territory, in order to preserve the Bretton Woods system. And in 1991, Kuwait and Saudi Arabia covered a large share of the costs the US incurred fighting the Gulf War. But there is a critical difference between now and then: goodwill.
With his propensity for threats and coercion, willingness to betray friends and allies, and disregard for rules and norms, Trump has systematically destroyed whatever international political capital he inherited, decimating US global leadership in the process. The coercive Mar-a-Lago Accord – which harks back to the Roman Empire’s demand for tribute from territories its legions occupied – would only accelerate America’s decline. The Mar-a-Lago brand is best reserved for golf tournaments and rococo weddings.