Source: FT Chinese
Stephen Miran believes that the dollar's reserve status, overvaluation and trade deficit face a trade-off. The overvalued dollar makes the manufacturing industry less competitive, but it also maintains the "dollar hegemony". How to reform the excessive deficit and the decline of the manufacturing industry?
Stephen Miran, chairman of Trump's Council of Economic Advisers, immediately entered Wall Street to do foreign exchange trading after graduating with a doctorate in economics. At the Senate's appointment hearing in February this year, he said that this period of market testing made him no longer "bookish" but began to "get down to earth". When explaining why he was qualified for the position of presidential economic adviser, Miran said that his ordinary family background made him pay more attention to ordinary people; and when his mentor Feldstein (who was once Reagan's economic adviser) discussed thesis with Miran, he always asked: "Imagine that I am a senator, and what you say must be understandable to me." Miran said that this training also prepared him to communicate with professional politicians. Shortly before the November 2024 election, Milan, who was still a strategist at an investment fund, wrote a policy paper discussing various economic strategies, trade-offs, and risk considerations that could and should be made after Trump's victory. It discussed in detail the new international financial system called the "Mar-a-Lago Agreement." Naturally, the "Mar-a-Lago Agreement" received considerable attention both inside and outside the United States after he was reappointed.
Mar-a-Lago Agreement: An Overview
This is a 40-page long article, and its main idea is as follows. The US dollar is still facing the "Triffin" dilemma under the Bretton Woods system. The US dollar has the status of a reserve currency, and various sovereign states have accumulated US dollar reserve assets. The continued accumulation of US dollar assets by foreign countries means a continued trade deficit for the United States (foreigners net export goods in exchange for US dollars). From the perspective of the balance of commodity trade, the intervention of financial projects (the continuous accumulation of US dollar assets by foreign countries) has led to an overvaluation of the US dollar, a decline in the international competitiveness of US goods, and a decline in manufacturing employment and output. However, the reserve status of the US dollar maintained by the overvaluation of the US dollar also has a great benefit in national security, which is what Milan calls "financial extraterritoriality." He gave an example that if a security threat needs to be combated, it is only necessary to check its accounts and confiscate its US dollar assets to achieve a great combat effect. Therefore, in Milan's view, the current US dollar reserve status, the overvaluation of the US dollar and the trade deficit face a trade-off relationship. On the one hand, the overvalued US dollar reduces the competitiveness of the US manufacturing industry. On the other hand, the overvalued US dollar is a necessary condition for maintaining the "US dollar hegemony", and the latter is of great significance to national security. The current dissatisfaction with this system is concentrated on the excessive trade deficit and the excessive decline of the manufacturing industry, so we must find ways to reform it.
Next, Milan analyzed the benefits of tariff protectionism. He believed that tariffs were effective; he emphasized that tariffs could bring about the appreciation of the US dollar and the benefits of appreciation to the United States, such as helping to reduce inflation. He analyzed in detail the issue of domestic and foreign sharing of tariffs, advocated a gradual implementation strategy, and discussed the optimal tariff rate (he suggested an average of about 20%), as well as various related issues.
After discussing tariffs, Milan began to discuss exchange rate issues. Following the previous discussion of the Triffin dilemma, Milan believes that the depreciation of the US dollar can also achieve the effect of enhancing the competitiveness of the US manufacturing industry. However, there is a big risk in the depreciation of the US dollar. Foreign investors may sell US bonds under the expectation of depreciation, leading to an increase in long-term interest rates, which will increase the fiscal burden, put pressure on industries such as real estate, and be accompanied by greater market risks. Milan also discussed various obstacles facing international coordination, such as the lack of motivation for major trading partners to cooperate. How to deal with these difficulties in the process of dollar depreciation? Here Milan introduced the "Mar-a-Lago Agreement": 1) National security is a public product. The United States provides this product to partner countries. Protected countries need to cooperate and pay by purchasing US Treasury bonds; 2) National security is a long-term capital product. Protected countries need to purchase long-term Treasury bonds (bearing long-term interest rate risks); 3) If a protected country refuses to exchange short-term US Treasury bonds for long-term Treasury bonds, the United States refuses to provide national security guarantees.
Milan explained the working principle of this agreement. The depreciation of the US dollar is conducive to revitalizing the US manufacturing industry. The "stick" of tariffs and the "carrot" of providing national security benefits can be used to attract trading partners to sell some of their US dollar reserve assets and buy local currency assets, thereby depreciating the US dollar. In order to defend against the interest rate risk of US debt during the depreciation of the US dollar, trading partners need to exchange their short-term US Treasury bonds for long-term Treasury bonds, thereby lowering long-term interest rates and maintaining economic and financial market stability. Finally, during the depreciation of the US dollar, the Federal Reserve can carry out various operations to stabilize the financial market (such as providing liquidity tools to international investors holding long-term US debt) and strive to achieve orderly depreciation.
Milan's thinking is quite comprehensive. He considered the problem that security partner countries actually do not hold too many US debts, and continued to think of various new solutions for this. In summary, Milan believes that there is a "not too wide road" that will enable the depreciation of the US dollar and make the manufacturing industry internationally competitive; at the same time, partner countries will share more costs for the national security umbrella. One way to pay is to redistribute global effective demand (turn more to buying US products) and the other is to let international trading partners bear more interest rate risks. On page 29 of the report, Milan concluded that the historical status of this agreement will be comparable to the Bretton Woods system.
This is the main content of the Mar-a-Lago agreement that has been widely discussed in the United States and abroad recently.
It is not easy to say "great"
Milan's report is rigorous in analyzing many issues. He is very insightful when he talks about the international competition for effective demand. The demand for US reserve assets, that is, the US merchandise trade surplus, has brought imbalances to the US economic structure. This cost is mainly caused by the decline of US manufacturing, while the financial industry has gained more benefits. This view is also fair. The financial "extraterritoriality" brought by the reserve status of the US dollar is helpful to national security, which is roughly in line with reality. He specifically talked about the possibility of a global tariff chain reaction (tariff wall) against China, which I have also discussed in this magazine. Milan's discussion of the optimal tariff also has a theoretical basis: there is a trade-off between the benefits of tariffs on foreign merchants' lower prices and the welfare losses caused by price distortions. He believes that tariffs below 20% can generally promote welfare.
However, the analysis in the full text is far from supporting a new international financial system at the level of the Bretton Woods system. The concept of national security is too broad here. In the current international financial system, the United States provides the main reserve assets, which has a certain role in ensuring national security, but this role is far less than the author believes. In addition, it may not be a good idea to mix economic and national security issues together, because such "accounts" are difficult to settle. The system designed by Milan is also very troublesome in organization, requiring constant coordination and participation by the US Treasury, the Federal Reserve and the economic departments of various countries. In terms of operation, Milan repeatedly emphasized the need to use a gradual approach to find the best "parameters", but as a practitioner in the financial market, he should know that it is almost difficult for the financial market to have a controllable "gradual", and expectations will lead to many sudden changes.
Another major shortcoming of the "Mar-a-Lago Agreement" is the conceptual misunderstanding of the benefits of the depreciation of the US dollar. The depreciation of the US dollar means that the international relative purchasing power of the income of US residents has decreased, which means that the United States needs to export more and import less. This is a "hard life", and the essence is to work more and consume less to repay the US dollar debt (foreigners have reduced their holdings of US dollars). If the US economy is under-demanded and unemployment is serious, and the economy is driven by devaluation and exports, then the benefits of devaluation are worth mentioning; but the current US labor market is fully employed, and I don't see how much benefit there is in further "working" through devaluation. At the same time, low-income groups among Trump's voters will be frustrated because the devaluation of the US dollar may mean a significant increase in the cost of daily necessities for them. It is also a far-fetched explanation that forcing foreign countries to exchange their short-term US bonds for long-term US bonds and letting international investors bear more interest rate risks will benefit the United States. Interest rate risk is real, but it is only a fluctuation. In the long run, the cost of this fluctuation is very limited, which means that the cost shared by partner countries through this channel is very small.
It can be seen that the system designed by Milan is too complicated and troublesome, and the benefits are very small. Looking back at the Bretton Woods system, it is much simpler and clearer. Since the gold standard has been proven to be unworkable, and the complete credit currency and floating exchange rate face the precedent of mutual distrust between countries, Keynes proposed a compromise system: the US dollar is pegged to gold, and other major currencies are pegged to the US dollar. When a country's economic imbalance is more serious, the country can adjust its exchange rate against the US dollar through mutual consultation. The reason for the end of this system is also very clear. The economy has grown, the US dollar has increased, and gold is limited. People don't believe that 35 US dollars can continue to exchange for one ounce of gold. After the connection between gold and the US dollar ended, the world entered the era of credit currency and floating exchange rates (unexpectedly, it works well).
Since Trump took office as president again, the frequency of using words such as great and unparalleled in the mouths of cabinet officials has reached a new high. For example, Milan called Trump's "tariff upheaval" on April 9 a model of the great art of deal. However, the "Mar-a-Lago Agreement" for which he became famous, including the idea of listing Trump's residence as a landmark in the world's financial history, is not easy to be "great" at present.
The total amount belongs to the total amount, and the industry belongs to the industry
The decline of the US manufacturing industry is caused by the overvaluation of the US dollar. The high labor costs in the United States are usually said to be the high exchange rate of the US dollar. Under the current system, the United States has achieved full employment and high welfare, so it is not suitable to use a quantitative policy such as devaluation of the dollar to solve local and structural manufacturing problems. The overall economic situation is good, so why should we touch it? Local problems can be fixed wherever there are problems, which is simpler and more feasible. Here I think Milan did not distinguish the priorities clearly.
A good way to solve the problem of the decline of the US manufacturing industry is to subsidize "key" manufacturing industries (a worse way may be to implement tariff protection for certain "key" industries), such as providing subsidies for the purchase of "key products" such as automobiles, semiconductors, and materials produced in the United States. The total amount is the total amount, and the local is the local. This is simple and clear. It may only take hundreds of billions of dollars in subsidies each year to increase 1.5 million high-end jobs in the US manufacturing industry, thereby roughly achieving the goal of "security" in the manufacturing industry, while maintaining the sustainability of the current world economic system (in which the United States has benefited greatly). Industry subsidies are a conservative approach (and the approach with the lowest total social cost), but Milan is caught in the dilemma of building a grand system, hoping to gain benefits by regulating the complex financial system. His strategy design is very complex, leaving many "loopholes", which deviates from the essence of conservatism, although he believes that he is participating in a conservative movement.
The bigger reason for "using the wrong prescription" may be forgetting the promise to benefit the general public, rather than intellectual deficiency. Subsidizing specific manufacturing industries requires funds, and the only source of funds can be taxing the super-rich. The leaders of White House policy would rather take huge macroeconomic risks (shared by all residents) than tax the super-rich. Now that macro risks have emerged, can this remind them to get back to their "original intentions"?
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