Trump's Dollar Plan: Currency Peace, Not War

Think Plaza and Louvre, not the 1970s...

THERE has been a lot reported in recent days about the return of currency wars, writes Jim Rickards in The Daily Reckoning.

This story arises in the context of a likely Trump election victory in the November Presidential elections.

Trump badly bungled his transition after first being elected President in 2016. He wasn't ready with a long list of loyal appointees.

Many of his senior appointments such as Rex Tillerson as secretary of state, James Mattis as secretary of defense and John Kelly as chief of staff secretly disliked Trump but accepted their roles as so-called "adult supervision" around the supposedly reckless Trump.

They thwarted his agenda. That backstabbing came on top of the large number of Obama holdovers in the deep state who saw themselves as a "resistance" movement.

Trump is doing a better job of preparing for a second term as President, but the resistance isn't sitting still either. They're moving to disable a new Trump administration even before the election.

The currency wars stories are part of that effort.

As reported by The Washington Post, Politico, The Wall Street Journal, Yahoo Finance and other outlets, Trump's working on a secret plan to devalue the US Dollar. The goal would be to cheapen US exports and thereby help the US balance of trade and create exported-related jobs.

But the critics say this will only increase US inflation as Americans have to pay more for their imported goods using cheaper Dollars. The critics also say that other countries will retaliate against the US by cheapening their own currencies (that's the essence of a currency war) and no country will be any further ahead.

In fact, the entire world will be worse off.

Before looking more closely at what's actually going on, some basics about a currency war should be explained. The first rule is that the world is not always in a currency war.

The periods from 1944-1971 (the original Bretton Woods era) and 1987-2010 (the period of the Washington Consensus) were times of currency peace. This contrasts with 1921-1936 (Currency War I), 1967-1987 (Currency War II) and the current period since 2010 (Currency War III).

The second rule is that currency wars can last for 15 years or longer. It comes as no surprise that the currency war that commenced in 2010 is still going strong 14 years later in 2024. And that points to another key aspect of this debate.

The currency war being written about today by the media is not a new currency war. It's the same one that has been going on since 2010. We're simply in a new phase or a new battle.

It is true that cheapening your currency can import inflation. Sometimes that's a legitimate policy goal if your country has been suffering from excessive deflation (gradual, moderate consumer price deflation caused by greater market efficiency and competition is economically beneficial).

That's obviously not the case in the US today.

It's also true that cheapening your currency can export deflation as trading partners pay less for your goods. That's what China was doing to the entire world from 1994-2010 and that's why the US launched a currency war in 2010 – to fight back against disinflation and borderline deflation caused by cheap Chinese goods.

Currency wars can also shift jobs overseas and destroy domestic manufacturing as the terms of trade shift based on changing currency values. Retaliation is always waiting right around the corner in any currency war. The US Dollar hit an all-time low in August 2011, which was consistent with the US goal of trying to import inflation.

But Europe struck back, and the EUR/USD cross-rate crashed from $1.60 to $1.04 as a result. So it is correct that no one wins a currency war, and everyone is damaged in the process due to volatility, uncertainty and the costs of conducting the war.

So are the critics right that Trump has a secret plan to devalue the Dollar? And are they right that this new stage in the currency war will bring inflation and hurt the US economy?

The critics are wrong and don't understand what Trump's actually trying to do. Trump isn't trying to start a currency war; he's trying to end it once and for all.

In the first place, no President has the power to unilaterally devalue the Dollar. That might have been possible under the gold standard or some standard of fixed exchange rates, but that hasn't been the state of the world since 1973.

Exchange rates fluctuate based on a number of factors including interest rates, industrial growth, exchange controls, central bank interventions, capital flows, tax rates and many other macroeconomic variables. But the idea that the President can just wave his hand and devalue the Dollar is false.

Far from the reckless, inflationary process the media claim, Trump's actual plan is based on the highly successful model developed by James Baker for Ronald Reagan and implemented in the Plaza Accord of 1985 and the Louvre Accord of 1987.

After the severe economic recession of 1982 and Paul Volcker's policy of moving interest rates to 20%, inflation in the US was finally reigned in. Inflation dropped from 13.5% in 1980 to 6.1% in 1982 and then 3.2% in 1983.

Investment in the US went on a tear. US real growth was 16% from 1983-1986. Everyone wanted Dollars to invest in the US and the Dollar boomed reaching an all-time high in 1985.

Finally, the Reagan administration decided the US Dollar was too strong and was hurting US exports and jobs. Treasury Secretary James Baker convened a meeting of the finance ministers of France, Germany, Japan, the UK and the US at the Plaza Hotel in New York City.

The purpose was not to fight a currency war. The purpose was to create order in currency markets out of the chaos that had prevailed since 1973.

The parties reached a joint agreement that would devalue the US Dollar in an orderly fashion versus the French Franc, Japanese Yen, UK Pound and the German Deutsche Mark.

Once the targeted level for the Dollar was achieved, the parties would use their best efforts including market intervention as needed to maintain those levels within narrow bands.

A separate meeting in Paris at the Louvre in 1987 agreed that the devaluation phase was over and the Dollar would be maintained at the new parities. This was not currency war; it was currency peace achieved by agreement and implemented in a cooperative fashion.

The Louvre Accord (this time including the US, the UK, France, Germany, Japan and Canada) ushered in a period of global prosperity that lasted 20 years until the Global Financial Crisis of 2008.

Trump's goal is to repeat the success of the Plaza and Louvre accords. Trump's adviser on this is Robert Lighthizer, who is one of the most brilliant financial minds around and was Trump's US trade representative (2017-2021).

Lighthizer was also USTR for Ronald Reagan from 1983-1985 so he's a veteran of prior currency wars and was in the administration around the time the Plaza Accord was being developed. Lighthizer is the perfect individual to help Trump achieve the kind of success that Reagan and Baker had in the 1980s.

The media are trying to portray Trump as reckless when he's proposing something highly beneficial for US jobs and US industry. Don't be fooled by false claims of new currency wars.

Trump's plan could actually achieve a new era of currency stability and lasting prosperity.