On November 4, a day before the U.S. elections, the current Treasury Secretary, Scott Bessent, a protege of George Soros and then CEO of Key Square Group, participated in the Capital Allocators podcast to share his views on the macroeconomic environment. He talked about many things, but there are two fundamental ideas to understand what the U.S. Administration is currently doing. Firstly, he is convinced, like the president, that the dollar can be maintained as the world's reserve currency while significantly devaluing it against other currencies: "Both objectives are not mutually exclusive," he stated.
The second, equally important for someone who is certain that we are heading towards a global monetary realignment, is that the chaos that seems to characterize the new government, imposing tariffs one day, suspending them the next, and doubling them the third day, does not necessarily mean a lack of control. "Throughout my career, some of my best investments have been when a policy, a government, or a management team is heading full speed towards a wall, and one assumes they will stop," he explained.
The U.S. is in the midst of a complete revolution in national, foreign, and economic policy. Since the 1980s, Trump has been convinced that the United States is the global "pushover," a power that inexplicably does not fully utilize its power for its own benefit, being unfairly taken advantage of by its partners, neighbors, and friends. An open economy unfairly punished by tariffs, taxes, and regulations. He is determined to end this, using not only its large market but all necessary means, including pressures, blackmail, or military threats.
The main obsession is the trade deficit. The traditional view of why the U.S. maintains chronic trade imbalances is that it spends too much. However, the current president's gurus believe that the reason lies elsewhere: the rest of the world's appetite for U.S. financial assets, especially Treasury bonds. Due to the increasing global demand to place their currency reserves or simply operate in markets, the U.S. would have had to incur large fiscal deficits. As capital inflows keep the dollar too strong for U.S. exporters to compete, this leads to persistent trade deficits.
The argument is not very convincing, or it only reflects part of the story, as this situation occurs with goods, but not with services, as major tech companies are well aware. Furthermore, Trump does not actually believe that everything is mainly due to the strength of the dollar, debt, or deficits, the vigor of its domestic demand, or the country's wealth. Instead, he blames the rest of the world's malice, a point he emphasizes daily, and the consequences of allegedly relinquishing its economic sovereignty after World War II by reducing tariffs and allowing uncontrolled capital outflows. For Trump, unlike all his predecessors, the liberal economic order that emerged from the ashes of the world wars has not been "the basis of American prosperity, but its ruin," according to Ian Bremmer, founder of Eurasia.
To address this, balance the books, generate trillions of dollars, and thereby lower taxes, he is trying to square the circle in the most radical and extreme way possible, with a shock and a complete reset of the system. Among analysts and investors, there are serious doubts that he is not deliberately inflicting damage on his economy with tariffs, layoffs of tens of thousands of public workers, agency closures, and attempts to freeze funds already allocated by Congress, which according to the models of the Federal Reserve Bank of Atlanta could lead to a GDP contraction this quarter. It's not that he wants a recession per se, something politically challenging for someone with such a fragile ego who presents himself as the best in history at all times and on any subject. But rather a shock through reducing public spending to achieve a controlled weakening of the dollar, especially if combined with collaboration with the Federal Reserve in a monetary easing phase.
Some signals are undeniable. The Trump administration is transforming the U.S. economy, shifting it from the consumer giant it is today to a manufacturing powerhouse. The messages are daily, using both the carrot and the stick: fiscal, regulatory, and all kinds of incentives for domestic manufacturing, and obstacles and penalties for offshore production. They aim to create jobs, promote "made in America," and end "globalism." In the words of the White House, "the president remains committed to restoring American manufacturing and global dominance." And just like in his first term, they believe that if China weakens, even slightly, it will have been worth it.
The problem is that doing this under current conditions is almost impossible. Hence the need for an aggressive plan, a "detox," in their own language. Stephen Miran, head of the White House Economic Council, has outlined this the most. In November, after the election victory, he published a 40-page essay titled User's Guide to Global Trade System Restructuring, analyzing the steps to weaken the dollar's value while strengthening its global power. "There is a path by which the Trump Administration can reconfigure global trade and financial systems for the benefit of the United States, but it is narrow and will require careful planning, precise execution, and attention to measures to minimize adverse consequences," he stated.
To achieve this, Trump's team aims to change dominant paradigms since Bretton Woods (1944), when a monetary order was devised that linked currencies to the U.S. dollar, which was in turn convertible to gold at a fixed exchange rate to promote stability. This ended in 1971 when President Richard Nixon suspended convertibility, ending the gold standard and ushering in an era of floating exchange rates. Miran has introduced into public discourse, closely followed by Wall Street, the idea of Mar-a-Lago Agreements, the new version of the famous Plaza Accords of 1985, a coordinated pact among major economic powers to devalue the dollar against the yen, the mark, the pound, or the franc when Paul Volcker's Federal Reserve did not ease its tough policies.
Mainstream economic doctrine states that to achieve this, accomplices, allies, friends, not enemies, are needed. Unlike Ronald Reagan, Trump uses the hammer and his team presents it simply: those who do not agree will no longer be considered allies and will not only face tariffs but will also be excluded from the American military umbrella. Hence Trump's recurring threats to the BRICS for considering the possibility of promoting a rival currency. Or his disdain for the EU and the euro, which he believes were designed solely to "screw the United States."
In the mentioned paper, Miran outlines another very delicate and complicated possibility in financial terms: that these same countries agree to exchange the U.S. bonds they currently hold (China is no longer the main holder in favor of Japan), as well as dollar and even gold reserves for zero-coupon bonds, with no interest, maturing in a century, something that credit rating agencies would not view favorably, at first glance. "Historically, the United States has adopted multilateral approaches to monetary adjustments. While many analysts believe that there are no tools to unilaterally address currency devaluation, this is not true," the economist stated in his essay.
Traditionally, a controlled weakening of your currency without damaging its predominant role requires not only the mentioned allies but another context, as typically imposing tariffs achieves precisely the opposite effect, a stronger dollar. Not to mention the reaction that the fear of a contraction or even a recession, however small, is provoking. A weaker dollar could boost U.S. exports by making them cheaper abroad, but the increase in import costs would also drive inflation, reducing Americans' purchasing power.
However, Trump's team is very confident. They have gone from denying secondary or unwanted effects on the economy to referring to them as minor "turbulences," a period of "transition or detox" from "public spending addiction," or even stating that "no pain, no gain," there are no benefits without some pain. And in any case, they believe that the time for pain is now, at the beginning, when it is easier to swallow.
Furthermore, they consider that in the face of a looming recession, which would inevitably impact the rest of the world's economies, other players would be more tempted to play by the new rules. Starting with the Federal Reserve. "While the decline in asset prices would counteract the excessive financialization that has affected the U.S. economy, especially if a weaker dollar boosts the industry," noted Gillian Tet in the Financial Times a few weeks ago.
"It is not clear where the current strategy of shock and awe by the Trump administration is supposed to lead. The assertion that the appeal of the dollar is an exorbitant burden, rather than an exorbitant privilege, is not convincing, especially when those presenting it are so reluctant to give it up. Markets are uneasy about the punishment that the Administration, convinced that the United States is a victim, is willing to inflict on its close allies. If such behavior diminishes the appeal of the dollar, it may indeed become an exorbitant burden. But that is not a future that any American should desire," warned Raghuram Rajan, former Chief Economist of the IMF and former Governor of the Central Bank of India, a few days ago.