Comments On "The Mar-A-Lago Accord"

In an attempt to find an explanation for the erratic policy of the Trump administration, people are pointing to the so-called “Mar-a-Lago Accord.” (This short explainer by Torsten Sløk offers one summary.) Although one could imagine that this policy mix is what some members of the White House want, we run into the classic “you can’t get there from here” problem. To the extent the plan would work, it relies upon the world being one of simplified economic models, and the goodwill of other countries.

Cargo Cult Conservatism

Before diving into the complexity of the Mar-a-Lago Accord explanation, we might as well start with the correct explanation of Trump’s economic policies. He wants to roll the United States back to the economic system of the 1890s (or even earlier). The key motivators are that there were few constraints on the ultrarich, and there was no income tax. Instead, Federal revenue was almost entirely due to tariffs.

I must confess that I mis-spent my youth and was a conservative. In fact, my only political affiliation was being a Young Conservative in the early 1990s in England — at which point, contact with dim-witted Thatcherite students pushed me off in the other direction. One side effect of this is that I am well acquainted with conservative thought.

The idea of rolling the clock back to 1890 is best described as cargo cult conservatism.¹ Although conservatives invariably pine for some lost golden era, the smarter ones are aware that societal changes happen for a reason. You cannot unbreak an egg, and the system of the 1890s was shattered by one of the most traumatic events in the history of Western Civilisation — the First World War. The entire social order was shattered in the mobilisation for total war, and we are still living with the consequences. Thoughtful conservatives were always aware that gradual reform was needed to adapt to structural changes.

Mar-a-Largo Summary

The summary of the desired outcome of the Mar-a-Largo Accord in the linked article is as follows:

The U.S. gives:

1. security;

2. access to U.S. markets/consumers.

In return, the U.S. extracts:

1. a weaker dollar;

2. a larger manufacturing sector;

3. existing Treasury debt [held by foreign (official?) creditors swapped into century bonds.

Tariffs would be used as a tool of coercion, and the U.S. would create a sovereign wealth fund that would allegedly weaken the dollar.

Although the United States could achieve these objectives, they may regret doing so.

Weaker Dollar

To the extent that countries peg their currencies to the U.S. dollar in some fashion (I do not follow currency market trends, but most pegs seem to be “squishy” at this point), those foreign policy makers can weaken their currencies. This mainly applies to Asian and developing economies, with Japan being a special case within Asia.

Countries could sell their U.S. dollar reserves in an attempt to weaken their currencies. But if they do not have capital controls (like Japan), the private sector is free to take the other side of the currency trade by buying private U.S. dollar assets. However, their reserves need to be liquid to sell — which runs counter to the forced conversion into century bonds.

Countries without capital controls and negligible currency reserves (e.g., Canada and Europe) have no mechanism to strengthen their currencies other than hoping that the expectations fairies can do the job. Their governments have no USD assets or cash flows to buy their local currencies. In a free floating regime, governments have unlimited firepower to weaken their currencies, but can only strengthen them via the indirect mechanism of relatively lowering domestic prices and hope that reversion to purchasing power parity works its magic. (My belied is that it generally does, so long as you are willing to wait a decade.)

The United States can perhaps renegotiate its currency and trade agreements with countries that relied upon export-led growth and a closed capital account (with China being the largest weight). Otherwise, it needs to wade into currency markets and weaken its currency, creating foreign official reserves. Labelling those reserves a “sovereign wealth fund” is just be a linguistic shift designed to make the concept more appealing to the free marketeers in the Republican coalition.

Would a “Sovereign Wealth Fund” Weaken the Dollar?

Currency market trading logic is best described as stupid, and I have no doubt that having an arm of the United States government dumping USD on global markets would tank the U.S. dollar in the short term.

The problem is the longevity of the effect. By definition, for every CAD/EUR/JPY/GBP… the U.S. government entity buys, there is a seller. If they are buying with the objective of tanking the value of the U.S. dollar, they are by definition overpaying relative to pricing to the previously existing market clearing prices. To the extent that U.S. private assets are attractive, the private sector sellers of the assets could just as easily buy U.S. private sector assets. The balance of payments have to balance after all.

So, for this policy to work, the U.S. government has to trash the attractiveness of U.S. dollar private sector assets. And if one glances at one’s Bloomberg terminal, one can say “Mission Accomplished!”

Aside: Interest Rate Policy

Although I think interest rate parity arguments are a load of hooey, conventional economists might ask whether interest rate policy could weaken the dollar. Sure, but that would require the Fed to set dollar weakness as the primary target of Fed policy — which probably means higher inflation. The hard money faction of the Republican coalition would veto this.

Debt Restructuring

Trump does appear to want to run the United States government like one of his businesses, and restructuring debt would be on brand. A forced restructuring would cause the bond market to projectile vomit, and very few countries could meaningfully have their arms twisted in this matter to generate a superficially “voluntary” agreement (Japan being the most significant).

Manufacturing

It was always easy for the United States to increase manufacturing employment — go backwards down the value chain. Sweatshop textile manufacturing requires a lot of workers. However, people wanted the high-paying jobs from high end manufacturing.

I graduated as an electrical engineering undergraduate in 1990. Even then, consumer electronics had largely been abandoned. A major side effect of Cold War military Keynesianism was that North America specialised in weaponry and high-end low production run technology items. (CPU’s being the highest volume product, but they sit at the top of the electronic complexity hierarchy.) Building a high volume consumer electronic manufacturing base would require training a lot of new electrical and process engineers in areas where domestic expertise disappeared decades ago. Meanwhile, the administration just attacked the funding of research universities.

The auto industry is the most vulnerable point of this tariff onslaught. I know very little about the situation with respect to Mexico, but Americans’ analysis of the situation in Canada is uniformly terrible across the political spectrum. Populists decry the free trade agreements, but they refuse to consider what is happening outside the United States. The “free trade” agreements are managed trade agreements — and they created a North American auto industry that had free access to American, Canadian, and Mexican markets. (E.g., if you are a Chinese manufacturer, you do not see any “free trade” in autos in North America.) Destroying the supply chains that crossed borders would just force companies to reduce their economies of scale in production, they only get economies of scale in design/branding. The net effect on jobs in the United States would likely be small. Furthermore, breaking the agreements means that access to the Canadian market is hardly assured in the future for American parent firms.

Other Countries Have a Say

The United States has a fairly strong bargaining position right now. The reason for that is straightforward — they have effectively dumped all their alliance structures, and are now attempting to extort former allies. Those allies were too complacent, and now they are paying the price. However, one of the lessons of the First World War is that democracies are extremely good at mobilising rapidly against existential threats.

Countries are already questioning the wisdom of purchasing U.S. weapons, and consumer boycotts are already being organised and institutionalised. It does not matter what the tariff level is on American produce in Canadian supermarkets — it is rotting on the shelf, even if alternatives cost more than double. Grocery store margins are not infinite, and that shelf space is about to be lost. Badgering Mark Carney is not going to stop the movement across all levels of society to methodically eliminate dependence upon American suppliers.

Normally, recessions are good for improving the external trade balance. It is less clear how much that helps if the export sector is one of the driver of recession.

A rapid military build up in free countries would act to cushion the effect of American trade policies, and so the loss of American consumer markets may not be a major short-term concern.

Concluding Remarks

The United States was a wealthy, relatively closed economy. The rapidity of the policy shifts could easily lead to a recession, but growth would resume at some point. That resumption of growth is what the Republicans will focus on, as well as the disinflationary effects of a recession. As a result, I think they will market the policy shifts as being a success, and the American media will likely amplify the Republican messaging.

1. The term “cargo cult” is over-used in online discourse. Although there is no doubt that I am using “conservative cargo cult” as a catchy alliteration, there is a grain of truth to the description. The original cargo cults were an attempt to bring back air-shipped supplies by symbolic actions — creating air strips on Pacific islands — without the supporting elements (the American wartime air logistical system). Picking a few random features of the 1890s and believing that they are enough to reverse the arrow of time is a symbolic action that skips over everything else in society.