A recent proposal by CEA Chair nominee Stephen Miran has sparked buzz among financial experts about a potential “Mar-a-Lago Accord” aimed at weakening the US dollar and reducing trade deficits. However, this plan is fraught with risks and could have far-reaching negative consequences.
The accord would require trading partners to weaken the dollar and commit to providing low-cost, long-term financing to the US government, threatened by higher tariffs or removal of security guarantees. But experts warn that this approach is misguided and could lead to a destabilization of the global financial system.
A weaker dollar may seem like a solution to trade deficits, but it would do little to help the US economy or its workers. In fact, much of the US’s trade deficit is driven by fiscal deficits and economic growth, rather than the strong dollar. Moreover, cutting interest rates to lower the dollar would likely lead to higher inflation, which would further exacerbate the issue.
Furthermore, foreign governments are unlikely to comply with such a plan due to concerns about security guarantees and threats of higher tariffs. China, in particular, is expected to be resistant to such an arrangement, given its growing economic influence.
The plan also risks undermining the global dominance of the dollar, which is based on the safety and liquidity of US Treasuries, as well as long-standing prudence in economic policymaking. Mistreating allies, breaking trade agreements, and undermining support for global institutions could encourage other countries to seek alternatives to the dollar.
In conclusion, a “Mar-a-Lago Accord” would pose significant risks to the global economy and undermine the stability of the dollar. A more effective solution is to focus on domestic policy measures such as reducing spending, raising taxes, and balancing the budget, which could simultaneously lower interest rates and reduce trade deficits.
Source: https://www.ft.com/content/c5b1c6b3-85a7-4e99-bcac-3d331f03640b