Yanis Varoufakis for Efsyn.grTrump expects the world to be divided: A group of subservient countries (e.g., Europe and Japan) will help reduce the US trade deficit by keeping the dollar low and buying more US goods, energy, and weapons • A second group (e.g., China and Russia) will remain outside the US military umbrella but will still be commercially linked to the US, to which it will constantly send tariff revenue.
Donald Trump has a plan. And anyone in charge who makes the mistake of thinking of him as a swashbuckler acting “without a plan” will regret it – as is already the case with embarrassed European leaders. A good place to start understanding Trump's plan is to ask why he thinks Europe and China are taking advantage of America.
His central idea is that the US dollar may dominate, strengthening the US state and ruling class. However, while most people see the dollar as America's "outrageous privilege," it is actually its "outrageous dalliance."
To those who accuse Americans of importing more than they produce, Trump responds that US imports are outrageously high because, like a good Samaritan, America provides foreigners with a necessary free service that the rest of the world abuses: the free use of the dollar!
Here's how he thinks: Why doesn't the dollar fall like other currencies of countries with a permanent trade deficit? Because foreign central banks won't let it fall. As the dollar is the only safe international reserve they can get their hands on to support their currency, the dollars earned by European and Asian companies from their exports to the US are hoarded by their central banks. Thus, foreign central banks suppress the demand (and thus the value) of their currencies, keeping the dollar very high. Result; Their exporters export more goods to the US and American industry declines!
Yes, says Trump, the hegemony of the dollar is beneficial both to the US government (as it sells its debt cheaply to foreigners) and to stockbrokers (who manage foreign capitalists' money, with which they profit in the US Stock and real estate markets). But these benefits are not enough, in Trump's eyes, to offset the damage done to American industry.
And that's not all. Trump's nightmare is that the dreaded "tipping point" is looming: as US output declines as a percentage of global output, global demand for the dollar is growing faster than US GDP. Consequently, the dollar value is rising even faster to keep pace with the world's reserve needs. This cannot go on indefinitely. When US deficits exceed a certain threshold, foreigners will panic and sell off their dollars en masse. Then, amid international chaos, Americans will end up without industry, with depleted financial markets and a bankrupt state.
To prevent this disaster, Trump has two goals: Depreciate the dollar over the long term. And to squeeze long-term US borrowing rates. And this is where his tariffs come into play.
Trump's centrist critics are wrong to argue that Trump believes his tariffs will miraculously reduce the US trade deficit. He doesn't think so. Instead, it fits them into a two-phase strategy.
First phase: With shock tariffs, Trump forces foreign central banks, faced with the recessionary effects of his tariffs, to lower domestic interest rates, thus causing an appreciation of the dollar. The short-term appreciation of the dollar offsets the effect of tariffs on the prices US consumers pay for imports, keeping both US inflation and the US trade deficit relatively stable. So what will have changed at the end of the first phase? One thing: his duties will be paid by foreigners.
Second phase: Trump will dictate three conditions to foreign governments to withdraw the tariffs that hurt them. 1) Their central bank to sell some of its short-term dollar assets in exchange for its own currency. 2) Agree to swap the US bonds they already own for new ultra-long-term bonds, possibly perpetual bonds. 3) To purchase many armaments and energy from the US.
Of the Asian countries, which today accumulate the most dollars, he will insist on the first term. From the relatively dollar-poor eurozone, it will focus on the second and third. When he talks to Berlin, he will demand that the migration of German industries (eg BASF, Volkswagen) to the US is not blocked. From Beijing, he will ask for other, more geopolitical, concessions.
When a foreign government accedes to his demands, Trump will declare another victory. But even when an administration says no, Trump will continue to receive large dollar amounts from the tariffs. Ultimately, Trump expects the world to be divided: A group of subservient countries (eg Europe and Japan) will help reduce the US trade deficit by keeping the dollar low and buying more US goods, energy, and weapons. And a second group (eg China and Russia) will remain outside the US military umbrella, but will still be commercially linked to the US to which it will constantly send tariff revenue.
From Beijing's perspective, Trump's economic plan is not a problem. Unlike the European Union, which is already facing long-term industrial and technological decline, which Trump's methods will only reinforce, the Chinese economy has both depth and dynamism. However, there is always the risk that Trump's plan will backfire (eg trigger a massive sell-off of US debt leading to a global recession) or that hawks within his administration will prevail. In both of these cases, Beijing must be ready to implement its own global plan. Which plan? The transformation of the BRICS into a system similar to Bretton Woods, in which the yuan will play the anchor role that the dollar once played in the original Bretton Woods.
● The article is an abridged rendering of Yanis Varoufakis' monthly column in the Chinese news agency quancha.cn
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