This is an audio transcript of the Unhedged podcast episode: ‘How to manipulate the US dollar’
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Robert Armstrong
Can we make America great again by making the US dollar weak again? This is Unhedged, the markets and finance show from the Financial Times and Pushkin. I am Rob Armstrong, coming to you from Unhedged world headquarters in New York City, joined today by Aidan Reiter, very excitingly the newest member of the Unhedged team, who started work with us . . .
Aiden Reiter
Three days ago, is that right?
Robert Armstrong
Yeah, Monday. Welcome, Aidan.
Aiden Reiter
Thank you.
Robert Armstrong
How has it been so far? Say something nice!
Aiden Reiter
It’s been fantastic. And I’m just happy to give listeners a tenor to match Rob’s bass.
Robert Armstrong
I wish I knew some bass part from, like, a Puccini opera that I could just . . . (Laughter) (Singing) I am the very model of a modern major-general. (Laughter)
Aiden Reiter
Is that Pirates of Penzance?
Robert Armstrong
(Laughter) Enough musical theatre. Your first assignment, just about, as an Unhedged writer, was handed to you by none other than the former president of the United States, Donald Trump, who said in a recent interview that he hated the strong dollar, that it was terribly unfair, that other currencies were too weak, especially the Chinese currency, and that something had to be done. So I asked you to go off and find out what could be done.
Aiden Reiter
Yeah. And, you know, it’s unclear if this would really happen. He’s definitely of two minds when it comes to the strong dollar. On the one hand, he doesn’t like the strong dollar. He thinks it negatively impacts the United States. On the other hand, he wants everybody to use the dollar. And that would imply the dollar gets stronger.
Robert Armstrong
In this area, as in so many others.
Aiden Reiter
Yes, he’s definitely of split mind, but there’s people in his camp who clearly wanna go down this road. Robert Lighthizer has written about this in his book, and it’s kind of been kicking around since April.
Robert Armstrong
Robert Lighthizer, I should say, is a longtime adviser, economic adviser to Trump, and potentially our next Treasury secretary, should Trump win.
Aiden Reiter
Yes, indeed. And he has been a long proponent of weakening the dollar.
Robert Armstrong
And the idea here very most broadly is that with a weak dollar it is American stuff is cheaper for the rest of the world. More foreigners buy American stuff. The trade deficit, which Trump really hates, gets smaller.
Aiden Reiter
Exactly. And it would allow the US to get a more competitive advantage on the international trade market over China, which he in 2019 accused of currency manipulation.
Robert Armstrong
OK. Let’s assume that there is a second Trump administration, and that administration actually means to go through with weakening the American dollar. What are their options?
Aiden Reiter
So there’s essentially four options on the table. First is to actually go in and intervene in the international currency market. The second would be either coercing other countries or co-ordinating with them to weaken the dollar. Third would just be to spook the market and hope they don’t call your bluff. And finally, and probably the most draconian, is to place a tax or some other levy on foreigners holding US assets or dollars.
Robert Armstrong
OK, let’s walk through the different options one by one. Door number one: intervening in the market. How does that work?
Aiden Reiter
Essentially, the United States has a certain amount of money it can use to go intervene in the market and flood it with dollars, which would weaken the value of the dollar. So there is the Exchange Stabilization Fund, which is under the control of the US Treasury secretary, so he can use that. It’s currently a mixed bag of foreign assets and US Treasuries that they can use to go intervene in the market.
Robert Armstrong
Is this any different from what Japan does to control its interest rate?
Aiden Reiter
So it’s somewhat different from what Japan does to control its interest rate. But it’s the same as what Japan has done to intervene in the value of the yen. So the Ministry of Finance, because of how Japan has controlled its interest rate, they have a lot of yen that they’re just sitting on. So what they have done is they’ve gone into the market to try to strengthen the yen, but because the interest rate fundamentals are such that it’s so much cheaper to borrow in the yen, essentially every time they go intervene in the market, it’s like burning currency.
Robert Armstrong
Indeed. And that is exactly kind of my point. Wouldn’t it take a lot of big, beautiful American dollars to affect what is a huge, liquid currency market?
Aiden Reiter
Yes. And arguably the Exchange Stabilization Fund, which is how you would go about this, is not even big enough to do one intervention. So look at the Japanese yen. Every time the Ministry of Finance has intervened — and they’ve done it about three times in the past year — each time, it’s about $69bn they just throw into the market, right? The US economy is about four to five times the size of Japan. The US dollar is much more liquid and much more traded. The Exchange Stabilization Fund is just $200bn.
Robert Armstrong
So you throw $200bn in the market and the market sort of giggles and releases a small burp and goes on exactly as before.
Aiden Reiter
Precisely. And I could not imagine the politics of taking $200bn in this economy and just going and burning it on the market. That would not go well.
Robert Armstrong
OK. A couple of questions. The first is in the interview, Trump didn’t talk about intervening in the currency. What he actually talked about was forcing other countries to strengthen their currency. So he was talking about threatening tariffs if they didn’t let their currencies strengthen. Is that the same thing?
Aiden Reiter
Not the same thing. Actually, I think that brings us to option two, which is doing something co-ordinated. Essentially, if you just throw and do a unilateral intervention, if the economic fundamentals don’t change, then essentially, again, you’re burning the dollars on the market because as you said, the market will just burp and say, thanks so much for this money. We’re just gonna, you know, go price . . .
Robert Armstrong
(Laughter) Price the dollar however we want.
Aiden Reiter
Exactly. So the way to really do it is to get the broader international exchange rates and broader international market to switch, right? A strong dollar only exists in opposition to a weaker (inaudible).
Robert Armstrong
Now, this gives me an opportunity to talk about Ronald Reagan, which is something I’m always looking to talk about. So this sounds like what we did with the Plaza Accords, when the world was very anxious in the ‘80s about Japan’s dominance as a manufacturer. And if I remember my history correctly, everyone sort of ganged up on Japan and said, “We have to change the currency exchange rate or something terrible is gonna happen”. Am I remembering that correctly?
Aiden Reiter
Yeah, that’s just about right. Essentially, Ronald Reagan and US Congress were coerced by manufacturers, or they thought it was the right thing to do to go get the world to change the US dollar in order to balance it against Japan and some other weaker currencies. And the reason they had to do that was also because of economic fundamentals. Rates were super high in the US, not as high elsewhere. And that’s kind of what we’re seeing right now.
Robert Armstrong
Right. OK. So it sounds like there is a nice analogy between that era and this era, except you scrub out “Japan” and you write “China”. China is scaring the whole world with its manufacturing prowess. It’s already been labelled a currency manipulator. It does control, it does peg its currency at a low-ish rate to the dollar. Why don’t we have a new set of accords? Where would Trump have his accords? Not in the Plaza, the . . .
Aiden Reiter
In the Trump Hotel.
Robert Armstrong
(Laughter) Yeah. The Mar-a-Lago Accords, where the world gangs up on China. What’s wrong with that idea?
Aiden Reiter
Well, when the world, quote unquote, ganged up on Japan, Japan also came to the table. You kind of need them to tango. China is not interested in doing that, right? Having a weaker currency to the dollar is a huge part of their macroeconomic strategy. And despite Trump’s claims in 2019 that they were a currency manipulator, it didn’t really result in much.
Also, the broader economic situation is such that no other economy, because the yen is so weak and because China threatens this overcapacity to flood other markets, no other economy is really gonna wanna strengthen their currency at the same time, especially China’s not there. And there’s very little that these economies can do. Yes, they can try to change their value relative to the yen. But if China is still intervening with the yuan, then you still have a (inaudible) . . .
Robert Armstrong
I think you just invented a word there: “interventing”.
Aiden Reiter
Oh, yes.
Robert Armstrong
I need to have a grammar intervention here. So if I understand you correctly, China kind of has a veto on the co-ordinated action strategy (Overlapping speech) sum up that way.
Aiden Reiter
Right. They are . . . The prospect of China flooding the market will stop other economies from doing this. And if other economies do this with the dollar, China probably wouldn’t go along either way. So they have a veto.
Robert Armstrong
OK. That’s options number one and number two.
Aiden Reiter
That is co-ordinated. Trump, as you said, could threaten tariffs against all these countries. But again, because they don’t want to see their economies flooded by Chinese goods, they would probably rather take the tariffs than manipulate their currencies.
Robert Armstrong
OK. Very good. What’s number three?
Aiden Reiter
Number three is spook the market, scare everyone. Trump could just say he was going to pursue this policy and that the market might react such. He could also even, you know, mess with the Exchange Stabilization Fund, just wants a small sell-off. And maybe that’ll cause the market to go. But as we’ve said and you said in the last podcast, there’s the dollar smile effect. When things aren’t good, people go back to the dollar. So even if he spooks the market sufficiently, people will still run back to the dollar and we’ll go back up again.
Robert Armstrong
For those of us who wish to manipulate the dollar, the situation is suddenly looking a little bleaking. I hope we have something good in store for option number four.
Aiden Reiter
Option number four is probably the most potentially effective of these, but also, it’s the one that has the most ill portent for markets. So tax foreign holdings of US dollars in assets. Essentially try to stop the capital inflows that make the dollar stronger than it arguably should be.
Robert Armstrong
Right. So everybody in the world wants the dollar for a million reasons. It’s super liquid. It’s attached to a huge economy. Everybody accepts it. There’s a lot of things you wanna buy with dollars — Treasuries, American stocks, etc. If I understand you correctly, the proposal here is that you just make it harder to buy dollars. You tax those transactions.
Aiden Reiter
Yeah, tax those transactions. You know, make sure that either is a cost sufficient to holding a dollar that people would wanna put their money elsewhere. And, you know, this is actually something that has some bipartisan support. This is not just something coming out of the Trump camp. There was a proposal by Senators Josh Hawley and Tammy Baldwin, a Republican and a Democrat, to pursue this.
Robert Armstrong
Could you just, in a really simple way, Aiden, explain to me how that works?
Aiden Reiter
Yeah. There’s a couple of ways this manifests, but the most basic principle is that all these flows coming in makes the dollar worth more than it, some would argue it should be. And because the dollar’s worth more than it arguably should be, Americans are able to buy things abroad easier. And it’s more expensive for Americans to export things.
Robert Armstrong
Yes. And that’s the trade deficit.
Aiden Reiter
That’s the trade deficit. And there’s other things that would change on a broader, you know, macroeconomic level. But the trade deficit would be one of the impacts.
Robert Armstrong
So I’m warming up nicely to this idea. And also, it would generate revenue, right? Instead of spending dollars intervening in the market, you’re putting a tax on foreigners. So you’re not even taxing Americans and you’re generating revenue for the Treasury. I mean, this sounds like Christmas came early.
Aiden Reiter
Yeah. And, you know, arguably a tariff also creates revenue. But at the end of the day, there’s some really important economic impacts to doing something like this. Same thing with doing a tariff, right? We have 16 Nobel laureates wrote a letter saying these proposed policies, whether they be tariffs or dollar devaluation, would be inflationary. Tariffs, as many people have said, are inflationary. Arguably, dollar devaluation would be inflationary in the same way.
Robert Armstrong
OK, let’s walk through that. So you weaken the dollar. Why does inflation now have to go up?
Aiden Reiter
First of all, Americans would not love the idea of their dollars being worth less, right? We like having a strong currency.
Robert Armstrong
We don’t like the word “weak”, just in general. Everything in America is strong.
Aiden Reiter
But, you know, in terms of the trade deficit and inflation, if it’s now more expensive for me to import things, that causes the cost of those goods to go up. You would need some form of substitute in the domestic economy in order to fill that so that you have a broader price stabilisation.
Robert Armstrong
Yes. So I’m buying my bicycle. I’m sure it was manufactured in China. Under the proposal here, the dollar gets weaker because we’ve taxed inflows of capital into the United States. Now, the Chinese bicycle becomes more expensive. And I go to a bicycle factory in America to buy my bicycle.
Aiden Reiter
I’m not sure how many bicycle factories there are in America, but I imagine that’s fewer than in China.
Robert Armstrong
Yes.
Aiden Reiter
And, you know, so there’s gonna be this lag, this delay between us sourcing the goods and building up the manufacturing capacity in the United States to fill the things that will now be more expensive. So there will be an inflationary shock. And that’s not just true of the taxing foreign holdings. That’s true of any of these dollar devaluation approaches.
Robert Armstrong
So inflation, or the risk of inflation, is one problem with trying to manipulate the dollar down. Is that the only problem? If we can handle a little inflation, are we OK?
Aiden Reiter
Not necessarily. Taxing foreign holdings has this other, you know, unique outcome. While it might be the most effective way to close the trade deficit, it’s also potentially the most effective way to tamper with the market. As Unhedged had written before, in a world full of capital controls and in a world where everybody wants the dollar and there are relatively few capital controls on the dollar, money and capital inflows come flooding into the United States, which pumps up our assets. It pumps up the dollar and arguably allows us to borrow at the rate that would allow us to pump up our own economy and do all the things we actually need to do in the economy.
Robert Armstrong
And I should probably note that capital controls elsewhere are not the only reason that money comes flooding into the United States. We also have a huge market. It’s really liquid. It’s easy to get into, in that sense. We have really good companies. We have rule of law. So your capital is relatively safe here and there. You can appeal to the courts if something goes terribly wrong. So there’s a lot of reasons people are jamming money into the United States, which explains why American stocks are so much more expensive than European stocks, Japanese stocks, Chinese stocks.
Aiden Reiter
Yeah. And if you suddenly cut those flows short, there will be a major repricing on the market. It would be probably pretty fast. It could involve a big tumble. And yes, things might stabilise after a while. But that first big tumble is gonna be hugely, hugely impactful.
Robert Armstrong
It is gonna be an adjustment to a world in which the capital of every country is no longer forming a line to cram into the S&P 500.
Aiden Reiter
Some people would say that’s actually a better outcome for the United States and the world. Really, you know, according to a lot of economists, capital should be flowing to developing countries and to these untapped markets.
Robert Armstrong
OK, so wrapping up, is this all just talk? Is any of this stuff going to happen in the foreseeable future? Could it happen in the foreseeable future, that America has had enough of the strong dollar and decides to do something about it?
Aiden Reiter
Well, I think there’s two ways we need to look at that. The first is, you know, the economic fundamentals are likely gonna change in the coming months. The market’s already expecting inflation to come down, interest rates to come down. Once the interest rate differential between the US and other countries comes down, it’s not gonna be as much of a problem between the US and European allies. It might still be a problem with China. But you know, Trump has already said he wants to do 60 per cent tariffs on China. That might just take care of some of those issues altogether. (Robert laughs)
But in terms of whether or not a Trump administration would want to do this, there are some people, like Robert Lighthizer, who have been very bullish on the prospect of doing something like this. But as we just walked through, it’s both costly and hard to do. And there are some really, really major political and economic ramifications that the Trump administration or any administration that wants to do this would probably want to avoid.
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Robert Armstrong
Well, we can’t have any of those ramifications. Thanks for that, Aiden. We’ll be right back with Long and Short.
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This is Long and Short, that part of the show where we go long things we like and short things that we do not like.
Aiden Reiter
We can also say it’s the name for the Unhedged writing duo now, with Rob well above six feet and me at a measly 5’9, 5’10.
Robert Armstrong
(Laughter) Aiden, do you have a long or a short for us?
Aiden Reiter
I do. I am long tomatoes. It is . . .
Robert Armstrong
Wow.
Aiden Reiter
. . . the end of July. Tomato season is coming upon us. I am extremely excited to go back to Connecticut where I’m from, jump in the car and go to all the farmers markets to try and track down all the delicious tomatoes to make all the wonderful summer salads.
Robert Armstrong
Yeah, it’s true, I think of it the other way. We have like, ten months of disgusting tomatoes in America. And then there’s like a six-week window where you can have a decent tomato. And when I’m in charge of the country, I will not be manipulating the currency. I will be making it illegal to sell tomatoes during the other 11 months of the year.
I am long competition. We wrote a story yesterday about a stock of a company called Lamb Weston that makes french fries, and its stock took a vicious tumble. And the long and short of it was during the pandemic and the associated inflation, Lamb Weston was able to charge a lot for its french fries. It was able to jack up prices.
Aiden Reiter
It was a hot potato.
Robert Armstrong
It was a hot potato. What we learned from its latest earnings report is that competition has pumped up, fast food restaurants are competing on price with one another again. They’re passing the pain on to Lamb Weston’s French fry operations. And the competitive function of the economy, which sort of went on holiday during the pandemic, seems to be back, at least in the French fry world.
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Listeners, eat tomatoes, eat french fries and come back to Unhedged, which will be in your feed again next week.
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Unhedged is produced by Jake Harper and edited by Bryant Urstadt. Our executive producer is Jacob Goldstein. We had additional help from Topher Forhecz. Cheryl Brumley is the FT’s global head of audio. Special thanks to Laura Clarke, Alastair Mackie, Gretta Cohn and Natalie Sadler.
FT premium subscribers can get the Unhedged newsletter for free. A 30-day free trial is available to everyone else. Just go to ft.com/unhedgedoffer.
I’m Rob Armstrong. Thanks for listening.
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