What is the Mar-a-Lago Accord?
Under President Trump’s administration, some advisors have floated unconventional ideas, including compelling foreign governments to exchange U.S. Treasury holdings for lower-cost, longer-term bonds (e.g., century bonds). This approach is aimed at reducing interest costs on the national debt, which has ballooned to $36 trillion (over 120% of GDP). Economist Stephen Miran, now leading the Council of Economic Advisers, has suggested leveraging geopolitical tools like tariffs and security assistance to pressure foreign governments into such swaps.
Chartbook 363 Stockholm syndrome in Mar-a-Lago: The belief that “something must be done” and the sanewashing of economic policy in the age of Trump
By: Adam Tooze – Columbia University
The case for taxing capital flows
Michael Pettis argues that addressing trade imbalances through taxing capital inflows is a more effective and sustainable approach than imposing tariffs. His main points are:
- Root cause of trade imbalances: The U.S. trade deficit is primarily driven by imbalanced capital flows, which are fueled by global excess savings seeking safe investments in the U.S., rather than by low domestic savings or fiscal deficits.
- Proposal for taxing capital inflows: The Competitive Dollar for Jobs and Prosperity Act proposes a “Market Access Charge” (MAC), a variable tax on foreign capital inflows used to purchase U.S. assets. This would balance the capital account, leading to a corresponding reduction in the trade deficit.
- Advantages over tariffs:
– Flexibility: A tax on capital inflows allows for gradual and less disruptive adjustments compared to tariffs.
– Financial stability: It discourages short-term speculative investments while encouraging long-term productive investments.
– Efficiency: Costs are borne by banks and speculators rather than consumers or producers, avoiding distortions in global supply chains.
- Critique of tariffs: Tariffs are seen as ineffective because they merely shift trade imbalances between countries without addressing underlying structural issues. They also disrupt value chains, raise consumer prices, and create economic inefficiencies.
- Potential risks: While taxing capital inflows could lead to temporary capital shortages, this risk can be mitigated by adjusting the tax rate as needed.
How Trump Can Fix America’s Trade Imbalance
By: Michael Pettis – Peking University
The case against the Mar-a-Lago Accord
Jeffrey Frankel argues that the Mar-a-Lago Accord is poorly conceived, destabilizing, and counterproductive, likening its coercive nature to imperial tribute demands that could hasten America’s economic and geopolitical decline. His key points are:
- Proposal overview: The Mar-a-Lago Accord seeks coordinated international intervention to depreciate the dollar while addressing U.S. deficits and maintaining the dollar’s global dominance. However, it lacks the balanced policy measures of the Plaza Accord, such as reducing U.S. budget deficits or encouraging surplus countries to increase spending.
- Economic risks:
– Depreciating the dollar could raise U.S. interest rates, as foreign central banks would reduce their holdings of U.S. Treasury bills, lowering demand and increasing borrowing costs.
– There is inherent tension between devaluing the dollar and preserving its status as the dominant global currency, potentially accelerating its decline.
- Controversial measures:
– Proposals include issuing 100-year zero-coupon bonds (effectively a debt restructuring akin to default), charging user fees on foreign-held U.S. debt, and taxing foreign investments in the U.S.
– A newly announced Sovereign Wealth Fund (SWF) lacks clarity and funding sources, raising doubts about its feasibility.
- Coercive approach: The plan relies on coercion, including threats of tariffs and leveraging U.S. geopolitical power, to force foreign countries to accept unfavorable terms. This strategy risks alienating allies and accelerating moves away from the dollar.
- Geopolitical implication: Unlike past instances where allies voluntarily supported U.S. initiatives (e.g., during Bretton Woods or the Gulf War), current strained relationships and diminished goodwill make coercion less effective.
No Mar-a-Lago Accord
By: Jeffrey Frankel – Harvard University
