Photo: Tom Williams/CQ-Roll Call, Inc/Getty Images
Picture this: the U.S. is in turmoil, its economy spiraling after a period of runaway inflation. The price of milk and gas are a national obsession, and, increasingly, just about everything is less affordable. In response, the government takes emergency measures. The Federal Reserve hikes interest rates to the highest they’ve been in decades. Prices come down, but there is a problem. Those same high rates start making the U.S. dollar so valuable that just every other country prefers it to their own money, and consumers here are more than happy to oblige foreign demand by buying cheap stuff from abroad. Trade deficits blow out, undermining the U.S.’s global economic power. The U.S. government is faced with the possibility of doing something unprecedented — tanking its own currency, and gambling that inflation will once again send the economy spiraling.
This was the situation in 1985, when Ronald Regan was President and “Born In The U.S.A.” was the most popular song in the country. On Wednesday night, J.D. Vance accepted Donald Trump’s nomination to be the Republican Vice Presidential candidate, and in his speech, laid out a vision of the U.S. that fundamentally reorders the U.S. economy to avoid any version of this trap, away from the consumer and toward bringing back manufacturing jobs from abroad. “We’re done sacrificing supply chains to unlimited global trade, and we’re going to stamp more and more products with that beautiful label made in the USA,” he said during his acceptance speech at the Republican National Convention in Milwaukee. “We’re going to build factories again, put people to work making real products for American families, made with the hands of American workers. Together, we will protect the wages of American workers and stop the Chinese Communist Party from building their middle class on the backs of American citizens.”
At the center of this — in order for these policies to be successful — is requirement for the U.S. dollar to be much weaker against other global currencies than it is today – against Chinese yuan, the Euro, the Japanese yen, and so on. There is a precedent for this in the a Reagan-era intervention in the markets (even ift this kind of policy also tends to get labeled as “manipulation” today). But the global economy of today is not the same as it was 40 years ago, and the odds of it blowing up in Vance’s face are far higher.
For at least the last two years, the U.S. dollar has been the strongest major currency in the world. The bull run, spurred by high interest rates and a strong economy, has mostly been a boon domestically, helping offset some of the post-pandemic inflation, giving consumers — the engine of the economy — more power to buy the goods imported from abroad. Abroad, the story is different — the strong dollar has been a “wrecking ball” that’s made it harder for many people around the world to afford food, fuel, and other products that are generally priced in dollars.
That streak of dollar strength might be winding down though. In the next few months, the Fed will probably lower interest rates, and slowly bring the dollar’s purchasing power down with it. To Vance, this would be merely a beginning to what he wants to see. This week, Vance has been talking up the benefits of a weak currency. “‘Devaluing’ of course is a scary word, but what it really means is American exports become cheaper, and that’s important,” the Ohio Senator told Politico in a report published Monday. Vance went on to cast the strong dollar as a drag on blue-collar jobs, which have famously been outsourced abroad from the state he represents in Congress. “If you want to employ a lot of people in manufacturing, you need to make it easier for us to export and not just import what we need.” It’s not as if Vance’s ideas have come out of nowhere. Vance is, essentially, an anti-free trade Republican, who’s praised Biden-appointed Lina Khan for using the Federal Trade Commission to break up monopolies, and worked with Elizabeth Warren to draft anti-Wall Street regulation. In an interview with the New York Times’ Ross Douthat, he brought up his (very few) similarities with “Bernie bros“. Still, how he achieves this goal of creating more manufacturing jobs is still unclear, and though he may share a goal with the Senate’s most far-left wing, how he would go about achieving this would, likely, backfire.
In his interview with the Times, Vance pits trade and immigration as mutually antagonistic forces in the U.S. economy. “The trade issue and the immigration issue are two sides of the same coin: The trade issue is cheaper labor overseas; the immigration issue is cheaper labor at home,” he said. Vance is right that cheaper labor and lax regulations abroad have made manufacturing here less attractive to companies. But four decades of free-trade policies have also entrenched consumers as the economy’s driving force, with more than 68 percent of gross domestic product coming from buying stuff. Diluting the purchasing power of the world’s most important currency isn’t as simple as pulling a lever, and Vance’s vision of a manufacturing renaissance would come at the expense of the consumer — meaning less buying power for the average family and, most likely, more inflation.
Knowing how politically toxic inflation is, would Trump be game to pursue this policy? Even people who are the most concerned about the dollar’s place in the world aren’t so sure whether a second Trump administration would actually plan to weaken the dollar. “If they were to massively devalue the dollar, then all of a sudden they have all these inflationary effects, again. Devaluing the dollar would cause inflation to go higher,” said Brent Johnson, the founder of hedge fund Santiago Capital, whose “dollar milkshake” theory about the unintended affects of a too-strong dollar has received a lot of attention from Wall Street and investors.
This is where the lessons of 40 years ago come in. At the time, Fed Chair Paul Volcker convened leaders from Japan and Western Europe at the Plaza Hotel in New York — three years before Trump bought it — to go along with the U.S.’s plan to devalue the dollar. By just about every measure, the Accord was a success — the dollar fell about 40 percent against other major currencies, and the trade deficits fell with it.
I spoke about the Accord with Jeffrey Frankel, a professor at the Harvard Kennedy School, who served on the Council of Economic Advisors under both Reagan (in 1983 and 1984) and Bill Clinton, who told me that the primary goal of the Accord was to stop “protectionist legislation that was making its way through Congress. So it was to prevent protection. Whereas Trump has made it quite clear he’s in favor of tariff protection, and intends to increase them.” (He also pointed out that about 25 percent of the dollar’s rise in the early 1980s was driven by speculation, while that’s not the case today). Still, there were consequences. Over the next few years, inflation would rise up above 5 percent — not as high as the 13 percent or so peak during the Carter administration, and lower than what Frankel had projected, but, by comparison, far higher than today’s 3 percent rate. During the same period, manufacturing jobs mostly stayed the same (years later, after recessions and free-trade agreements made it cheaper for businesses to send jobs abroad, they declined rapidly).
Any version of this policy would not stand in isolation. Trump, who long advocated for a weak currency, has also floated a plan to replace the income tax with tariffs on foreign goods — a plan that economists believe would spur inflation by reducing competition. “The combination of pressuring the Fed to lower interest rates, putting up tariffs, and depreciating the dollar — all three things are inflationary,” Frankel said. “Those are about the most inflationary things you can do.”
Johnson sees these policies producing two possible scenarios: in one, the Fed backtracks, and raises rates — which then makes the dollar stronger again; in the second, the U.S. holds firm, and countries outside the U.S. have increasing trouble getting a hold of dollars — which they would still need to pay for oil, commodities, and debt. “If he puts these massive tariffs on it’s going to constrict dollar supply outside the United States, which then can cause a slowdown outside the United States. It can cause a crisis outside the United States. And then, that can blow back on the United States,” Johnson said. “The point is, if there’s less dollar supply outside the United States, then the dollar outside the United States is going to start rising.” This crisis abroad could include more expensive oil, countries unable to buy food to feed their populations, and the kinds of mass migrations toward richer countries that have already caused political upheavals throughout the West.
This gets to the biggest difference between the global economy now and what it was 40 years ago: China. In 1985, the Asian powerhouse economy was Japan, which supported the Plaza Accord. China was only in the beginning stages of its transformation into the world’s manufacturing center. Today, China would be unlikely to support a U.S. plan to weaken the dollar, especially if it would siphon away manufacturing. Trump has also previously labeled China a “currency manipulator” following a decision by Xi Jinping to devalue the yuan. And since 2022, Xi has been working with Russia, Brazil, and other countries to try and come up with an alternative financial system, one that would bypass the U.S. dollar entirely. (It hasn’t gotten very far). Simply put, there would be nothing to stop China from weakening its currency in retaliation, triggering a kind of global race to the bottom.
“It’s not just as simple as saying, ‘we’re going to devalue the dollar,’ because everywhere else is in the same situation,” Johnson said. “If the US devalues, it’s not to say that China wouldn’t devalue, and it’s not to say that then Europe wouldn’t devalue.” Not everyone believes that a currency war would break out between the world’s two largest economies, but that doesn’t make the prospect any more palatable. Could Vance’s vision of a manufacturing renaissance happen? It’s possible — but only after sacrificing the bedrock of the U.S. economy as we know it. “It would take such a big depreciation that it would do more harm than good,” Frankel said.
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