Remind me again why Americans think Donald Trump would be so much better off when it comes to inflation and the economy?
Trump's political team is reportedly planning to devalue the US dollar. This may well be Trump's most inflationary and economically destructive idea yet. That's quite an achievement considering what else he and his advisers have come up with (across-the-board tariff increases, deficit-financed tax cuts, massive workforce reductions, etc.).
According to Politico, Trump's goal is to boost US exports and reduce imports. For example, if one dollar can buy fewer euros or Japanese yen than it currently can, then U.S.-made products will appear slightly cheaper and perhaps more attractive to European and Japanese customers (among others). So, hey, maybe this could help some US companies trying to sell products abroad.
That is, until you consider everything else that could happen if we intentionally tried to weaken our currency, which would open Pandora's shipping container with disastrous consequences.
Follow this authorCatherine Rampell's opinions
It's true that the dollar is unusually strong right now, although probably not for reasons Trump is happy about. Exchange rates typically reflect a country's macroeconomic conditions (among other factors such as interest rates). Thanks to a variety of factors – including our relatively limited exposure to the war in Ukraine – we are doing better than most of our peer countries. In the words of Kenneth Rogoff, a Harvard professor and former chief economist at the International Monetary Fund: “The U.S. economy is in crisis.”
The relative strength of the dollar makes U.S.-made goods less attractive, although our potential global customers may not feel particularly comfortable anyway given that many other countries are in or near recession. I suspect that if Trump were to stimulate the US economy, intentionally or unintentionally, he could achieve his goal of rapidly weakening the dollar and reducing trade deficits.
How would Team Trump weaken our currency if not through a recession? That's not entirely clear. He could try to force the Federal Reserve to cut interest rates. This is something Trump already wants to do for other reasons. (For example, he has a lot of debt, so lower interest rates would help his own finances.) Or perhaps he would push many other countries to raise their interest rates, which seems unlikely. However, if this were to happen, it could lead to a global recession.
Or perhaps he would tax foreign financial flows into the United States, as some senators have suggested. This would also likely weigh on the economy, said Maurice Obstfeld, a fellow at the Peterson Institute for International Economics.
(Did you notice any themes here?)
Whatever the mechanism, a weaker dollar would likely lead to higher prices for American consumers, and not just during their summer vacations in Italy. Americans buy many imported goods, from fruit to toys to cars to home furnishings. These would all become more expensive if the purchasing power of the dollar fell.
So much for Trump's promise to defeat inflation. And that's not the only problem with his plan.
Perhaps some US exports would become more competitive, as Trump hopes. Ironically, however, some U.S. industries that stand to benefit most from a weaker dollar are not Republican favorites. These include Big Tech, Hollywood and higher education, sectors that enjoy a combination of fairly competitive exports and/or high offshore profits that would increase in value.
There is also a risk that other countries will not want to go along with Trump's plan. Our trading partners could take a number of countermeasures to prevent their currencies from appreciating against the dollar, to which we could respond with countermeasures and so on. In other words, we could see a continuation of the trade wars that Trump started earlier.
Global trade or currency wars, in turn, would likely be harmful to just about everyone, including U.S. businesses and consumers.
Deliberately weakening the dollar, or even attempting to do so, also jeopardizes its role as the world's “reserve currency.” We have a stable government that pays its bills reliably and does not do shady things to intentionally manipulate the value of its fiat currency. As a result, the dollar is widely used in international trade and dollar-denominated U.S. Treasury bonds are in high demand.
The fact that US dollars are considered a virtually risk-free store of value gives the United States some great privileges. It allows us to continue to spend more than we collect in taxes because it is cheap and easy for our government to borrow to finance ever-growing deficits. An erosion of global use of the dollar could make it more expensive for the U.S. government to continue borrowing so heavily (meaning that taxes may have to rise or spending fall to cover budget deficits).
We may also weaken our ability to impose sanctions on countries, companies or individuals whose actions we disapprove because dollars are so commonly used in international transactions and we have some ability to restrict these transactions.
On the other hand, perhaps we should give Trump some credit. Reducing our global influence, and especially our ability to punish certain global villains, might be exactly what we want.
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