A reader asks about the Mar-A-Lago Accord.

Stone, what is your opinion of the Mar A Largo accord? It seems to be a clever new scheme to deal with debt!

Steve

President Donald Trump’s aggressive plans to shake up how the US trades with the rest of the world have fueled speculation about the potential for a grand multinational bargain that would deliberately weaken the dollar — helping American exporters compete with rivals such as China and Japan.

So, what would a ‘Mar-a-Lago Accord’ attempt to accomplish?

The rough concept is this: Trump has promised to deliver a golden age that will include a renaissance for American manufacturing and exports. He also has longstanding concerns about the size of the US trade deficit, which hit a record $1.2 trillion in 2024, characterizing it as effectively a transfer of wealth abroad.

The trouble is, the dollar’s exchange rate has been historically strong, undermining US competitiveness by making imports relatively cheaper. Indeed, some analysts view the dollar today as overvalued based on economic models that look at things such as the domestic purchasing power of a currency. This overvaluation, and its effects, means Washington has an incentive to reach some kind of deal with other nations that would address the currency strength.

Here’s what I think

So, the short answer to your question is that I doubt much of any of it can be implemented under the current set of circumstances. Moreover, most of it is just wishful thinking on the part of the Trump regime as I will explain now.

The USG is much more indebted than during the Plaza Accord in 1985

By forcing foreign institutions and nations to swap their current Treasury holdings for some sort of discounted zero coupon bonds with an extended duration would ultimately prove counterproductive.

Why?

First, it would immediately reduce the attractiveness of Treasury securities and existing foreign holders would be less likely to buy any in the future. Moreover, this would create more uncertainty surrounding the entire Treasury market. It’s even difficult to figure out who owns what. By function, investors would begin to demand larger risk premiums for holding USTs. That means higher yields.

Second, by forcing the dollar lower in the international markets, foreigners and domestic investors alike would be less likely to want to own US Treasuries.

Part of the allure of owning Treasuries is based on the strong dollar. The strong dollar in which the Treasuries are denominated provides a huge incentive for investors to want to own the Treasuries and hold them over time.

The USG cannot have it both ways

The US Government needs a strong dollar if it wishes to maintain the USD as a global reserve. And in order for the USG to maintain the USD as the global reserve, the US economy must, by function, maintain trade deficits to flood the world with the required dollars.

I often refer to the Triffin Paradox in this regard.

This paradox was identified in the 1960s by Belgian-American economist Robert Triffin. He noted that a country whose currency is the global reserve currency must somehow supply the world with its currency in order to fulfill world demand for these FX reserves. This supply function is nominally accomplished by international trade, with the country holding reserve currency status being required to run an inevitable trade deficit.

Thus, I find it virtually impossible for the Trump regime to implement the objectives of this “Mar-A-Lago” accord under the present monetary and financial system constraints.

The US is stuck in a self-sustaining loop

Indeed, the US government is stuck in what I would consider a self-sustaining loop.

1) It needs a strong dollar as the amount of Treasuries in circulation has greatly increased.

2) But, the strong dollar causes large trade deficits.

3) The US Government wishes to maintain the US dollar as the global reserve, thus it needs to maintain these trade deficits, so that the dollar can be spread to all four corners of the world.

4) Though the USG is desperate to lower its total interest outlays, I do not see how it can do so under current circumstances without creating a lot of investor angst. Weakening the dollar will ultimately drive up interest costs and domestic inflation.

5) The US  trade deficits are now semi-permanent and structural, since much its manufacturing capacity has been offshored. Moreover, higher wages and relatively stringent domestic regulations make reshoring a tougher proposition. Weakening the dollar would have a blunted impact and would drive up price inflation for consumers as they would still need to buy foreign made goods.

It all fits together like pieces in a Tetris and the propositions the Trump regime proposes don’t fit together in the aggregate.