Agefi Luxembourg - mars 2025

Mars 2025 13 AGEFI Luxembourg Economie Opinion– byBrunoCOLMANT,M.Sc., Ph.D., CFA,Member of theRoyalAcademy of Belgium S uppose there is one constant inU.S. monetary policy. In that case, the country never re- pays its debts in anything other than dollars, which effectivelymeans they are never truly settled. This is the privi- lege of a nation that, for over a century, has imposed its currency as the universal standard and that, moreover, consumesmore than it produces. As a result, the rest of the world— meaningallcountriesexcepttheUnited States—funds the American trade and budget deficit. This burden is significant, as U.S. publicdebt, although75%heldbyAmerican institutions, accounts for approximately one-third of global GDP. Butthatisnotall:theworldneedsdollarsforcountless transactions, especially in international trade, where the dollar is involved in 60% of global exchanges. Howarethesedollarscreated?Throughavastsystem ofcurrencyexchangesbetweencentralbanks.Forex- ample, if I open a dollar account at a Belgian bank, these dollars appear onmy balance but do not phys- icallyexist; they result fromanexchangebetween the European Central Bank (ECB) and the Federal Re- serve,therespectivecentralbanksoftheEurozoneand theUnitedStates.Thismeansthattherestoftheworld mustcontinuouslytradecurrenciesrepresentingasig- nificant portion of global GDP. The dollar is thus the backboneof theglobal financial system, and itsdom- inance is, among other things, guaranteed by the in- tervention capabilities of theU.S.military. This is where the core of the problem lies: the dollar must beaweakcurrency tobeabundant. If thedollar were strong, it would become a vehicle for hoarding rather than circulating throughout the economy. In thisregard,itisessentialtotakeanempiricalapproach whenanalyzingU.S.monetarypolicy.Thereisnoab- soluteconstant,exceptperhapsthedoctrineofRobert Roosa(1919–1993),whoservedasUnderSecretaryof theTreasuryunderJohnF.Kennedy(1917–1963,U.S. Presidentfrom1961to1963).Roosawasalsothemen- tor of Paul Volcker (1927–2019), who was Chairman of the Federal Reserve from1979 to 1987. Roosa’s doctrine merely extended the principles outlined by Franklin D. Roosevelt (1882–1945, U.S. President from 1933 to 1945), who stated at the be- ginning of his first term: “The internal economic health of a nation is a far greater factor in its well- being than the value of its currency in terms of ex- change with other nations.” In the 1960s, Robert Roosa formalized the principles ofAmericanmonetary policy. He asserted that if the quantity of dollars in circulation exploded, it was not anAmericanproblembutanissueforcountriesaccu- mulating trade surpluses.During theBrettonWoods system (1944–1971), Roosa specifically targeted Ger- many and Japan, urging them to increase domestic consumption to balance monetary flows. This doc- trine was bluntly summarized in 1972 by John Con- nally (1917–1993), Secretary of the Treasury under RichardNixon (1913–1994, U.S. Presidentfrom1969to1974),inanow-famousphrase: “The dollar is our currency, but your problem.” This same John Connally, alongside Paul Volcker and under RichardNixon’s directives, ended the Bretton Woods accords in 1971 by first suspending and then officially abolishing the dollar’s convertibility into gold. This led to a sharp dollar depreciation, which lostnearly50%ofitsvalueagainsttheDeutscheMark between 1971 and 1979. But the story is not over. Donald Trump’s economic policy is inflationary, whichnecessitatesmaintaining high interest rates to curb inflation, thereby strength- ening the dollar. Why? Tax cuts and import tariffs drive domestic prices, forcing the Federal Reserve to counteract inflationwithhigher interest rates. However, Trumpwants aweakdollar. This iswhere the Miran doctrine comes into play, championed by StephenMiran, the current Chairman of the Council ofEconomicAdvisorsattheWhiteHouseandaclose associateofTreasurySecretaryScottBessent.Stephen Miran has developed an approach combining tariffs and monetary manipulation to achieve three objec- tives: financing themassiveU.S. public deficit,which hasreachedunprecedentedlevels,devaluingthedol- lar to boost American exports, and maintaining low interest rates onU.S. debt so that the dollar remains a transactional currency rather than a hoarding instru- ment, thus preserving its role as theworld’s primary liquidity source. This vision aligns with the paradox of BelgianeconomistRobert Triffin (1911–1993),who predictedthattheBrettonWoodssystemcouldnotbe sustained if theUnitedStates continued issuingmas- sive amounts of dollars to supply global liquidity— an issue that ultimately led to the abandon- ment of the gold standardby theU.S. in1971, asmentioned earlier. Stephen Miran’s idea is that U.S. tariffs wouldbecomeabargainingtool:theywould be adjusted depending on whether trading partners agree to subscribe to ultra-long-term (century-long) or even perpetual U.S. bonds toavoidTrump’stradewarsandmaintain U.S.militaryprotection. Thevalue ofthesebondswouldquickly erode due to inflation and dollar depreciation.As a result, countries trading with theU.S. or relying on its military shield would find them- selves forced to fi- nance the U.S. government for free. Thiswould inevitably weaken the dollar. But Stephen Miran goes even further. He proposes that theWhiteHouseuse special executivepowers to reduceinterestcouponsonU.S.bondsheldbyforeign central banks that refuse to revalue their currencies against the dollar. The alternative, which I have always favored, would be for the White House to place the Federal Reserve under direct control, stripping it of its independence toalignmonetarypolicywiththeimmediateneedsof the U.S. government. This would mean forcing the Fed to refinance public debt at zero or even negative interestrates,therebyeliminatingthecostofservicing thedebtfortheUnitedStates.Suchamovewouldim- mediatelyflood themarketswith cheap liquidity, fa- cilitating debt repayment and fueling a dangerous excessofmoneysupplywithcatastrophicsideeffects. If such a policy were implemented, it would create an unstoppable inflationary spiral. Themoney sup- ply would skyrocket without any regulation through interest rates, as these would be artificially kept at extremely low levels. In such a scenario, the progressive erosion of the dollar’s value would be inevitable, with investors andU.S. debtholders real- izing that their assets yieldnothing and that the cur- rencyislosingpurchasingpower.Thisphenomenon would be further exacerbated by a capital flight to- wardsother currenciesor safe-havenassets likegold or cryptocurrencies, accelerating the dollar’s decline even further. Thedollar’s collapsewouldnot be lim- ited to a U.S. crisis but would have unprecedented global repercussions. As the world’s reserve cur- rency, its downfall would trigger a significant mon- etary and financial stability disruption, forcing for- eign central banks to reassess their exposure to dol- lar-denominated assets. Confidence in the U.S. financial system would be irreparably damaged, promptingsomenations toseekalternatives, includ- ingbilateralmonetaryagreementsoutside thedollar framework. This shift would gradually dismantle U.S. monetary hegemony andusher in amultipolar worldwhere the greenback is no longer the corner- stone of international transactions, challenging decades ofAmerican economic dominance. Insummary,aloomingmonetaryandfinancialshock could strike our economies. It would stem from the dollar’s inability to remain a strong currency while U.S. debt is set to reach 40%of global GDP soon. The ratio of U.S. public debt to global GDP has surged from10–12% in the 1980s to around 30% in 2023, re- flectingthefastergrowthofU.S.debtcomparedtothe global economy. Moreover, U.S. inflation will be fu- eled by Trump’s economic stimulusmeasures, mak- ing the system even more unstable. A sudden negativeshocktothedollarcouldcrippleandrupture the entire Western financial system. I hope I am wrong, butwe arenot donewithnasty surprises. It is nowincreasinglyplausiblethatasignificantmonetary event is on the horizon. The question is no longer if it will happenbut howitwill unfold. Trump and the agony of the dollar: The financial nightmare threatening the planet Banque Degroof Petercam Luxembourg S.A., 12 rue Eugène Ruppert, L-2453 Luxembourg | Tel: +352 45 35 45 1 | bienvenue@degroofpetercam.lu | www.degroofpetercam.lu | RCS B25459 CA Indosuez Wealth (Europe), 39 allée Scheffer, L-2520 Luxembourg | Tel: + 352 24 67 1 | communication@ca-indosuez.lu | luxembourg.ca-indosuez.com | RCS B91986 Joining forces to offer your wealth an ocean of possibilities. Grow. Closer. Wealth Management Investment Management Corporate Finance Fund Solutions