In the first part of this series, I looked at how the Trump administration's blend of ignorance and unscrupulousness has led them to consider a cryptocurrency stockpile as a win-win for both scammers and the public being scammed alike. Or perhaps they're being a bit disingenuous there. Here I go on to look at how their profound misunderstanding of money threatens to turn the US into an impoverished kleptocracy. Which, on reflection, might also be a deliberate part of the plan.
In February, Donald Trump carried on appending his distinctive zigzag scrawl to a growing pile of executive orders, including A Plan For Establishing A United States Sovereign Wealth Fund. This declared:
[…] it is in the interest of the American people that the Federal Government establish a sovereign wealth fund to promote fiscal sustainability, lessen the burden of taxes on American families and small businesses, establish economic security for future generations, and promote United States economic and strategic leadership internationally.
The objectives sound splendid, but in no way do they logically follow the means proposed. As Stephanie Kelton explains:
The bottom line is that a currency-issuing government, like the United States, never has to worry about “finding the money.” […] the money gets spent into existence when Congress authorizes a budget and the payments are made. […] Even if it became “one of the biggest funds” in the world, as Trump envisions, it wouldn’t give the federal government any spending power it doesn’t already have.
Nor would a Sovereign Wealth Fund (SWF) permit, or logically imply, a change in Federal tax policy that wasn't already possible. And it certainly would not guarantee economic security for future generations of Americans. Indeed it suggests that we should anticipate quite the reverse.
Sovereign Wealth Isn't
"What on Earth," I hear you interject, "are you talking about, you raving old dipsomaniac? Everybody knows Norway has a Sovereign Wealth Fund, and they are doing just wonderfully because of it."
Well, if you'll set aside the conventional wisdom (and lay off the personal abuse) for a moment, I'll explain.
In a simple model of international trade and financial flows, consisting of industrious little workshops focused on exploiting natural competitive advantage in certain industries, and trading across borders for the mutual benefit of all humanity, there is no reason to value the production of exports over the consumption of imports. Being a net exporter does not mean that you're "winning" at international trade.
From the point of view of a currency-issuing government, as Warren Mosler has been saying for some time, "exports are the cost of imports". There is, all else being equal, no social good to be derived from exporting if you aren't intending to import just as much. All you would be doing is accumulating foreign financial assets you aren't planning to spend, and sending real useful stuff overseas for people in other countries to enjoy.
On the other hand, if you can manage the trick of importing without exporting, you would be receiving real stuff in exchange for your own currency, which costs you (as a country) nothing at all, as you have an unlimited supply of it. The US, by virtue of being the issuer of the de facto global reserve currency since World War II, has long been in a unique position to enjoy this benefit.
Because net exporting countries are happy to stockpile US dollars (mostly in the form of government bonds) as savings, the US has been able to export a relatively small amount of stuff in exchange for a significantly greater amount of stuff ever since they went off the gold standard in the early 1970s. The currencies of other wealthy Western countries (typically those with US patronage, or at least favour), have likewise been seen as secure savings vehicles, enabling those countries (including Australia) to also be net importers if they so wish.
If other countries aren't happy to accumulate your currency as savings, imports in excess of exports will devalue your currency, and imports will get more expensive until you export your way out of that imbalance. In a world of near-equality of wealth and power between nations, where no currency is favoured over another, this exchange rate see-saw would simply tend to keep each country's imports and exports in balance over the long term.
In the real world however, this is the trap that keeps poor, import-dependent countries indebted and a source of cheap labour and primary resources for the wealthy. The existence of generally-appreciating wealthy nation currencies, in a closed financial system like that of planet Earth, logically necessitates the relative depreciation of the currencies of the rest of the world. No matter how they scramble to export more and more they end up able to import less and less, and in a crisis must turn to institutions like the IMF, the world's most ruthless payday lender, to support their populations. This makes their situation even worse — a topic for a later depressing series of blog posts.
Now if you are a (relatively) wealthy country and for some reason deliberately want to be a net exporter and give away more stuff than you receive, you have to work out a way to stop your currency appreciating in value. Net exports drain foreign holdings of your currency, so if it is government policy to remain a long-term net exporter, the government ultimately has to find a way to replenish the stock of your domestic currency in foreign hands. Otherwise the exchange rate see-saw will inflate the real cost of your exports beyond what the foreign market will bear.
Enter the Sovereign Wealth Fund.
An SWF is analogous in function to quantitative easing (QE), as widely employed by governments during the 2008 financial crisis and the COVID pandemic. In QE, the government buys up domestic-currency-denominated financial assets, not because it needs the assets but because this will result in banks holding more funds in total in their central bank balances, which will drive down the cost for banks of borrowing from each other. These governments (wrongly) believe that this will stimulate a depressed economy. The objective is lowering the price of acquiring the currency; the central bank ending up with more financial assets (mostly the government's own bonds) is merely a side effect of that.
Similarly, one way a government can offset the deflationary effect (rise in the relative value of it's own currency) of being a net exporter, is by buying up foreign-denominated financial assets (mostly other countries' government bonds). This injects your domestic currency into the foreign exchange (FX) market and drains foreign-denominated assets, lowering the relative cost of acquiring your currency in that market. Again, your government is left holding additional financial assets, and again this is a side-effect, not the objective.
As Stephanie says, currency-issuing governments don't need a piggy bank in order to fund future domestic spending obligations. Economic security requires securing the real resources that future generations will need: healthcare, education, housing, public infrastructure, etc., and for that we should be spending now, rather than saving up to spend later, or pretending to do so.
Properly understood, all that a SWF means is that you intend to be a net exporter for quite some time. You can't liquidate the assets in that fund in exchange for domestic currency without compromising your ability to do that. The SWF-as-piggy-bank pose is pure political theatre. What it does in practice is indirectly subsidise your exporting industries.
The question of why a wealthy country like Norway (or, on a smaller scale, Australia) would encourage foreign consumption of non-renewable resources in this way, and gladly suffer the environmental blowback, is bewildering enough.
Why would the US want to start buying up foreign financial assets at scale, when all this could possibly do is jeopardise it's unique advantage to enjoy cheap imports?
Wild Speculation
Firstly, we can't discount incompetence. Trump's most loyal appointees share his childlike understanding of the world and paranoid sense of aggrieved resentment. As "fair trade" advocate Peter Navarro — trade adviser to the current and previous Trump administrations — wrote for Project 2025, the "stark lesson" of all the cheap goodies showered upon the US for nearly a century "is that America gets fleeced every day in the global marketplace both by a predatory Communist China and by an institutionally unfair and nonreciprocal WTO"!
However, while the majority of Trump's second-term appointees share his profound ignorance, they are also at least literate and administratively capable. (Obviously I don't include the celebrity and/or billionaire appointments in this class.) So it's prudent to at least consider the possibility of a rational agenda.
I can think of four reasons why a government might willingly exchange real goods and services and ask for nothing material in return.
- Political opportunism: Taking advantage of a sudden spike in global demand for one's exports, on the assumption that the windfall will be broadly distributed via that industry's workers and suppliers, and the foreign exchange imbalance will eventually sort itself out via the inflationary effect of increased domestic demand. The government could then, in the short term at least, take political credit for engineering a fleeting golden age.
- Economic development: A poor underdeveloped (or de-developed) country might take advantage of it's low-cost labour force to industrialise at a faster rate than possible if development were dependent on domestic consumption. This strategy requires the ability to plan on a timescale of generations, favouring entrenched dictatorships (eg. "predatory Communist China").
- Elite kleptocracy: This is I think the ambition of the Project 2025 crowd, whose pre-Woke "real America" is a bucolic antebellum vision of lesser-humans happy to toil in poverty under the benevolent guidance of a higher breed of man. This requires completely crashing the US economy to reduce the standard of living for the majority to destitution.
- Asset stripping: This appears to be, apart from personal vengeance and arbitrary sadism, the only thing Trump and his court of oligarchs is interested in. Lacking even the juvenile patriotism of Project 2025, their aim is to personally secure as much as they can get away with and cash out, leaving the country in a state of chaos and devastation.
Both of the latter options involve rendering the unworthy majority of the population dirt-poor in the process of becoming a net exporter, massively compounding the deliberate de-industrialisation of the Reagan/Bush/Clinton era. Which is consistent with everything else we've seen from the administration to date. I don't think there are many people left in positions of influence in the government (including most of the Democrats in Congress) who would have a problem with it in principle.
The Mar-a-Lago Accord
Evidence for some blend of these comes from the "Mar-a-Lago Accord", which is a new one on me, but apparently it has been generating quite a buzz in financial market circles in recent months. Last year, some of the sharpest minds in the US financial services industry (which you must concede has achieved some spectacular results since deregulation) started putting their heads together over how one might implement the Trump agenda as outlined by Project 2025 and others in the inner circle.
This is something of a challenge, as the Trump agenda is an assortment of ignorant knee-jerk responses to the paranoid grievances of wealthy but emotionally insecure white men. Consequently there is no policy proposal in the Trump agenda that doesn't undermine at least one other. The agenda is a war against phantasms waged by people who don't understand how the world works.
Which is where the Mar-a-Lago Accord comes to the rescue. The most comprehensive articulation of the plan comes from an investment banker called Stephen Miran, who insists that his work on this "is not policy advocacy", but is merely aimed at understanding "the range of possible policies that might be implemented, so that our team and clients can evaluate the consequences in the economy and financial markets that might result".
A cynic may feel that such a disclaimer smacks of "Well, yes I produced a design for the death camps, but I obviously wasn't endorsing it. It was an interesting technical challenge, and I just wanted to inform my clients, so that they could get in on the ground floor if they so desired."
(Coincidentally, Miran has since been appointed by Trump to serve as chairman of the Council of Economic Advisers, and we all know how comfortable Trump is with having people on his team who aren't guaranteed to be unfailingly supportive.)
So here's my summary of how the scheme is supposed to play out.
First problem: the US has been cheated for years by by dirty, underhanded currency manipulators who artificially devalue their currency, notably China, so we're going to punish them with tariffs on their exports until they stop.
Yes, tariffs are technically a tax on consumers in our own country, but this isn't a problem because when Trump imposed tariffs on China in his first term, it so happens that the relative value of China's currency fell at the same time (for some reason), so the cost of Chinese goods to US consumers stayed the same, more or less, if you squint a bit. And yes, the devaluation of China's currency was precisely the problem tariffs were supposed to solve, but here's the thing: a whole bunch of other major currencies also fell relative to the dollar, so quite possibly it was the US dollar that appreciated. Provided this coincidentally happens every time we impose tariffs, we'll be fine. Trump loves a strong dollar. Strong things are virile, manly, and not at all Woke.
Second problem: Trump hates a strong dollar. It makes our exports more expensive, and as everybody knows, the country that exports the most and imports the least wins. So the solution is to be a shrewd, forceful currency manipulator and artificially devalue our currency by buying up loads of foreign financial assets, and also imposing a "user fee" on foreign-held US Treasury bonds. The world will be flooded with dollars of decreasing value, further rendering Treasuries the worst investment on Earth, and the resulting fire sale of those will make the dollar positively toxic.
So reducing the desire to hold US dollars is vital; A weak dollar won't necessarily impose too much pain on the proles, assuming there's no other pressure on prices, from maybe tariffs or something… Anyway, good ol' American capital will surely seize this golden opportunity and patriotically ramp up manufacturing at a speed and scale never before seen in history, rather than fleeing to Europe. Probably.
Third problem: Reducing foreign holdings of US dollars would be a disaster. An artificially strong dollar is how we outspend the rest of the world combined on our military. Foreign bond holders are absolutely key to our ability to bomb brown-skinned people, anywhere in the world, on the slightest whim. It's kind of our thing.
Fortunately, Zoltan Poszar at Credit Suisse has come up with a cute workaround (again not an endorsement; just a synthesis of existing proposals): the US should run a global protection racket.
The sales pitch goes like this: a) living under the US security umbrella is a public asset, and b) even if it isn't, being an enemy is a public liability, therefore c) nice country you have here — be a shame to see it damaged. The fee for this service will be purchases of 100-year, non-transferable, zero-interest "century bonds" which, even assuming repayment on maturity, will be worth practically nothing by then. But really, who can put a price on not becoming a barren wasteland littered with depleted uranium and unexploded cluster munitions, and/or the next state of the Union?
The beauty is that it really doesn't matter how far the US dollar depreciates. This is effectively an immediate transfer of real assets, disguised by an exchange of financial assets, that weakens other countries whenever they are leaned on to come up with whatever absurdly inflated amount of dollars is required. The Secretary of State visits a country, announces that country's share of the next round of US military spending, remarks "My, haven't you the loveliest dark complexion, Prime Minister!" and out comes the cheque book along with an order for another batch of worthless US century bonds. Plus it reduces complex, multi-factorial geopolitics to a simple fee-for-service transaction.
Mind you, some delicacy in timing is required. Miran suggests — oh wait, I forgot; he's not suggesting anything, is he? — he expects that the administration will start with a phase-in of tariffs and the protection racket. Once the "demarcation between friend, foe and neutral trading partner" has been established, then comes the currency manipulation.
And just like that we've pauperised the majority of the US population (our now-globally-price-competitive labour force) while maintaining real income for our exporting oligarchs and our overwhelming military might.
Miran sees no ready alternative to the US dollar as a global reserve currency, which means that, as countries look for an alternative savings vehicle, "alternative reserve assets like gold or cryptocurrencies will likely benefit".
It's all nuts, but leads us to consider a related subsequent executive order in the next post in this series…