A follow-up to the first article, this article intends to show one way in which Trump intends to devalue the American dollar in line with rising discussions over new types of treasury bonds being issued.
Devaluation
With a weaker currency, exporting American goods becomes cheaper, thereby reducing imports and boosting American manufacturing as firms are incentivised to produce. In regard to the current account1, less money is leaving the USA, and exports typically rise with the devaluation of currency, meaning that money entering the USA increases: the current account improves.
Direct intervention in financial markets is a means for Trump to devalue the American dollar by tampering with debt shares, and the foreign exchange market responds by devaluing the dollar.
U.S. debt shares
The U.S. government spends more than it generates from tax revenue and fees, resulting in budget deficits. Crucially, the U.S. government has to pay back what is owed and does so through the Treasury by issuing new debt (bonds, bills, notes). Banks or investors buy the treasury-issued debt, giving the US government money to spend and by buying bonds, bills or notes, banks fund the deficit. Such that, after a certain point in time, the money lent to the US through the uptake of debt shares must be paid back, in full, to investors at a certain date (along with interest payments).
The issued debt can be issued with different maturities2. Longer-term bonds are less favourable because they are less liquid, a factor dependent on there being very little demand for these debt shares.
John Maynard Keynes famously said, “In the long run we are all dead”. In this case, the long run can be thought of as analogous to the long term. Keynes emphasises uncertainty in his famous quote – in a similar fashion, investors tend not to buy long-term bonds because there is no guarantee that the principal amount of the debt share will be of the same value at the end of the debt maturity. Thus, there are fewer buyers in the market for long-term bonds, investors may have to sell their shares at a discounted price for there to be any viable buyers at all, culminating in the asset becoming illiquid.
The demand for debt shares is linked to the demand for the dollar as a currency. For shorter term bonds, as soon as a term for a share expires and the principal amount is paid back, investors tend to seek more U.S. Treasury bonds (generally short-term). To do so, they must buy up dollars as a prerequisite to purchasing treasury bonds. This increases the demand for the U.S. dollar constantly and leads to it having a high value.
Under the Trump administration, there has been discussion over the introduction of ultra-long-term bonds, lasting beyond 30 years, proximate to 100 years in maturity. Following this, Trump intends to coerce foreign nations to switch short-term debt holdings to long-term holdings. By doing so, they prevent the increase in value for the dollar, especially over the short term.
Trump intends to leverage his policy with the defence policies mentioned in the previous article. Trump may threaten to pull back spending in NATO, compromising the basis of collective security, which NATO advocates for. The U.S. contributes to 64% of defence spending in NATO, more than all the other countries combined – playing an integral part in such alliances allows them to coerce other countries into swapping their debt shares with long term bills. long-term
- Current account: A country’s current account records the value of exports and imports of both goods and services and international transfers of capital: https://en.wikipedia.org/wiki/Current_account_(balance_of_payments)#:~:text=In%20macroeconomics%20and%20international%20finance,known%20as%20the%20financial%20account). ↩︎
- Maturity: Bond maturity refers to the date when a bond’s principal, or face value, is repaid to the investor. ↩︎