Why Donald Trump's plan to weaken the dollar is faulty | Kenneth Rogoff

NOW that the tariff war of US President Donald Trump is in full swing, investors all over the world ask: What is next on his agenda to improve the global economic order? Many turn to the “Mar-A-Lago Agreement”-a plan that was proposed by Stephen Miran, the chairman of the Trump Council of Economic Advisers, to coordinate with the trading partners of America in order to weaken the dollar.

At the center of the plan is that the status of the dollar as a currency currency of the world is not a privilege, but a costly burden that has played an important role in the de -industrialization of the American economy. The worldwide demand for dollars, the argument, increases its value and makes US stated goods more expensive than imports. This in turn leads to persistent trade deficits and drives US manufacturers to move the production overseas and take jobs with them.

Is there a truth in this narrative? The answer is yes and no. It is certainly plausible that foreign investors who want to hold US shares, bonds and real estate could generate a steady flow of capital into the United States that accept domestic consumption and increase the demand for tradable goods such as cars and not traditional and not traditional and restaurants. A higher demand for non -irradiated goods tends to improve the value of the dollar and to make imports more attractive to American consumers, just like Miran.

This logic also overlooks important details. While the status of the Dollar reserve wand increases the demand for government bonds (financial statements, financial bonds and finance ministry), this does not necessarily increase the demand for the demand for all US assets. Asia Central banks, for example, stick to financial exchanges to stabilize their exchange rates and maintain a financial buffer in the event of a crisis. They generally avoid other types of US assets such as stocks and real estate because they do not serve the same political goals.

This means that, if they just have to accumulate financial statements, this means that no trade surpluses have to carry out in order to obtain them. The necessary funds can also be collected through the sale of existing foreign assets such as stocks, real estate and factories.

This was exactly what happened in the 1960s until the mid -1970s. Until then, the dollar had established itself as a global reserve currency, but the United States almost always led a current account surplus – no deficit. Foreign investors collected US state bonds, while American companies expanded abroad by acquiring foreign production systems, either through direct purchases or through “Greenfield” taughts in which they were built from scratch.

The post -war period was hardly the only time when the country, which spent the global reserve currency, carried out a current account surplus. The British pound was the undisputed global reserve currency from the end of the Napoleonic War in the early 19th century until the outbreak of the First World War in 1914. During this period, Great Britain generally carried out external surpluses that were strengthened by high returns for investments in its colonial empire.

There is another way to interpret the US balance sheet account in order to explain why the relationship between the exchange rate and the retail force is more complicated than suggests Miran's theory. In accounting, the current account surplus of a country corresponds to the difference between national savings and investments by the government and the private sector. It is important that “investments” here refer to physical assets such as factories, living space, infrastructure and equipment – no financial instruments.

When considering this lens, it is clear that the current account deficit is influenced not only by the exchange rate, but also by everything that influences the remaining amount between national savings and investment. In 2024, the US finance deficit was 6.4% of GDP, significantly larger than the current account deficit, which was below 4% of GDP.

While closing the budget deficit would not automatically remove the current account deficit – this would depend on how the gap is closed and how the private sector reacts – it is a much simple solution than the introduction of a trade war. However, reducing budget deficit would include the difficult political task of convincing the congress of adopting responsible tax and expenditure calculations. And in contrast to a top -class trading confrontation, it would not cause foreign guides to found the favor with Trump. Instead, it would attract the attention of the media to domestic politics and the negotiations of the congress.

Another key factor for the current account deficit is the strength of the American economy, which has been the dynamics of the world's main actors in recent years. This has made us particularly attractive to companies for investors. Even production has grown to a share of GDP. The reason why employment did not keep up is that modern factories are heavily automated.

Miran's plan, clever, as it may be, is based on a faulty diagnosis. While the role of the dollar plays a role as a leading reserve currency worldwide, it is just one of many factors that contribute to the ongoing trade deficits of America. And if the commercial deficit has many causes, the idea that tariffs can be a panacea is at best doubtful.

Kenneth Rogoff is a professor of economy and public order Harvard University. From 2001 to 2003 he was the chief economist of the IMF.

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