Lots More on JD Vance and the Future of the US Dollar

in the know if you make this point. Is this notion that maybe the central role of the US dollar the reserve currency status is not so great for the US, and he has made that point in interviews and I think even in some testimonies that like he's not crazy about the dominance of the US dollar.

the Republican right. It's obviously also, I mean you probably saw the article that Robinson Mayer wrote, and he did. There's a lot of people in the Biden administration whove also read the book and I think gotten some good

takeaways from it. So this is you know, it's interesting to see that having a really cross part is an appeal even if the types of people who liked him been very different from each other are very different and their priorities for other things, but they seem to appreciate the analysis we put together.

there was a little bit of tension there. But I guess as time has gone on, he's sort of migrated towards clearly like this idea that actually the preserve currency status isn't that great for the American economy.

it is some point the words. But yeah, I mean, I think at least it would be more coherent to say say it the way it sort of the advances laid out that the use of the dollar outside the United States and its popularity as a place for foreigners to save money in dollars, that that has harmful effects the United States because it makes a dollar relatively more expensive than otherwise would be that at least is a coherent point if you can disagree with it, but it's

coherent as opposed to saying we want the dollar to be cheaper and it's great that the dollars reserve currency.

on faith. But what do you remind us? What is the gist here of why maybe it's not so good?

But in general, what it means is that your financial system, your domestic financial system, has evolved and adapted to meet the needs of foreign savers and borrowers at least as much as people in your own country. And that means that what people outside your country want to do can potentially have big impacts on your domestic economy because that's where the adjustment ends up happening. And that can be good or it can be bad, depending upon or at

least it needs it should be managed. Yeah, if it's not man some way, can lead a lot of real problems. So in the case of the United States, what this is meant is that over the past forty plus years or so, the overall preference of foreigners has been they want to spend less than they earn and save the difference by buying financial assets. And what that is meant is that Americans have to be on their side of this and borrow more selling financial assets to them in exchange.

That's what has happened to have been the case for the past forty plus years. And what that's meant is that Americans have been borrowing more than otherwise they would. That means more debt, and it also means some combination of either incomes being lower than the otherwise would be

or spending being higher. Now, whether this is good or bad, or how it translates into what the American living standards and living stands in the rest of the world, that depends a lot of specifics, and that's where it's important to get into kind of the nitty gritty and say, well, we don't necessarily want to just you know, close the trade deaf sip by any means necessary. One way to do that, of course, is you just impoverish Americans so

they spend less. That's not good, right, which, by the way, it used to be sort of the orthodox view of people, all, well, if you don't like the current account deficit, it's because the budget, the federal budget debtsit stubis we need to raise taxes and cut spending. Which is essentially saying that because other people in the rest of the world for whatever reason, are choosing to live below their means, in other words, spending less and consuming less than they're producing,

that therefore Americans have to live worse off. And that doesn't make sense. Obviously, it'd be better if people in the rest of the world live better, and that would encourage a healthy rebalancey in the US where we were genering more income selling the foreigners. But that's you know, if that's not going to happen, then the question is

what do you do about it? And you know, we wrote in the book most of the book is just sort of explaining all this in more detail, providing some historical context, showing it across different countries and time periods. But you know, the conclusion we did say, okay, well you've read all this, hopefully you understood it and taking it in like what is that? What are the implications for a country like the United States. And you know, Michael and I had a bit of a you know,

discussion about how to put that writing. The coclusion was very hard to sort of synthesize different points of view, and I think we came to a good sort of constructive synthesis here and basically saying, if you think that foreigners and can change their behavior and they're just going to continually be this net inflow of finance in the United States, and you know, the corollary being that people in the rest of the world are going to be producing a bunch of things are not using for themselves

and selling it to Americans, then there are things that the US can do to make that as beneficial for Americans as possible. The first thing is if someone is going to be borrowing, because someone in the US is gonna be borrowing to offset this, it should be the federal government because you know their ability to service the

debt and not face runs. And so if it's going to be much better than a private sector, the private sector borrows even if people still want to buy dollar assets and not always going to want to buy those private assets, and that great real problems. That's what happened in the two thousands, right there was there was never a situation where foreigners stopped wanting to hold dollars. They just wanted to stop holding particular types of dollars, and

that created all sorts of runs. If it's the federal government's less likely to be an issued. Okay, so that's that's one thing that's like step one. Then step two is because you want to make sure your private sector is not being reasonably you know, burdened by this, and then you say, okay, well we should figure out useful things we can do with the money, right, I mean, if the government has been borrowing a lot more than otherwise,

would be as well find things that are constructive. So one thing you could do, which I think would make sense to say, okay, well, obviously, you know, you have a society with some people are poorer than others, some people are more financially constrained than others, some people are more indebted in than others. If we can, you know, to a certain extent, increase overall incomes and living standards

for people, that would be constructive. Right. People would have more money, they'd be more financially secure, less curious, they could buy more things that would be good for jobs and incomes and well being and social being and so forth. That's one thing you could do, pretty straightforwardly. Another thing you could do is you could say, we have a

lot of unmet investment needs. We know what they are just because the various reasons you know, where there have been backlogs and even done them, or the things we think we're going to need in the future, and you can say we can borrow, have the treasury borrow at you know, relatively lower rates than otherwise would be the case, and support the financing of these investments that would be productive and hopefully again make people's living standards higher in

the future. And then the last thing that I think would make sense in this context is to the extent that foreigners are consuming less than you'd otherwise expect based on what they're producing, and they're creating relatives to that and excess of production and selling it. You just want to make sure that America's ability to produce things, or whatever country we're talking about here doesn't have to be the US could be like the UK isn't unreasonably displaced.

There are reasons why it's good to have a sufficiently large, diversified complex manufacturing sector in your country, for productivity reasons, for national security reasons, and you want to be able to preserve that and not have it unreasonably Obviously they're technological changes or whatever things like that happens, you know, it doesn't necessarily make sense for the US to have a huge T shirt manufacturing industry, but you don't want

to have a situation where, because of people's saving preferences which are totally unrelated, that like the US manufacturing sector or for other countries that supplies is not unreasonably demolished, and so some it makes sense in that case that have some government spending set aside to make sure there

is always demand for American manufacturing. And if you have this perspective, which is what we laid out in the book, you can, I think reasonably say that in many ways, a lot of we've seen in the past three years has really been you know, consistent with that that kind of policy making. I think that's constructive.

be like the big contradiction here. And I also feel like you could make a very strong argument that if we've learned anything from the past few years in terms of Americans economic preferences, it's that Americans hate inflation a lot more than they seem to like full employment. Right, So, like, how does all this come together and actually impact prices?

that it is contradictory. I mean, I think you could plausibly put together a sort of a reflationist agenda, the kind of thing that would have made a lot of sense and say two thousand nine twenty ten. You know, but does that fully make sense now? Or if it does make sense now, like, are people prepared to accept the full consequences of that? And I think the answer is probably no, Right, I mean, first of all, compressing the trade deficit for two sides. Then right, you can

lower imports, so you can raise exports. If you do it by lowering imports, then again, I mean one way of doing that is you somehow manage to make more things domestically and so you have less need imports stuff. Okay, fine, Or you do it by just buying less stuff domestically because you're poor, or you're just buying less stuff. So again there's like all these different layers of how this

plays out. Also for exports. By the way, you can increase exports because you're selling less stuff in your home market but you're able to sell it somewhere else, or because you're just producing more and as a consequence, you know, whatever share as export goes up. So there's four different

possibilities there. You can have different combinations. They all have different implications for living standards, for potential interactions with how much spare resources are available and what that might mean for inflation. And so you know, it's dangerous to oversimplify these things and just say like, oh, we want to have a narrow or trade depths. I mean, what you should care about is things like financial stability, things like full employment, things like making sure that you know you're

having a diversified, you know, sophisticated domestic production base. That's tricky, but I mean that's kind of I think how it would makes sense to prioritize things, right.

the European economy in the aggregate is very large. It is sophisticated, has got a lot of stuff that The European financial market in the aggregate is again large, it is open, but there's a lot of issues they have in terms of fragmentation, in terms of legal regime, in terms of just weird ideological biases against you know, government borrowing particularly you know, again encourage the fragmentation, and so that basically they're really punching below their weight. I mean,

that's sort of the most obvious one. You can also talk about Yuan, which is a different story, but like Europe's so obvious one. And so from foreign policy, like there are situations where sometimes you have disagreements in the US and Europeans about foreign policy. But the really big stuff that's happened recently there's been locks up, and same thing with Japan and Switzerland, and so you could have

a more diverse, pluralistic regime of financial systems. And nevertheless, you know, for when things matter, I mean, you talk about sanctions and banks, like there's an element where cutting off banks is important, but also what it is is like you are being cut off from our real economy as well, and to the extent that the real economy of the US and allies writ large is still very large relative to the global total, and very very large when it comes to you know, certain sort of essential

high tech components. You'd be able to swing a big stick if you want to. Even if that were not the case, I think that people shouldn't They should not be so afraid of that outcome that they you know,

ignore what's gooding and policy. And by the way, I should also add that sometimes you hear people make an argument that sanctions are bad because it undermines the reserve status, which I mean, that's just circular, right, Like the whole value of reserve status are being popular is that you can do sanctions, then you can't do something like I mean, that doesn't make sense.

in a way that was coherent. Is you say, you know, screw that, we're just gonna We're just gonna both you know, it's their problem, right, And basically what you would do is you have some kind of you know, capital controls or what the IMF now calls capital flow management measures I think is the term they came up with like ten years ago to But you know, if it's literally the case that foreigners cannot buy us financial assets or you make it prohatively expensive for them to do that,

that would have all sorts of other effects. And basically what that would be very chaotic, or could be very kotic, could be very you know, a narcic could end up leading to an overall poor world. Certainly, I think then the one where we have a kind of constructive approach. But if your view is foreigners are never going to change, and you don't want to do the things we laid out.

Because to be clear, the alternative path that I mentioned earlier, it does come I think it's overall beneficial, but it does come with one specific cost. What is that federal debt would probably rise to GDP. I think overall that's not a problem, but that is like one specific thing you could point to, and if you for some reason really don't want that, then the alternative is you say, look, you have these, you know you the rest of the world collectively produce more then you use. You can't sell

unless you sell to us. So now we're saying you can't sell to us, good luck figure it out. That's going to hurt Americans initially at first, but it's going to hurt other people more probably, And so that's where that as the alternative. I mean, you can sort of see, I mean they stent that there have been people and across the political spectrum feeling receptive to what we wrote in the book. I mean you can see that as

being a divide like which approach you prefer. I mean, I think you can tell from what I'm saying what I think makes more sense. Obviously, Another really good thing would be, you know, the places that have these sort of persistent under periods of under consumption, you know, Europe and China most obviously, but not exclusively, if they you know, increase their own living standards, that would also be very

helpful increasing consumption and investment where appropriate. But if that's not going to happen, or you've not skeptical, if you're not sure it's going to happen, then it's okay. Well you can really try to force them to try to figure it out, or you say, okay, we're just going to take advantage of ourselves and you know, a relatively you know, constructive positive some way.

before where the Democrat won. I guess the Garfield was against the tariffs, but they didn't and managed to repeal them. So you had a big increase that was you know

from I'm going to but your memory. Yeah. The point is the tariffs had been raised in the eighteen eighties, very early, very early to in state high The thing that arguably was really helpful for McKinley specifically, is you had big discoveries of gold reserves in the late eighteen nineties and exploitation of those reserves, and that east global monetary conditions after a long period in which gold supplies were dwindling relative to you know, financial needs, and so

that probably more than anything else, was significant. That wasn't obviously helpful just for the United States's helpful for everyone. And so if I were to sort of pinpoint something specifically, that would be, you know, if you have a big campaign about the golds. I mean that's partly also why you know, like the Brian campaign kind of fizzled. It was like, okay, well you're talking about how gold is so restrictive right at the time when gold supply is

going up, like nobody's carrious, huh. And so that I think was definitely a helpful tale end for McKinley. More broadly for the US. I mean, it really goes back to the Napoleonic Wars, you know, a long time earlier, where the US has just cut off, you know, against its will, from trade with Europeans. You know, that was a very extreme trade baron that forced the development of

an indigenous industry. And then ever since then you had, obviously with some fluctuations over time, but support for very kinds of protective tariffs that lasted basically until the end of World War Two, with fluctuations up and down.

We could just do it all with tariffs. Like what happens if we get like true hardcore tariffs around the world? Like, how does that play outenview?

of stuff. So I just got all that. In general, what you would expect to happen is that if you put tariffs on things, then it means that because the price is more expensive to import it from abroad, that you encourage production of that thing in the United States. And if you do it for everything, then it's moved

a lot of stuff. Now what that does with the trade balance is ambiguous, because presumably that creates an incentive because the US is a large domestic market to invest in the United States to be able to produce those things.

Oh yeah, and maybe you say that's the gold policy, But that doesn't necessarily mean it's going to have impact on the trade balance because you still to import all the stuff to invest I mean not importing everything, right, but there's going to be a degree you know, you're building up your capacity unless you're squeezing consumption some other way, right,

Like something has to give. And so that's why I mean, usually what ends up happening is the textbook thing is that your currency will appreciate if you put on tariffs. That's how it's sort of supposed to work. I mean, maybe it doesn't always do that, but by the way, that's why the textbook answer is that tariffs hurt your exporters. It's not because that like retaliation although that is certainly a factor. It's because the currency effect means that your

imports are the same and then your export. That's the sort of traditional argument. Now you can argue that there's specific cases where that might not be the case. It

pritpends on whether it's revenue usual. Right, if you have a ten percent tariff on all imports and you don't offset that with some tax cut or spending increase elsewhere, which is not what anyone suggesting, but leg just hypothetically, that's something like a fiscal tightening of around one percent of GDP And obviously and that skewed towards in many ways consumer goods. So like that might reduce the trade

deficit insofar as it reduces income and spending power. But that's not something that makes you, I mean, that's not say, a good thing, right, So it's a form, it's it's like a weird way of doing, like a sales tax or something in that kind of scenario. The other broader picture is if you are focused on shifting the composition of economic activity, which is what you're essentially trying to do with a sort of universal tariff, you're saying, you know, we actually do want to make more T shirts in

the United States versus import them. And assuming you're already and this is a big assumption, but assuming you're already at sort of full capacity in terms of your labor and material and capital resources that are available in your country, then that means that people are going to be doing there's gonna be some shift for people doing stop doing things they were doing that presumably now people think are valuable to switch to doing other things that we need

that we you know, because we're you know, we're cut off now ten percent tariff probably not gonna do that. So it's like small percent terms sort of like one hundred percent tariff or whatever like that. There's a point at which that would happen if we just sort of stretch out, you know, and think about what this means

in theory. And that's the argument for a while, you know, it makes people worse off, and why it impoverishes you over time because the thinking being like if you used to be going from making some valuable software healthcare thing and now you're doing you know, T shirt assembly or something, right, I mean, this is like you're going to be poor as a society, and so do you want to do that, and like the argument normally is no. Now that's different

from talking now the teriffs that we actually have right now. You know that both that Trump did and that Biden have done are much more targeted on specific countries and industries. So it's not really equivalent to that. And you can argue that's for national security reasons as much as anything else, and so that's like more complex. But I mean we're talking about it's like what the conception of broad based tariffs like that I think is the way to think about it.