While much of the recent focus has been on tariffs, another policy framework gaining attention in financial markets is being dubbed the Mar-a-Lago Accord. This framework seeks to put downward pressure on the US dollar to boost exports and bring manufacturing jobs back to the US.
Under this policy, the US will offer aligned countries security and access to US markets, and in return, these countries will agree to intervene to depreciate the US dollar, grow the US manufacturing sector, and solve the US fiscal debt problems by swapping existing US government debt for new US Treasury century bonds.
For those of us old enough to remember, this bears some resemblance to the 1985 Plaza Accord. Tight monetary policy under then-Fed Chair Paul Volker, coupled with expansionary fiscal policy during Reagan’s first term, drove up long-term interest rates, attracting capital inflows that led to an appreciation of the US dollar. By the mid-1980s, the US dollar had appreciated about 50 per cent against the yen, Deutsche Mark, franc and pound. This created significant challenges for US industries. Grain exports, the auto industry, heavy equipment manufacturers, and other sectors lobbied for protection from foreign competition. By 1985, Congress had begun passing protectionist laws, prompting the White House to negotiate the Plaza Accord to devalue the US dollar.
In September 1985, at the Plaza Hotel, the G-5 announced that “some further orderly appreciation of the non-dollar currencies is desirable” and they “stand ready to cooperate more closely to encourage this when to do so would be helpful.” Following the announcement, the US dollar fell 4 per cent against other currencies.
It took two years for the trade deficit to begin improving. While the Plaza Accord succeeded in reducing the US trade deficit with Western European nations, it largely failed to fulfill its primary objective of alleviating the trade deficit with Japan.
The Plaza accord worked through cooperation, whereas this plan appears to rely on coercion. Countries could be categorized as “green,” “yellow,” or “red” — foes, friends or adjacent countries. “Green” countries would receive military protection and tariff relief, but they must agree to a currency accord. Some “yellow” or even “red” nations might cut transactional deals.
Since tariffs may strengthen the dollar in the near-term, other countries could be “encouraged” to swap holdings of dollars, short-term Treasuries, or even gold for long-term or perpetual dollar bonds, suitable for repurchase deals at the Federal Reserve, to offset the fiscal impact. Alternatively, a sovereign wealth fund could accumulate foreign currencies such as EUR, JPY, and RMB to intervene in foreign exchange markets and help put additional downward pressure on the US dollar.
For markets, this raises three questions:
- How long will it take to make the necessary changes to US manufacturing production? (Likely many years.)
- Globalization has, for decades, put downward pressure on US inflation. Would a more fragmented global market lead to higher US inflation?
- Over time, will the rest of the world decrease its reliance on US markets while increasing its own defense spending? In such a scenario, what incentives would the rest of the world have to sign the Mar-a-Lago Accord?
Tariffs may be the start of a larger effort to realign the global trade and finance system.
Housing Affordability Watch
CMI monitors the latest developments and offers insights on solutions to Canada’s housing affordability crisis
Is CMHC moving the goalposts?
In June 2022, CMHC projected that 5.8 million homes would be needed to restore housing affordability by 2030, with filtering—adding a high volume of lower-priced, higher-density units—promoted as a key long-term strategy. But in its latest report, Canada’s housing agency presents a more cautious view around affordability, now framing the housing crisis as “a marathon, not a sprint.” Why the shift?
Read our latest Housing Affordability Watch for insights on the evolving narrative and the implications for Canada’s housing future: Is CMHC Moving the Goalposts?
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