To the impartial observer, it should be quite obvious that the US government’s trade policy strategy is currently failing spectacularly. Chinese President Xi Jingping is refusing to call to make a ‘deal’. The car tariffs, which were supposed to help the US auto industry regain its former glory, have to be withdrawn. The tariffs on USMCA imports have also come to nothing. In short, the entire house of cards of justifications for tariffs, based on the mistaken belief that the US could extract economic, political, and/or military concessions from the rest of the world in exchange for access to the US market, is collapsing on the US president and his MAGAists, Commerzbank’s FX analyst Ulrich Leuchtmann notes.
MALA plan risks undermining Treasuries’ safe haven status
“In a free market trade only happens when both sides benefit. Abolishing it also hurts the US economy: they deny others access to their market and deny themselves access to foreign products. This should also put an end to Stephen Miran’s idea of a ‘Mar-a-Lago accord’ (MALA). On the one hand, there was the idea of committing the rest of the world to coordinated USD weakening. MALA in the narrower sense, so to speak. And then there was the idea of forcing foreign central banks to convert their reserves into interest-free or low-interest perpetual bonds. Economically, this would be equivalent to the US Treasury waiving all or part of its liabilities to foreign central banks.”
“I don’t even want to imagine what would happen if the US were to force a large group of creditors to restructure. The safe haven status of T-notes would be gone. Forever and ever. The problem with this is that only its safe haven status allows the US Treasury to pursue its expansionary fiscal policy. Anyone who grants credit to a normal debtor only does so if they expect to get the capital they have lent back. For the US Treasury’s creditors, this would mean that they would have to trust that they would be paid from future primary budget surpluses. The problem with this is that such surpluses are hardly to be expected: the US Treasury’s primary budget has been in deficit for over 20 years.”
“If the US president were to destroy this characteristic of T-notes, the US Treasury would have to present a convincing plan for a permanently restrictive fiscal policy. If it cannot do so for political or economic reasons, the US faces a ‘Liz Truss moment’: exponentially rising yields. In my opinion, forced restructuring would undoubtedly destroy the ‘safe haven’ characteristic of T-Notes. Then this policy would also fail – as the tariff policy is currently failing. Only then would the crash be louder and the collateral damage greater – including in terms of USD weakness.”