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An Economic Advisor’s Weird Theory
Steve Miran is the Chairman of President Trump's Council of Economic Advisors.
CEA Chairman Steve Miran Hudson Institute Event Remarks – The White House, Apr 7 2025
Today I’d like to discuss the United States’ provision of what economists call “global public goods,” for the entire world. First, the United States provides a security umbrella which has created the greatest era of peace mankind has ever known. Second, the U.S. provides the dollar and Treasury securities, reserve assets which make possible the global trading and financial system which has supported the greatest era of prosperity mankind has ever known.
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Let me clarify that by “reserve currency,” I mean all the international functions of the dollar—private savings and trade included. I’ve often used the example that when private agents in two separate foreign countries trade with each other, it’s typically denominated in dollars because of America’s status as the reserve provider. That trade entails savings housed in dollar securities, often Treasurys. As a result of all this, Americans have been paying for peace and prosperity not just for themselves, but for non-Americans too.
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I’m an economist and not a military strategist, so I’ll dwell more on trade than on defense, but the two are deeply connected. To see how it works, imagine two foreign nations, say China and Brazil, trading with each other. Neither country has a currency that is trusted, liquid, and convertible, which makes trading with each other challenging. However, because they can transact in U.S. dollars backed by U.S. Treasuries, they are able to trade freely with each other and prosper. Such trade can only occur because of U.S. military might ensuring our financial stability and the credibility of our borrowing. Our military and financial dominance cannot be taken for granted; and the Trump Administration is determined to preserve them.
From an economic standpoint the theory Miran describes is bonkers. "Savings housed in dollar securities, often Treasurys" are not U.S. savings as he implies. They are money the U.S. has borrowed, i.e. the savings of foreigners.
His example of the U.S. dollar enabling trade between Brazil and China is just as wrong as his treasuries theory:
Brazil, China ditch US dollar for trade payments, favour yuan – News.au, Mar 31 2023
Brazil has just cut a deal with China to ditch the US dollar when paying each other for trade goods. It’s the latest victory in Beijing’s long-term drive to stomp on the greenback and establish the yuan as the dominant international currency.
The deal, announced Thursday, has revived concerns about the US dollar’s future.
Brazil and China will directly exchange payments without first converting their currencies to a trusted third-party economy.
That’s the traditional role of the greenback.
These ain't just small numbers:
According to Chinese customs statistics, the bilateral trade volume between China and Brazil in 2023 was US$181.53 billion, a year-on-year increase of 6.1 percent. Of this, China’s exports to Brazil amounted to US$59.11 billion, a year-on-year decrease of 4.3 percent, while imports from Brazil totaled US$122.42 billion, a year-on-year increase of 11.9 percent.
Brazil is not alone in doing this. Several other big countries, Russia, Saudi Arabia, Iran etc., have dropped U.S. Dollar intermediation in trade with China.
The Trump administration is aware of the problem:
Elon Musk @elonmusk – 22:51 UTC · Mar 29, 2023
Serious issue. US policy has been too heavy-handed, making countries want to ditch the dollar.
Combined with excess government spending, which forces other countries to absorb a significant part of our inflation
Steve Miran says the U.S. military ensures the "financial stability and the credibility" of U.S. borrowing. It does so only in that it destroys small countries which are trying to turn away from trading in dollars. Iraq and Libya are prime examples of this.
Brazil and China are too big to extort them. The consequences of Trump's tariff mania will show that again.
“From an economic standpoint the theory Miran describes is bonkers. “Savings housed in dollar securities, often Treasurys” are not U.S. savings as he implies. They are money the U.S. has borrowed, i.e. the savings of foreigners.”
Yes, well, despite the relative decline of US industrial production (but not so much in agricultural production) a lot of treasuries are domestic. Also, yes, well, foreign purchases of are indeed potential debts of the US government. That’s why some have floated schemes to convert some (all?) US treasuries held by foreigners into perpetuity bonds, where the principal is never repaid. A Mar-a-Lago accord, reportedly promoted by Miran himself, to effectively devalue the dollar so that the US can retake its so-called fair share (according to Trump) is another possibility, unaffected by who holds title to USTs. Effective inflation is a time-honored way of paying debts down, at the expense of the creditors—in this scenario also including foreign holders of USTs. And of course, the US could theoretically simply sequester foreign held treasuries. That would be a version of selective bankruptcy, which is a huge moral no-no in liberal economic and political theory, if morals matter. Aside from these considerations, there’s the question, why is it always bad for the US government to take foreigners’ money, and pay interest some time down the line? Some might think that this is an economic mechanism smacking of imperialism. The practical question is, when will foreigners stop parking their money in USTs as a safe haven? They don’t buy them to make money but to protect money. They won’t in general stop until they have a better safe haven, if not more profitable ways to make money such as investing in their own national economies.
I think the key takeaway from Miran’s remarks was:
Such trade can only occur because of U.S. military might ensuring our financial stability and the credibility of our borrowing. Our military and financial dominance cannot be taken for granted; and the Trump Administration is determined to preserve them.
The open confession that Trump is not a populist of any sort, and is totally committed to imperialism, and that the US dollar is founded on blood, not gold, nor even its share in world production, is notable. The larger portion of MoA commentariat suffering illusions about Trump should take note. [Trump Chaos Agent of Accelerationism do wrong I think because accelerationism is a crock, thus they simply function as high-brow apologists.]
There are three aspects to the dollar. There is the famous reserve currency function, which by the way gives the US substantial (as I understand it) advantages in arbitraging other currencies. Individual opportunities for such arbitrage occur only temporarily, but over time repeated because inevitable so-called market imperfections give the currency is widest use the edge. (See https://en.wikipedia.org/wiki/Triangular_arbitrage for a start.) The less important this arbitrage is, the less important the current moves away from Swift/denominating exchanges in dollars are. Worse, the setting up of new systems always threatens merely to give some other currency the arbitrage edge, making it difficult to set up such a system. Simply dealing bilaterally will almost certainly create issues with relatively permanent imbalances in trade, where one country accumulate a foreign currency it has less use for. A reserve currency serves legitimate uses in trade, as well as nefarious ones. For one thing, it serves to break the golden chain, which could threaten to strangle world trade due to dearth of gold aka money. Overall a smaller world economy has less growth or worse because large markets have greater opportunities, if only due to economies of scale.
Another aspect is, the dollar is the currency issued by the de facto lender of last resort, the US Federal Reserve. See Adam Tooze’s The Crash, for mind-numbing detail demonstrating I think the Fed acted as such. Despite economists’ repeated rediscoveries of cure for capitalist crisis, financial crises on a large scale are weathered best when there is such a lender. Doing without such a lender would tend to depress growth worldwide by increasing the potential risk.
And a third aspect is, provision of liquidity. This is the role provided by the USTs. World economy is capitalist/imperialist. They need liquidity for financial operations, which are and have always been essential to capitalist growth. In English the role of the Bank of England and the English public debt, or in the US, the achievements of the Federalists (well, maybe essentially Hamilton?) depended on government debt. Even in the earliest phases concentration of capital in the hands of the winners of speculative bubbles like tulip mania or the Mississippi or the South Sea bubble ultimately concentrated capital, however much they hurt the losers.
The fall of the dollar is not a thing until all three functions of the dollar are replaced by something else (or another country becomes the top imperialist power, if that’s an improvement?)
Posted by: steven t johnson | Apr 8 2025 17:51 utc | 35
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