More Trump, More Jobs, and Dollar Depreciation
By JC Collins
When Trump states that the US polices the world for very little and other nations will have to begin paying their share of the costs what he is really communicating is that the worlds monetary framework has begun to shift, or will be shifting in the near future.
In order to decipher this continuously repeated phrase we must first understand why the United States has policed the world in the first place. It is obvious that this safeguarding of the international community wasn’t a product of America’s overwhelming desire to spread goodness and be a beacon of hope in a mad world. The main purpose and function of America’s geopolitical role in the last seven decades has been a product of the monetary framework.
Since before World War Two the US dollar has been used as the international reserve currency. It was given official recognition and sanction as such at the Bretton Woods Conference in 1944. The importance of this role provided the US the ability to fund a large military force and export inflation around the world to other nations.
Much has been written on the Triffin Paradox both here on POM and elsewhere. A simple search on this site, or across the internet, will provide a large volume of information to help the reader understand how using the domestic currency of one nation, such as the USD, as the international reserve currency, has caused global imbalances and created a deflationary environment worldwide.
America willingly policed the world for the simple reason that it has been the US dollar which has been accumulating in the foreign exchange reserves of nations all around the world. I always like to think of it as protecting your business interests. America footed the bill as the international policeman in return for having its currency positioned at the apex of financial importance.
This USD denominated framework allowed the US to run large fiscal deficits and fund a massive military machine, which was subsequently used as the tool which policed the world. This setup also had its drawbacks though. With the exporting of US inflation to other nations, mainly emerging countries, American jobs and factories also packed up and moved to other regions.
The obvious reason for this is that the US dollar could not depreciate since it was the international reserve asset which all nations accumulated in their foreign exchange reserve accounts. As such, the currencies of other nations, especially the emerging nations such as China and Vietnam, depreciated their domestic currency through the exchange rate regime which they maintained with the US dollar.
This is what is meant by the US exporting its inflation around the world.
The more US dollars they accumulated through trade, the more domestic currency they had to print in order to purchase those dollars, which causes inflation and is amplified by having to devalue their currency even further to maintain the exchange rate peg.
Companies that operated within America found that they could not compete on the large international market with products that were made in America. With the US dollar so strong against the currencies of other nations, the exporting costs made those goods unaffordable in other economies. The obvious thing to do was move production to those nations and capitalize on the lower labor costs so that those products could be produced at a lower cost and imported back into America with huge profit windfalls, based on the value of the dollar.
Trumps continuous use of the catch phrases “they’re going to pay” and “bring jobs back” are in essence expressing the same concept. As the USD depreciates the framework and methodology described above will begin to reverse. The US dollar will be allowed to depreciate as a multicurrency reserve system begins to take effect. This will likely be a re-balancing between the USD, the euro, and the Chinese renminbi.
At least at first. The SDR of the International Monetary Fund will play a broader role down the road, but for now we will stay focused on the national currencies themselves.
As the dollar depreciates, or the other countries appreciate, which amounts to the same thing, American companies will bring production back to the US and jobs will increase at a dramatic rate, just like Trump is expressing.
It is interesting to note that all the other candidates are now using the same language as Trump when it comes to jobs and companies moving factories back to the US.
The American military will still be used to protect US interests, but those interests are now going to change. The need to police the whole international financial system will now be replaced with having to police specific regions which are more aligned with America’s new multilateral position within the emerging monetary framework.
This is being promoting to the American people as a form of nationalism, which fits with the overall message of Make America Great Again.
How this all plays out in the coming months and years may serve to be problematic. There are varying degrees of acceptance and alignment with the rest of the world. We are beginning to see China, Japan, and others openly express their opinions on a Trump presidency. Whether this is gamesmanship or outright resistance to America’s changing policies will have to be seen.
But what is obvious to most readers now is that massive change is taking place. This change has its roots in the evolution of the monetary framework which we have been discussing for over two years now. This change is beginning to externalize through geopolitics and domestic American politics. When we filter Trumps comments through what we have learned about the multilateral financial transition, we can begin to see what is coming our way. – JC