Trump Wants to Destroy the Dollar

So there’s this fox… and there’s this goat.

And the goat is wandering through a field one day when he hears odd noises nearby.

The goat follows the sound and soon comes upon a well and looks in—and sees a fox at the bottom of the well.

“What are you doing down there?” the goat inquires.

“What—are you stupid?” the fox replies, indignantly. “There’s a massive drought coming—some say the worst drought ever. They’re calling it the Fox Drought. The biggest drought. Very dry in terms of not wet. So being the smartest animal in the world, I jumped into this well because I will always have access to water while you and all the idiots who are not as smart as me die from the heat. If you want to live, you should jump down here too, goat. Otherwise, you’re just another of those idiotic idiots who don’t see how wise I am for having fallen, I mean jumped down here in the first place.”

A concerned look spreads across the goat’s face.

“Hmmm,” the goat mutters. After a moment of contemplation, he says, “You know—you make a good point. I’ll join you.” And he jumps into the well.

Just as he lands, the fox leaps onto the goat’s back, then leaps out of the well.

Free, he turns back to look at the dumbfounded goat, and says, “Never take advice from a fox in a difficult situation.” The fox cackles loudly as he trots away…

With homage to Aesop, and an apology for tweaking his tale a wee bit.

Now, moving on…

I’ve noted in a few recent dispatches that I was in Portugal’s beachside Algarve district recently, speaking with attendees at International Living’s Fast Track Europe conference. And one of the topics that kept coming up was an increasing concern that America seems to have no real solution to deal with its rapidly growing debt.

However, as I told the many who stopped to chat, I think there is a solution.

It’s an ugly solution.

A painful solution.

A solution that will slam American families and very likely precipitate the dollar’s loss of reserve currency status…

But a solution, nonetheless.

And one that, it would seem, Team Trump is eager to potentially pursue.

That solution: Default.

Now to be clear, Team Trump will never label its plan as a default.

It will call it a restructuring of America’s debt… or better yet, it will say it has “successfully refinanced America’s debt by negotiating lower interest rates that benefit all Americans, and—see?—Joe Biden was never smart enough to think of this!”

But no matter the spin or the “newspeak” that the administration trots out, the plan is ultimately about a default.

First, let’s set the stage:

• America has $36.7 trillion in national debt, 123% of GDP.
• Uncle Sam pays more than $1 trillion per year in interest payments, about 15% of the federal budget.
• This year, $9.2 trillion in US Treasury debt will mature, 25% of the entire debt load.
• That debt currently carries an interest rate of roughly 2.5%.
• If the debt were refinanced at presiding rates, the interest rate on new debt would jump to between 3.8% and 4.8%, depending on maturity… meaning the $1 trillion in debt repayment costs jumps markedly (painfully) higher.

Two further points that are relevant background:

• American manufacturing began moving offshore in the early 1980s because the US dollar was exceedingly strong and US manufacturers simply could not afford to build in America and sell globally.
• That excessively strong dollar gave rise to 1985’s Plaza Accord, in which the US and her major trading partners—namely, Japan, the UK, and West Germany—agreed to destroy the value of the dollar as a way to, hopefully, save US manufacturing (ultimately, the move was simply too late).

Stage set, we move on…

Team Trump realizes that a boatload of debt is due this year; that the debt promises to force Uncle Sam into even greater borrowing (that hampers Trump’s ability to pass a tax plan that will cost the country another $7 trillion in debt); and that if Trump can force the dollar lower, then just maybe he can entice companies to onshore their manufacturing processes (laudable, but as I’ve written elsewhere, not likely).

But how to accomplish all of that?

By renegotiating America’s existing debt.

Trump is throwing tariffs around like he’s throwing spaghetti at a wall because he wants to force countries to the negotiating table, where he is likely to threaten them with this knot of a solution set that benefits no one but America:

1. Sell dollars and force the value of the greenback lower.
2. Send your manufacturing plants back to America.
3. Willingly trade your existing US debt for “zero-coupon century bonds” or we raise tariffs to extreme levels on your country and we take away all US military protection.

I’ve talked about Trump’s desire for a weaker dollar in previous dispatches, and I’ve noted that bringing manufacturing back to America, while an admirable goal, is likely to prove underwhelming in terms of creating new blue-collar jobs—because of how automatized today’s factories are.

Here, let’s focus on the zero-coupon century bonds.

Yes, El Jefe, let’s do that—and you can start by telling us what on God’s little blue rock is that?

Century bonds are bonds that mature in 100 years.

Zero-coupon bonds are bonds that have a zero interest rate. They’re issued at a discount to their face value, and then the owner collects the face value at maturity. The interest income is basically the rise in the bond’s value from its issuance cost to its maturity value.

So, a zero-coupon century bond is a bond that would mature in 2125, and it would likely carry a reduced interest rate.

Suddenly, the US is off the hook for $1 trillion—or more—in annual interest payments. And it would have no meaningful debt maturities for 100 years into the future.

And with that, Team Trump will have freed up trillions in cash (that could go to pay for his tax plan that benefits the super-rich by taking from Main Street Americans… not my analysis; that’s the analysis of a wide swath of non-partisan economists).

However, that’s a default. Plain, simple, dictionary definition of a default: Forcing a bond owner to accept something different than was originally agreed to.

If Germany expects a trillion dollars at maturity in 2027, and suddenly that repayment is pushed out 100 years… again, a default by definition.

It’s what overly indebted Third World economies do that then causes the International Monetary Fund to weigh in with restructuring plans to save Western lenders from the profligacy of banana republics.

If this happens—if century bonds emerge as a real solution set for the Trump administration—then the dollar is no longer going to maintain its reserve currency status.

No country will abide by that standard when they see that the country backing the reserve currency willfully forces a default onto lenders. It’s highway robbery at the tip of a drone and stealth bombers.

And when reserve currency status evaporates, well, that’s a nasty world we enter.

• The dollar plunges in value.
• Interest rates on new debt America must sell would soar (the US would still have to sell 1-month to 20-year paper because no one is going to willingly invest for 100 years).
• Those higher rates will force mortgages, credit cards, auto loans/leases, home-equity loans, etc. to surge, leading to inflation and likely a collapsing housing market (high mortgage rates will drive down home values, otherwise buyers cannot afford the interest payments).
• Inflation will rage because the dollar will lose such value that imports will become prohibitively expensive.
• Or, prohibitively expensive prices on imported finished goods and raw materials would see American consumers live a lesser lifestyle with (still expensive) lower-quality goods.
• Gasoline prices would soar since oil would no longer be pegged to the dollar. It would likely be pegged to a basket of non-dollar currencies, all of which will have risen sharply against the dollar, meaning the cost of a barrel of oil in dollar terms will rise dramatically. (And the fact that the US produces a lot of oil is irrelevant. Oil is priced globally, not locally. America would have to shut down oil exports and close the economy and force American producers to sell oil at low prices… and that’s a whole different set of planned-economy disasters.)

Just remember: When a fox tells you to jump into a well with him, he’s very likely got a very different agenda in mind—one that leaves you suffering while he trots away as a self-described hero.