Convergence: Part 1: Geopolitics




Part 1: Geopolitics


A User’s Guide to Restructuring the Global Trading System - The Administration’s Argument for Global Instability

For decades, the United States accepted the Triffin Dilemma, the economic dilemma where the U.S. was required to run trade deficits to provide the world with the reserve currency it needed to function.

The current administration has checked out of that arrangement. The goal is no longer global stability; the goal is the Mar-a-Lago Accord.  A deliberate, coordinated, and, if necessary, coercive, devaluation of the U.S. Dollar (USD).



The Overarching Goal

Trading partners must either share the cost of the USD’s reserve status or watch the U.S. unilaterally debase it to favor domestic manufacturing.



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Step 1: Implement Graduated Tariffs

Phase-in Tariffs to raise revenue and generate negotiating leverage.

The original initiative envisioned a 

  • 60% baseline tariff on Chinese imports and a 

  • 10% universal tariff on all global imports, 

Phased in predictably to allow for supply chain adjustments.  

In Feb 2025, the administration utilized the IEEPA to impose broad duties. 

  • 25% tariff was on goods from Mexico and Canada

    • 10% carved-out rate for Canadian energy resources. 

  • The 60% rate on China was largely used as a negotiating threat; 

    • The actual applied rate on Chinese goods was 10%-30% during 2025–2026 period as 'Phase Two' trade deal was sought.   

    • A 10% tariff was applied to Chinese goods

  • By April 2025, the 'reciprocal' tariff concept was expanded to a 10% global baseline, with threats to graduate these rates based on partner cooperation.   

The statutory basis for these actions faced a historic challenge. 

  • On February 20, 2026, the United States Supreme Court ruled 6–3 that the IEEPA does not grant the President the authority to impose broad global tariffs for macroeconomic purposes without explicit congressional authorization. 

    • Court invalidated the IEEPA-based tariffs

    • Administration immediately pivoted to Section 122, which permits the President to impose a temporary import surcharge (<150 days)



Historical Outcomes: The Shadow of 1930 and 2018

The historical efficacy of universal tariffs is largely viewed with skepticism by economists, primarily due to the risk of retaliatory spirals and domestic price inflation.

  • The Smoot-Hawley Act (1930): Raised duties on >20,000 imports to average rate of 20%. 

    • 65% decline in global trade

    • 31% drop in U.S. exports to retaliating nations. 

    • Resulting bank failures in agricultural regions and the shrinkage of global liquidity deepened the Great Depression.   

  • The 2018–2020 U.S.–China Trade War: U.S. imposed tariffs on ~$350bn Chinese imports.

    • Net loss of $79.4bn for the U.S. economy, as firms were forced to absorb costs / pass them to consumers.

    • By 2020, the trade deficit with China remained largely unchanged from 2017 levels, suggesting that tariffs without underlying macroeconomic shifts are ineffective at altering trade balances.
        

  • Revenue vs. Inflation: 

    • Tax Policy Center estimated that the Section 122 tariffs would raise $194bn. 

    • This revenue is offset by an average household burden of $1,230 annually. 

    • Historical outcomes suggest that tariff revenue tends to decline over time as importers shift sources or domestic demand falls, with revenue projected to drop to $69bn by 2035.  


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Step 2: Terming-Out Foreign Reserve Debt and Century Bonds

In an unprecedented attempt to manage the U.S. fiscal burden and discourage the 'inelastic demand' for Treasuries, the administration aims to pressure trading partners to convert their short-term Treasury bills into 'century bonds'.   

Implementation and Mechanism (2025–2026)

This policy was formally introduced as part of the 'Strategic Debt Management' program in early 2025. 

  • The U.S. Treasury has offered 'voluntary' swap terms to foreign official institutions—predominantly central banks in East Asia and the Middle East - whereby they exchange existing coupon-paying bonds for zero-coupon or near-zero-interest century bonds. The intent is to:   

  1. Reduce Rollover Risk: Convert $3.8 trillion in foreign-held official debt into instruments that do not require principal repayment for a century.   

  2. Lower Interest Costs: The 'One Big Beautiful Bill' (OBBB) Act projects interest savings of $700bn over a decade if these swaps are successful.   

  3. Weaponize Duration: Forcing foreign holders into ultra-long-dated assets reduces ability to 'dump' Treasuries in a crisis, as century bonds carry extreme price sensitivity to interest rate changes.  

  • Variation from the original initiative occurred as the Treasury realized that a 'forced' swap would likely be classified as a default by rating agencies. As a result, the initiative has shifted toward a 'tiering' system: 

    • countries that participate in the 'term-out' receive lower tariff rates, 

    • those that refuse face 'user fees' on their interest remittances.   


Historical Outcomes of Ultralong Debt Issuance

Historical data suggests that century bonds are successful for the issuer primarily in low-interest-rate environments, but they carry significant risks for the holder.

  • Issuer Success (Austria and Mexico): Austria issued a century bond in 2017 with a 2.1% coupon. Taxpayers saved a fortune as inflation subsequently spiked, effectively reducing the real value of the debt. Mexico issued century bonds between 2010 and 2015 to hedge against long-term interest rate movements, successfully placing about 7% of its total debt in such instruments.   

  • Creditor Volatility: Century bonds exhibit 'high convexity.' A 1% decline in long-term rates can generate a 40–50% capital appreciation, but a 1% rise can lead to catastrophic losses.   



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Step 3: Apply Currency User Fees and Transaction Fees

Implementation and the OBBB Act (2025–2026)

The implementation of 'user fees' has been partially realized through the 'One Big Beautiful Bill' (OBBB) Act of July 4, 2025.   

  • The Foreign Remittance Tax: 

    • A 1% excise tax was established on electronic transfers of funds from the U.S. to foreign recipients, effective in 2026. 

  • Withholding on Treasury Interest: 

    • Proposals to withhold a portion of interest payments on Treasury securities for non-cooperative trading partners have been drafted but not yet universally applied. 

    • These are referred to as 'strategic defaults' by critics and are intended to reduce the appeal of using the USD as a reserve accumulation tool.   



Historical Data on Capital Controls: The 1963 Interest Equalization Tax

The historical antecedent for taxing foreign capital flows is the Interest Equalization Tax (IET).

  • The IET (1963–1974): Proposed by the Kennedy administration to address the balance-of-payments deficit, the IET taxed U.S. persons’ acquisitions of foreign securities to make domestic investment more attractive.   

  • Outcomes: 

    • reduced capital outflows in the short term, with the deficit falling from $3.5 billion in early 1963 to a surplus in 1968. 

    • led to the 'de-nationalization' of the dollar by incentivizing the creation of the offshore 'Eurodollar' market, where dollar-denominated transactions occurred outside the reach of U.S. regulators.   

  • Implications: Historical data indicates that 'user fees' on currency or debt often result in 

    • capital flight

    • development of alternative financial infrastructures

    • trend currently visible in the rise of stablecoins and non-dollar commodity pricing in BRICS nations.   

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Step 4: Enact Supply-Side Deregulation and Cheap Energy Policies  

Implementation and the OBBB Act (2025–2026)

The 'Unleashing American Energy' Executive Order (January 29, 2025) mandated several critical changes:

  1. Fossil Fuel Expansion

  2. Regulatory Repeal: The 'Sunset Executive Order' directed agencies to set expiration dates for all existing energy regulations by September 2025. It also required the repeal of ten regulations for every new one issued.   

  3. Ending the 'EV Mandate'

  • R&D Expensing: Reinstated immediate deductibility for domestic research and development expenses.   

  • Bonus Depreciation: Extended 100% bonus depreciation for the acquisition of depreciable assets like machinery and equipment.   

  • Corporate Tax Realignment: Adjusted international provisions (GILTI, BEAT, FDII) to favor domestic manufacturing.     

Historical Data on Reagan-Era Deregulation

The current supply-side initiative is a direct attempt to replicate 'Reaganomics' (1981–1988).

  • Growth and Inflation: 

    • 26% rise in Real GNP and 

    • created 20 million jobs. 

    • Inflation plummeted from 13.5% to 4.1%.   

  • Creative Destruction: 

    • peacetime record 3.8% annual increase in manufacturing productivity. 

    • highest rate of bank failures since the 1930s.   

  • Fiscal Outcomes: 

    • Federal debt tripled under Reagan

    • U.S. moved from a net creditor to the world's largest debtor nation. 

    • The current 2025–2026 trajectory mirrors this pattern, with the OBBB Act projected to add $3.3 trillion to the deficit before accounting for interest costs. 

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Step 5 (Extra): Accumulate Forex Reserves and Unilateral Intervention

Implementation and Dedollarization Context (2025–2026)

Since early 2025, the U.S. Treasury has actively participated in currency markets to cap the dollar’s value. 

  • In April 2025, the dollar suffered its largest monthly decline since 2009 (down 4.9%) following the 

    • announcement of universal tariffs and 

    • the administration’s stated intent to devalue the greenback.   

The 'unilateral' approach is considered high-risk, as it could trigger a 'disorderly' 20–30% decline in the dollar, ending the 'American exceptionalism' premium on U.S. assets.   

Historical Precedents of Unilateral Devaluation

  • The Nixon Shock (1971): 

    • President Nixon suspended the dollar’s convertibility into gold

    • devaluation led to a period of high inflation and volatility but allowed the U.S. to escape the constraints of the Bretton Woods system.   

  • Switzerland and Japan (2011–2015): 

    • Both countries engaged in interventions to prevent their currencies from appreciating during the Eurozone crisis. 

    • The Swiss National Bank (SNB) eventually had to abandon its currency floor in 2015 after its balance sheet became unsustainably large, causing a 20% jump in the Franc in a single day.   

  • Current Risks: 

    • Historical data suggests that interventions to weaken a currency are often offset by capital inflows seeking higher interest rates. 

In early 2025, a 'pattern reversal' was observed where the USD fell despite rising interest rates, suggesting that investors were fleeing the U.S. due to policy uncertainty and tariff-related growth concerns.     


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Outcome: Pursue a Multilateral Currency Accord (The Mar-a-Lago Accord)

The 'Mar-a-Lago Accord' is a proposed multilateral framework designed to replicate the success of the 1985 Plaza Accord, specifically targeting a coordinated weakening of the U.S. dollar (USD) to restore the competitiveness of American exports. 

The policy argues that the USD is 'artificially' strong because trading partners use it as a reserve asset to maintain their own undervalued currencies.   

Implementation and Status (2025–2026)

  • Implementation of this accord remains in the 'coercive negotiation' phase as of early 2026. 

  • Championed by Council of Economic Advisers (CEA) Chairman Stephen Miran and Treasury Secretary Scott Bessent, it uses tariffs and security guarantees as the primary bargaining chips. 

  • The proposed mechanism involves the G7 nations and China selling USD reserves and allowing their local currencies (Euro, Yen, Yuan) to appreciate.  

  • However, Japan and the Eurozone have resisted a coordinated devaluation, citing the risk of importing inflation 

    • The 'accord' has deviated from a formal G5-style agreement into a series of one-offs where 

      • Countries like the UAE and Taiwan have pledged large investments in the U.S. economy ($1.4 trillion and $100 billion, respectively) in exchange for tariff exemptions.   

      • U.S.–UK Economic Prosperity Deal

      • 15% baseline tariff agreement with the EU, which the administration presented as the first step toward 'burden sharing'. 

Historical Data on Coordinated Devaluation: The Plaza Precedent

  • The Plaza Accord (1985): 

    • The G5 nations agreed to intervene in currency markets to devalue the USD. 

    • Within two years, the dollar fell 40% against major currencies.   

  • Success and Consequences: 

    • The U.S. trade deficit began to shrink, eventually clearing in 1991. 

    • However, for Japan, the massive appreciation of the Yen shock that forced the Bank of Japan to lower interest rates, ultimately fueling the late-1980s asset price bubble.   

    • By 1995, the 'Reverse Plaza Accord' was necessary as the weak dollar threatened the stability of the global financial system 

      • illustrating that coordinated currency moves are often 

        • temporary and 

        • can lead to unintended structural imbalances.   

If international partners refuse to participate in a coordinated weakening of the U.S. dollar (USD), the U.S. administration has outlined a 'unilateral approach' designed to drive reserve managers out of the dollar and force a devaluation through coercive financial and trade measures.

These actions range from standard fiscal interventions to 'incendiary' and high-risk maneuvers best characterized as 'strategic defaults'.





The following represent the toolkit for weakening the dollar:

Rational and Targeted Financial Measures (i.e. what Stephen Miran is allowed to write publicly about)

  • Imposition of 'Currency User Fees': The U.S. Treasury could impose a 1% 'user fee' on interest remittances for foreign official holders of U.S. Treasuries. Reduce the appeal of reserve accumulation and drive central banks to sell their USD holdings.

  • Establishment of a Sovereign Wealth Fund: The U.S. could create a fund to unilaterally intervene in markets by selling USD to accumulate a portfolio of foreign currencies such as the Euro, Yen, and Yuan. This would increase the global supply of dollars while bidding up the value of competitor currencies.

  • Unilateral Selling of USD Reserves: The Treasury could actively participate in currency markets to cap the dollar's value. Historical precedents like the 'Nixon Shock' of 1971 show that the U.S. can effectively devalue the currency by unilaterally altering its convertibility or market stance.

  • Monetary Policy Pressure: The administration may seek a more 'acquiescent' Federal Reserve to lower interest rates aggressively. Because interest rate differentials are a primary driver of currency strength, cutting rates to 2.5% or lower while other nations remain steady would naturally weaken the dollar. We can see this with Trump’s dissatisfaction with Jerome Powell’s reluctance to pursue lower rates.






Coercive and High-Risk Strategies ( i.e. what might make the headline of the Economist for a small number of readers)

  • Forced Debt 'Term-Out': The U.S. could require foreign creditors to swap their liquid, short-term Treasury bills into 100-year 'century bonds' with near-zero interest rates. This would 'weaponize duration,' making it difficult for foreign holders to exit their positions without taking massive capital losses.

  • 'Strategic Defaults' on Interest: Under the International Emergency Economic Powers Act (IEEPA), the U.S. could choose to withhold interest payments from 'non-cooperative' trading partners. While originally intended as leverage, market observers warn this could be classified as a selective default, potentially destroying the 'safe haven' status of U.S. debt.

  • Tying Security Guarantees to Currency Levels: The U.S. could make its 'security umbrella' (defense commitments for NATO/Taiwan/South Korea) contingent on those countries agreeing to purchase century bonds or devaluing their own currencies against the dollar.









'Irrational' or High-Volatility Actions (i.e. what actions we are currently seeing the administration take)

  • Intentional 'Debauching' of the Currency: High-risk proposals suggest using the 'money printer' to inflate away the national debt. By intentionally generating high inflation, the U.S. could make the real value of its debt trivial, though this risks a 'debt spiral' and a total loss of investor confidence.

  • Unpredictable 'Tariff Spikes': Rapidly escalating tariffs (e.g., universal 10-20% surcharges) can be used to shock the market. If investors perceive the U.S. as the primary source of global economic risk, they may repatriate capital or move into assets like gold, triggering a 'disorderly' 20–30% decline in the dollar.

  • Erosion of Institutional Independence: Political threats against the Federal Reserve or the 'politicization' of economic statistics could signal to markets that the U.S. is no longer a stable environment for capital, leading to a sudden flight from dollar-denominated assets.

  • Weaponization of the Dollar via Sanctions: Increased unilateral use of financial sanctions without ally support can 'throne' the dollar by forcing other nations to develop non-dollar payment infrastructures (de-dollarization), thereby reducing global demand and weakening the currency over the long term.




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Synthesis

The Triffin Dilemma and the New Monetary Order

The central insight of the administration’s strategy is a rejection of the Triffin Dilemma.

By 'terming-out' debt and imposing user fees, the U.S. is effectively signaling that it no longer wishes to provide a 'free' public good in the form of a global reserve currency unless its partners share the cost.   

Historical data suggests this transition is risky. The 'weaponization' of the dollar via sanctions and now 'user fees' has already accelerated de-dollarization among BRICS nations. 

If the U.S. successfully devalues the dollar by 20-30%, it may boost manufacturing exports, but it also risks a 'tipping point' for the U.S. at large, where it may lose its status as the global investment destination.   

By shifting from a policy of providing a stable global reserve currency to one of ‘coercive devaluation’, the U.S. would essentially be turning the world’s safest asset into a high-volatility instrument.



References


 




Location: New York, NY, USA

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