Dear Reader,
Today I want to talk about a story quietly taking Wall Street by storm:
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The “Mar-a-Lago Accord.”
It’s based on a paper by Stephen Miran, Trump’s nominee to lead the White House Council of Economic Advisors…
And it’s basically a grand bargain between the U.S. and its allies to restructure our debt and weaken the dollar.
Looked at from one perspective, it’s a little wild.
But on the other hand, it’s not necessarily new.
See, in 1985, in an economy with high inflation, high interest rates and a strong dollar, we had the Plaza Accords…
The U.S. made a deal with France, Japan, Germany and the U.K. to weaken the U.S. dollar.
In public, all presidents call for a strong dollar.
But big business loves a weak dollar.
Strong dollars make U.S. imports cheaper and U.S. exports more expensive.
When you’re selling overseas you want a weak dollar so that your exports, which are imports to the locals receiving them, are cheaper in their local currency.
So boosting exports is the real aim here.
But the most astonishing thing about the “Mar-a-Lago Accord,” is a debt swap…
They’re trying to get foreign owners of short-term debt to swap that debt out and replace it with 100-year, non-tradable, zero-coupon bonds.
In theory, this would drive down the interest payments choking us on our federal debt.
That is really interesting…
The idea is that we’re going to push it on our military allies to try to force them to trade the debt they have for long-term, hundred-year bonds, non-tradable, zero coupon, meaning they don’t pay interest; they just mature at 100%.
So a zero coupon bond means that they would issue it at, I don’t know, 80%, and it would mature in 100 years at 100%.
That’s when lenders would get their money back.
So, word is filtering around that the U.S. is attempting some sort of debt restructuring.
And if you Google “Mar-a-Lago Accord,” you can see it for yourself.
Now, this makes some sense…
The dollar strength makes imports cheaper, our own stuff we manufacture more competitive.
Tariffs are one way, a very primitive way of dealing with that.
The more sophisticated way is tweaking the value of the dollar.
A lot of analysts who follow this believe the U.S. dollar is overvalued anyway, based on purchasing power, parity of a currency.
But a weaker dollar would make our exports more competitive to other countries, boost business and lower the trade deficit.
If American companies could sell more overseas because the dollar’s weaker, it lowers the trade deficit, in addition to tariffs.
But a weaker dollar would also reduce borrowing costs.
If the dollar is worth less, so is total debt.
This is a lot to process.
I never thought I’d live long enough to see the United States talk about restructuring its debt.
But count on Trump to make a really, truly bold plan – to look at this totally differently.
And he is speaking to something very credible.
Our debt is truly choking us.
And this is a crazy, bold idea, that’s for sure.
But I’ll tell you something – I talked to a lot of professional investors about it this week, before talking to you about it…
Because this is a big deal.
So before I came to you with this story I wanted to talk to friends on Wall Street who are in the bond business.
Their idea is, geez, this is unsettling.
And could have an unintended consequence of really rattling the debt markets and pulling buyers away even more, which would not be good.
So I know the Trump administration is definitely floating this – but they’re doing it quietly, so they could walk away from it if there’s an uproar from Wall Street.
But this is a significant moment in U.S. history and I thought it was an important piece of information to share with you, behind the markets.
Have a wonderful weekend and I’ll see you Monday.
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