The US Treasury market has a sell-off as a result of President Donald Trump’s numerous tax presentations, not the least of which was his decision to impose” Liberation Day” mutual tariffs on April 2.
The sell-off, which started on April 5, was largely caused by concerns about tariff-related prices and overly leveraged hedge funds facing percentage names. But most importantly, it demonstrated a rapid market acceptance that Trump is serious about implementing profoundly problematic economic laws.
Investors today think that anything is achievable under Trump, following the courage of the Liberation Day tariffs. The proposed” Mar-a-Lago Accord,” suggested by Stephen Miran, who is currently the head of Trump’s Council of Economic Advisers, stands out as probably the most destructive statement, even though it is currently unlikely to get implemented.
The valuation of the US dollar, which Miran believes is the biggest issue facing the country’s economy, may lead to an effort to address a Mar-a-Lago Accord, which had aim to increase the US trade deficit and increase production.
His approach would be to convert short-term US Treasuries held by foreign investors to long-term, non-tradable zero-coupon obligations at much lower inherent offer, which would be the equivalent of restructuring US sovereign debt. The outcome would be to lower the cost of funding for the US government as well as to decrease the money.
The proposal’s apparent simplicity contrasts with its possible disastrous effects, which would be a specialized default on US Treasury bonds. Bonds are currently regarded as the country’s safe asset and are currently denominated in the dollar, the reserve currency of the world.
The disruption a move like this could cause would be so wonderful that Miran’s plan has frequently been derided or dismissed, but Trump’s outrageously high mutual taxes, which are officially suspended for 90 time except for China, were not expected sometimes.
So, some buyers are concerned about a potential US king debt restructuring. In a possible Mar-a-Lago Accord model, it should be noted that US Treasury transfers are not the only way to weaken the dollar while lowering the US Treasury’s financing costs.
Miran even suggested that in collaboration with the Treasury, the Federal Reserve may help to lower the cost of loan servicing. Although story provides some examples, Iran did not fully understand how such coordination may lead to lower US Treasury yields.
In order to support US war efforts, the Federal Reserve specifically implemented obvious offer controls in 1942 and 1951. However, the global financial system of the day resembled nothing less than it does today, not just because of its interdependence, where foreign investors own close to 30 % of US royal debts, but also because there were therefore foreign exchange controls and funds account restrictions.
The senator and his economic team should have received a distinct wake-up call from the severity of the Liberation Day sell-off and Trump’s timely decision to halt most of the mutual tariffs to prevent the US economy’s collapse, including the abandoning of US Treasuries.
In theory, this should make Miran’s anticipated Mar-a-Lago Accord even less likely to ever become a reality. No one can deny Trump’s unpredictability, which makes him unaffordable.
Due to the exorbitant privilege of the US as the issuer of the world’s reserve currency, US Treasuries can no longer be regarded as the safest assets in the world. The US’s virtuous circle, which it uses foreign capital to finance its bloated fiscal deficit and trade imbalance, is now in danger. The dollar’s future as the world’s all-powerful reserve currency is also uncertain.  ,
As the Treasuries sell-off demonstrated, firting with the dollar’s reserve currency role is even more dangerous than imposing sky-high tariffs on trading partners. In fact, assuming that market forces will still be allowed to operate freely in the future, market forces appear to be the best defense the US economy has against poorly thought-out and bad policies.
Bruegel’s senior research fellow, Alicia Garcia Herrero, is the country’s chief economist for Asia-Pacific, and a professor in the Hong Kong University of Science and Technology’s adjunct program.