Hey, Mr. Trump

In yesterday’s world, the dominance of the dollar amounted to a Faustian dilemma: the United States could indeed finance itself cheaply, but at the cost of dependence on foreign entities, ultimately leading to its decline.

A traditional definition of a reserve currency is that the country issuing it must run a balance of payments deficit. Why? In order to supply liquidity to the rest of the world. However, large and sustained deficits gradually erode confidence in that same currency, which then becomes weakened and whose reserve status is gradually called into question.

According to this logic, the rhetoric and actions of the U.S. administration stigmatize countries running trade surpluses, which result in a structurally overvalued dollar and the decline of the American industrial sector. Foreign central banks, natural buyers of dollars, also find themselves in the dock, accused of deliberately weakening their own currencies to boost national trade surpluses. The American executive observes how these actors recycle their dollars into Treasury Bonds, thus also contributing to the weakening of U.S. industry and harming domestic workers.

Yet this analysis by American officials—who portray themselves as victims of the duplicity of foreign states and central banks—is no longer suited to the current architecture of globalized finance.

Deficits (trade and balance of payments or current account deficits) are significantly amplified by capital flows generated by a private financial system known for its legendary elasticity. Today’s true imbalances lie not so much in cross-border trade but in the truly stratospheric flows of liquidity invested in the United States—into financial and tangible assets—by private sector players, fund managers, and the shadow banking system, often based in financial centers like Luxembourg, Ireland, and the Cayman Islands.

Global finance no longer recycles its surpluses and investments through traditional channels, but through the proliferation of financial institutions of all sizes that multiply leverage effects in order to amplify both their impact and their profits. The dominance of the dollar is not threatened by U.S. deficits per se. It is, however—and quite clearly—undermined by the illusion of security offered by a global financial system that, in fair weather, provides massive and opaque liquidity.

We must recognize that it is the very core mechanism ensuring liquidity in the system that has undergone a paradigm shift: it is no longer primarily U.S. deficits that finance both the United States and the rest of the world, but private monetary creation—which vanishes the moment risks appear on the horizon.

Advisors should explain to the President of the United States that we are no longer in the 1980s or 1990s, nor even in the early 2000s, because the real vulnerability of the American nation now lies much more in financial instability than in trade deficits.

In other words, official accounting balances and imbalances reveal only part of the picture, without capturing the complexity and concentration of financial risk. A country with balanced accounts can still be a source of global instability. Another—such as the United States—may run enormous and persistent deficits, and yet retain its status as a safe haven and reserve currency, as long as it succeeds in avoiding financial turmoil.

Before you leave, read a short excerpt from A Levantine Youth

“One can witness a crime without necessarily approving of it. One can shake a hand knowing—or sensing—that its owner is rotten. One can hear words without fully grasping their significance at the time. Forty-five years ago, what this young man saw—atrocious or immoral—what he experienced in dramatic situations and events, the repugnant or manipulative characters he encountered, the adult I have become now attempts to convey. Back then, I was still just a child, cherished by his parents…”

Buy it:

in France: FNAC

in Switzerland: PAYOT

in Lebanon: ANTOINE

in Canada: Les Libraires

AMAZON

…and in your bookstore.