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| Restructuring the Global Trading System |
| By Joe Withrow, Senior Analyst, The Bleeding Edge |
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The grand chandeliers of the Plaza Hotel sparkled like constellations in the evening sky, casting a golden glow over the room. |
| The date was September 22, 1985. Autumn was descending upon New York, and then Treasury Secretary James Baker stood amidst the opulence of one of the city's most iconic landmarks. |
| The Plaza Hotel, with its French château-inspired architecture and storied past, has hosted kings, presidents, and celebrities since its opening in 1907. On that night in 1985, it would host something else entirely – a revolution in global economic policy. |
| From its marble-clad lobby to its soaring ceilings, the hotel exudes a sense of permanence and power… setting a fitting stage for an accord of international acclaim. |
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| AI rendering of the Plaza Hotel, circa 1985 |
| Located at Fifth Avenue and Central Park South, the Plaza Hotel has been the site of countless historic events – from John F. Kennedy's pre-inauguration evening… to the Beatles' first New York press conference… to the filming of the popular movie Home Alone 2. |
| The hotel's grandeur was always apparent to real estate mogul Donald Trump, who would buy the Plaza Hotel in 1988 and host his second marriage there in 1993. |
| But on this early autumn evening in 1985, the hotel wasn't about luxury or celebrity – it was about forging a new economic future. |
| Sitting at an elegant conference table deep within this iconic building, James Baker smiled as the assembled finance ministers and central bank governors signed the documents before them – one by one. |
| With all signatures in place, representatives from France, West Germany, Japan, the United Kingdom, and the United States – the entire Group of 5 (G5) – had ratified the Plaza Accord. |
| The Catalyst for the Accord |
| The story began earlier that year when James Baker had assumed the role of U.S. Treasury Secretary under President Ronald Reagan. The U.S. economy was in something of a precarious position, and Reagan charged Baker with doing something about it. |
| President Nixon had cut the U.S. dollar's final link to gold in 1971 – setting off nearly a decade of stagflation. Consumer prices soared… but economic growth stagnated. |
| Federal Reserve Chairman Paul Volcker addressed the problem of inflation with a series of aggressive interest rate hikes beginning in 1979. By June of 1981, the federal funds rate had reached an all-time high of 19.1%. |
| This drove interest rates to elevated levels throughout the U.S. economy. That, in turn, attracted outsized foreign exchange (forex) investment. |
| The result was that the dollar soared 44% against other major currencies in a short period of time, making American goods prohibitively expensive abroad and decimating the nation's trade balance. By 1985, the U.S. trade deficit had ballooned to a record $122 billion. |
| The strong dollar and growing trade deficit had the effect of hollowing out America's manufacturing sector – leading to the offshoring of once stable manufacturing jobs overseas. |
| This is the climate into which James Baker stepped into the role of Treasury Secretary. President Reagan tapped him to deliver a solution, and Baker put forth a radical plan. |
| That plan was the Plaza Accord, as signed by the G5 countries in that luxurious conference room in 1985. |
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| Artist's rendering of the State Suite overlooking Central Park, circa 1985 |
| The Plaza Accord called for synchronized currency market interventions to drive down the dollar's value against the other currencies – especially the Japanese yen and German Deutschmark. |
| To do this, each country had to commit to coordinated currency market operations where they would sell dollars and buy their own currencies in the open market to keep a lid on the dollar's exchange rate. |
| Japan and Germany were required to do this aggressively. France and the UK agreed to mild currency interventions to support the plan. |
| And the results were dramatic… |
| Within two years, the dollar's value fell by nearly 40% against other major currencies. American exports became cheaper and more competitive abroad, helping industries battered by years of trade imbalances. As a result, real exports rose 20% from 1985 to 1988. |
| But then it all stopped. Another agreement signed by the G5 – the Louvre Accord –effectively ended the policies that James Baker spearheaded at the Plaza Hotel in 1985. |
| Thus, the rise in American exports reversed, and the United States gradually built ever-larger trade deficits over the next 30+ years. Meanwhile, China replaced Japan as the largest exporter of consumer goods in the world, making the massive trade deficits an even tougher pill for the U.S. government to swallow. |
| The story of the Plaza Accord had largely become forgotten history. But some new breadcrumbs suggest that the stage is now set for a similar international monetary agreement… and this one promises radical changes that will not be reversed in a mere three years as the Plaza Accord was. |
| The Recapitalization of America |
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| When we step back and connect the dots like this, it becomes evident that we're staring down a once-in-a-generation financial and economic reorganization. It's centered around the United States, but this reorganization will have ramifications that impact the entire globe. |
| The latest domino to fall was President Trump's appointment of economist Stephan Miran to fill the vacant seat on the Federal Reserve Board of Governors. Interestingly, the White House described this move as "temporary" – implying that their long-term plan is different. But this is a big breadcrumb… |
| We'll come back to Miran and why he's a critical piece of the story unfolding before us in just a minute. But first, I'll submit to you that the markets began pricing in a massive recapitalization of the United States the day after the 2024 U.S. presidential election – when Trump was called the winner. |
| Please note that I make that comment matter-of-factly. I'm not cheerleading for politics here… I'm just following the breadcrumbs and trying to connect the dots as best I can. |
| No matter who's in office or what their policies are, our job here at Brownstone Research is to figure out how to best navigate those waters and where the best investment and trading opportunities are. |
| The Dow Jones Industrial Average, the S&P 500, and the Nasdaq Composite each surged to record highs the day after the 2024 election. And notably, small-cap stocks started to gain momentum for the first time since the Fed began aggressively hiking interest rates in March 2022. |
| That was the market beginning to price in America's recapitalization. |
| Recapitalization refers to a significant restructuring of an entity's financial and economic framework. It's all about stabilizing the capital structure. |
| It's more common to talk about recapitalization in terms of a business, but the Trump administration is applying the same principles to the U.S. government. For the United States, this must be done on the following levels: |
- U.S. Dollar Stability
- Economic Revitalization
- U.S. Government Debt and Fiscal Health
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The first pillar, U.S. Dollar Stability, stems from the recently passed GENIUS Act and the rise of stablecoins. In fact, stablecoins represent a 21st-century Bretton Woods Agreement that will serve to re-dollarize the world – keeping the U.S. dollar as the dominant currency globally. |
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| So we're going to focus on the second pillar today – Economic Revitalization. And it all starts with reversing something called Triffin's dilemma. |
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| The Paradox of Power – Perpetual Trade Deficits |
| In the 1950s, a Belgian-American economist by the name of Robert Triffin spent considerable time analyzing the plumbing of the global financial system… and he came to a troubling conclusion. |
| The U.S. dollar had only served as the official reserve currency of the world for several years at that time – thanks to the Bretton Woods Agreement that was signed in 1944. |
| Per that agreement, the U.S. dollar was pegged to gold at a fixed rate of $35 per ounce, and all other currencies were pegged to the dollar – thus creating a stable and predictable monetary system. |
| In addition, foreign central banks were permitted to convert their U.S. dollar holdings into gold through the "Gold Window". This allowed foreign governments to trade their dollars in for gold at will. |
| As such, the U.S. dollar was considered to be honest money, and it was trusted in transactions around the globe. When countries engaged in cross-border trade, the U.S. dollar was the settlement currency of choice. |
| This dynamic solidified the United States as the world's leading financial powerhouse, and it bestowed an enormous benefit upon Americans by keeping interest rates low and the dollar's purchasing power high. But looking ahead, Triffin saw a major trade-off that most missed. This became known as Triffin's dilemma. |
| At its core, Triffin's dilemma arises from the inherent conflict between a country's domestic economic priorities and its role as the issuer of the global reserve currency. |
| For the US, maintaining the dollar as the world's reserve currency meant that it had to supply dollars to the world. That required running persistent trade deficits… because the world needed a constant flow of dollars to maintain global economic growth. |
| So America's trade deficits support liquidity for the global financial system. But they create a dynamic that incentivizes imports and undermines domestic manufacturing competitiveness. |
| In other words, Triffin's dilemma requires America to ship dollars to the world, and the world ships America foreign-made goods in return. This disadvantages domestic manufacturing and the workforce. |
| This is the core reason why the U.S. industrial sector was gradually hollowed out over the course of several decades because it was dramatically more profitable for companies to move and expand their manufacturing footprint overseas. This is why the percentage of people working in US-based manufacturing fell from about 28% in 1960 to 8% today. |
| It's become clear that the Trump administration is hell-bent on reversing this trend. And that brings us back to Stephan Miran… |
| The Man With the Plan |
| Stephan Miran has served as Trump's appointed chair of the Council of Economic Advisers (CEA)… and he's become a lynchpin in the administration's plan. |
| I would wager that most of us have never heard of this guy before. For that matter, I bet most of us have never heard of the CEA, either. It's one of numerous think-tanks that analyze economic data and write academic papers that nobody reads about their analysis. |
| But Miran started to emerge as a key player in the plan to recapitalize America when he wrote a paper titled A User's Guide to Restructuring the Global Trading System. Curiously, the paper was published in November of last year – just one week after Trump secured the election victory. |
| In his paper, Miran makes the case that America's economic revitalization hinges upon the restoration of the industrial sector. As such, he calls for the U.S. government to implement an "explicit, strategic" industrial policy. |
| Miran specifically points to Triffin's dilemma as the leading driver that caused America's export sectors to be hollowed out. He also suggests that any efforts to balance the federal budget would make it even more difficult to revive America's manufacturing sector. That's because the dollar would likely appreciate dramatically against foreign currencies in that scenario… and a strong dollar makes American-made goods less affordable in global markets. |
| To solve this problem, Miran states that we need a controlled devaluation of the dollar. That is to say, he's calling for another Plaza Accord. It seems what happened at that iconic hotel in 1985 isn't forgotten history to him. |
| In fact, Miran goes so far as to propose a "Mar-a-Lago Accord" in his paper. Here's a brief overview of the plan: |
| To weaken the dollar without manipulating interest rates or triggering financial instability, Miran suggests imposing user fees on foreign holders of U.S. Treasuries and encouraging trading partners to convert short-term debt into ultralong-duration bonds. |
| If successfully implemented, these policies would reduce U.S. dollar accumulation by adversaries like China while also alleviating funding pressures on the Treasury. Converting U.S. debt into 50-year or even 100-year bonds would make the national debt much easier to manage because it would reduce the massive need for annual roll-overs. |
| Miran also emphasizes differentiating policies based on geopolitical relationships – rewarding allies with reserve currency privileges while penalizing adversaries through tariffs or withholding interest payments on their Treasury holdings. |
| What we're talking about here is a two-tiered monetary system – one that favors America's strategic allies while penalizing adversaries in a non-kinetic way. |
| If implemented correctly, Miran suggests that such a system would minimize domestic price inflation while devaluing the dollar in a controlled fashion in foreign markets… which would make American manufacturing more competitive. |
| He went on to suggest that the U.S. government could use the revenue generated from tariffs to issue consumer tax rebates to lower-income households as a buffer against the rising cost of imports. I find that interesting, because we're starting to see this idea floated in the financial media. |
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| These kinds of headlines are setting the stage for "DOGE payments" as a means of offsetting the dollar's fall in purchasing power, should the Mar-a-Lago Accord come into being. |
| And we should note that Miran's paper explicitly states that a systematic tariff regime needs to be put in place before any of the other policy pillars can be pursued… and that's now largely complete. Some of the details are still subject to ongoing negotiations, but Trump has installed a comprehensive tariff regime. |
| Reversing Decades of Financialization |
| Like it or not, Miran's Mar-a-Lago Accord is the Trump administration's next step in its quest to revitalize the American economy and recapitalize the country. |
| If successful, this intentional industrial policy will reverse decades of financialization that hollowed out the American middle class and led to stagnating wage growth. Here's why that's important: |
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| Source: Economic Policy Institute |
| The chart compares the growth in median U.S. wages, adjusted for inflation, against total American productivity – the output of goods and services. The data spans from the late 1940s to the present day. |
| Here we can see how wages and productivity were in sync until 1971. The average person's salary increased proportionally with America's output of goods and services, just as it should in a healthy economy. |
| But look at what's happened since – our productivity powered forward… but our inflation-adjusted wages went stagnant. That's what happens when you run your economy on consumption fueled by debt and government spending. |
| This chart succinctly summarizes why Middle America has been hollowed out. The average worker has not benefited directly from U.S. productivity gains in 50 years. |
| Reverting to a production-led economy would help reverse this trend. That, in turn, would solidify the middle class and inject new life into those Rust Belt cities that have been dormant for decades. |
| In addition, the reshoring of manufacturing would help secure the supply chain that we rely on for all the essential goods that we purchase on a regular basis. |
| When we depend on foreign manufacturing for critical goods, we rely on complex global supply chains to get those goods from their point of origin to American ports… and then to American warehouses… and then to store shelves or our front porches. |
| This is a rather magical process when everything is working as it should. But as we saw during the COVID hysteria, we can face shortages very quickly if there's a hitch in the supply chain somewhere. |
| But there is a trade-off. |
| If we do see Miran's industrial policy implemented, foreign-made goods will become more expensive for American consumers. All the foreign electronics and household products we buy today will cost more than they do now. |
| Rising wages would help offset such cost increases, but this would still reverse the trend of cheap imports that the U.S. and most of the Western world have enjoyed for a long time now. So it's something of a gambit, and not everybody will be happy with all aspects of it. |
| But it's important for us as self-directed investors to understand that the current administration is executing an intentional plan. Whether we think it's a good plan and whether they can successfully pull it off is debatable… but it's a clear plan nonetheless. |
| The media likes to portray Trump as chaotic, moody, and subject to whims – and he certainly plays to that persona with his social media posts. But he's not winging any of his economic decisions. They are aligned with a comprehensive set of policies that are rolling out, one by one. |
| If we recognize this, we'll be resistant to the urge to make split-second decisions based on the latest headlines put out by the financial media. We'll also be able to spot investment trends long before others do. Both are equally important for investment success. |
| Coming full circle, everything we talked about today pertains to the second pillar of America's recapitalization – Economic Revitalization. Next week, we'll look at the third plank: U.S. Government Debt and Fiscal Health. |
| Regards, |
| Joe Withrow
Senior Analyst,The Bleeding Edge |
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