Henry Kissinger Schools Mercantilist Trump About Reserve Currency

Before explaining Henry Kissinger's lesson for Donald Trump and all of us, I want to issue a disclaimer. I am not a fan of the former Secretary of State. I am not a fan of the abuse of globalization, which happened partly under Kissinger's watch. A real respect for the sovereignty of nations would have been preferable to Kissinger's policy.

But that doesn't mean that Henry Kissinger fails to understand the importance of the USA as issuer of the reserve currency. Dr Kissinger understands that the US must remain issuer of the reserve currency, or else those expatriated dollars will flood uncontrollably back into the United States. Kissinger wrote:

By gaining the global currency reserve status the US effectively forces the world to follow US monetary policy and the US gets to export inflation as the world is forced to hold US dollar reserves, not only could the US control global commerce but it lived above its means at the expense of other nations. Trump doesn’t understand this benefited the US by spreading inflation to the world and mostly insulating the US. 

Donald Trump Official: He Is the Greatest Threat to US Dollar as Reserve Currency

Kissinger blames the gutting of the middle class on monetary policy. He doesn't go into detail and I won't attempt to read his mind.

But Kissinger does understand that isolationism by the reserve currency nation results in lack of liquidity to the world. With the reserve currency being entrusted to the USA, the world then reinvests dollars into the United States. Because of the Fed, it is likely that not enough dollars are reinvested in the USA. But the alternative is worse.

We live a higher lifestyle than we would without the dollar as reserve currency. We print money and export money.  We don't save enough to be the mercantile nation that Trump and his minion, Peter Navarro wants. Professor Norman Mogil  says this about the Navarro plan:

The U.S. savings rate is less than 5 per cent and that is woefully inadequate to finance economic growth at home. The shortfall in U.S. domestic savings is being picked up by foreign countries as they amass trade surpluses. Viewed from a different angle, the trade deficits are a result of persistent federal government deficits (negative savings) and insufficient U.S. domestic savings.The modern day mercantilists focus exclusively on one side of the balance of payments ledger, namely, the trade flows. But the other side of the ledger --- the flow of funds back into the United States ----is equally important. Hitting one side of the ledger will have consequences for the other side. No one country benefits from economic nationalism in the final analysis.

Trump's plan to keep dollars in the US will cause an even greater hoarding of dollars abroad until a replacement currency can be found. Companies that stay in the US, taking advantage of their quality of product and the good will of consumers who like to buy America, would be hurt in their efforts to export until a reserve currency could be found. That could take a long time. Inflation could follow as Dr Kissinger says, or maybe just a terrible slowing of world trade. 

Trump wants to establish an isolated, unsavory brand of sovereignty. That bullying sovereignty is at odds with the model of sovereignty we saw in the Westphalia Peace, based on mutual respect among nations.

This desire to keep dollars in the USA at all costs reminds me of the American School of Economics. The American School was fashioned in the image of Alexander Hamilton's policies. I don't see how the principles of the American School would work in the age of derivatives and at the level we see of global trade. It would likely require a total meltdown of our financial system in order to be applied. And it is a system that seems at odds with Donald Trump, the man.

From the link above, Henry Carey said this school requires:

    1. Government support for the development of science and public education through a public 'common' school system and investments in creative research through grants and subsidies.
    1. Rejection of class struggle, in favor of the "Harmony of Interests" between: owners and workers, farmer and manufacturers, the wealthy class and the working class.

Those Utopian goals are not what we see from Donald Trump. Cooperation is not exactly his middle name. He has called for defunding of the arts.

So no, it is more likely that Donald Trump is more interested in mercantilism, at this point a closet mercantilist, but I don't see any announcements about his first budget that our big business will be subsidized in the exporting of products to make them cheaper. Taxing what consumers buy from abroad, coupled with subsidies to companies that export, would be a really expensive mission. There is no guarantee that other nations would not increase mercantile tendencies as well. Navarro apparently wants to combat mercantilism:
Navarro's policy prescriptions include that “U.S. should be tough on trade, crack down on intellectual property theft, tax Chinese exports, combat Chinese mercantilism, [and] bring jobs home.”
However, the problem is that once we impose tariffs and make our people poorer, we will have to make up for it by establishing a mercantilism of our own. Tax cuts for big business will not do it. Subsidies for exports will be necessary in order to undercut competition, and that will be expensive.

Mercantilism is the idea that a nation must export more than they import. That will not permit the US to maintain the reserve currency for which a trade deficit is needed. The Triffin Paradox, that nations with the reserve currency end up with trade deficits is better than the alternative of not having the reserve currency.

Mercantilism will not be efficient, as Adam Smith proved. It will be a financial disaster and Donald Trump will become a hated man, and will be fired from his job as POTUS, if he pulverizes the US economy with Navarro's mercantilist ideas.

The idea of a one world currency would likely fail due to mistrust of the issuers. A sovereign nation must issue a reserve currency, not a group of supra nations. That is why no one wants the Euro to take the place of the dollar!

 Yet, Trump wants to establish an isolated, unsavory brand of sovereignty. That bullying sovereignty is at odds with the model of sovereignty we saw in the Westphalia Peace, based on mutual respect among nations. Trump could put world trade in jeopardy.

It is true that some Americans long for an American mercantilism as other nations are free to practice it, mostly in Asia. But biting the mercantilists' hands could prove to be unwise, as we possess the reserve currency and they don't. Asia is an immense market that can enrich America in tourism, and in the increase of factories built in the USA, as we have seen from Japan, and more recently from China.

Asian mercantilism is one necessary benefit for America in the future. Asia likes America. There are many potential customers from Asia. It would be foolhardy to force them to change their minds, but that is exactly what Navarro, and maybe Trump, want to accomplish! The United States retains the right to stop Asia from dumping products that are subsidized too greatly, and it asserts that right frequently.

Mercantilism is the opposite of Marxism, and yet Trump's other key adviser, Steve Bannon, would like the existing state and maybe even the current economy to be destroyed.  He has stated he is a Leninist. Perhaps he is colluding with Navarro to establish a mercantile economy that would put America into a very deep recession, perhaps a Great Depression. That could allow Bannon and Trump to take control of government in a way they cannot do now.

Massive political upheaval could happen, if all this goes far enough to the extreme, and Peter Navarro gets his way. Make no mistake about it, the man who has Donald Trump's ear is an economic revolutionary, pusher of a primitive form of capitalism, who will put America in great jeopardy.

And adding to Navarro's influence, Bannon is the man to capitalize on the outcome. Bannon has said he would like a holy war and/or the destruction of government. Hopefully he will be surrounded by people who don't allow his views to become reality.

These advisers represent a warning to the Republican Party and America as a whole, that radicals have taken over government and their plan should be taken seriously, as something that must be avoided. In the age of derivatives and collateral increases, the possibility of massive inflation, of soaring interest rates, of economic instability and even chaos, will rob America of more wealth than it can make up for with an untested and aggressive export policy coupled with animosity toward other nations throughout the world. This economic doctrine will not make "America great again".

If Donald Trump would focus on getting dollars held by our multinationals, as Jamie Dimon advocates, back into the USA for investment there is still hope for a little better than above average growth in the US.

This article was first published by me on Talkmarkets: http://www.talkmarkets.com/content/currenciesforex/henry-kissinger-schools-mercantilist-trump-about-reserve-currency?post=126808&uid=4798

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