Speaker 1: Bloomberg Audio Studios, Podcasts, radio News.
Speaker 2: I'm Caroline Hepkee, and this is Here's Why, where we
Speaker 2: take one news story and explain it in just a
Speaker 2: few minutes with our experts here at Bloomberg. Most followers
Speaker 2: of US politics now know Mara Lago, the Summer Residents,
Speaker 2: and bolthole of President Donald Trump. But financial markets are
Speaker 2: starting to talk about the resort for a different reason.
Speaker 3: It's about taking your creditors into a room for the
Speaker 3: United States of America and actually saying you've got to
Speaker 3: swap your treasuries for long term debt. Now, this is radical.
Speaker 3: Nobody's saying that this is actually going to happen.
Speaker 4: Now, why are we doing this? The idea is to
Speaker 4: reorient to trade the world global trade system, which we
Speaker 4: seem to be trying to do with tariffs, to bring
Speaker 4: down the value of the dollar, to bring down interest rates,
Speaker 4: and to make the US more competitive. That's what goal is.
Speaker 5: I don't think anybody's really taken a really creative approach
Speaker 5: to problem solving with regard to this debt and what
Speaker 5: we're seeing out of the Trump administration and so many
Speaker 5: different parts is a very creative and new thought approach.
Speaker 2: Trump is rewiring global trade with threats of tariffs. He's
Speaker 2: upended geopolitics, NATO, and the global security framework. Given the
Speaker 2: presidents unconventional at high stakes maneuvers, some on Wall Street
Speaker 2: are wondering if the international financial system may be next.
Speaker 2: The concept of deliberately weakening the US dollar to help
Speaker 2: the American economy is causing a stir in the markets.
Speaker 2: So here's why the idea of a Mara Largo accord
Speaker 2: has everyone's attention. Our global economy correspondent Endacuren joins US
Speaker 2: now to explain, Hi, Ender, what is this phrase Mara
Speaker 2: Lago accord and where is it come from?
Speaker 1: At its core, it's all about how President Donald Trump
Speaker 1: wants to shake up the way the US trades with
Speaker 1: the rest of the world, and at the core of
Speaker 1: that is the US dollar as America's currency, and that's
Speaker 1: driving speculation that perhaps President Trump will look for some
Speaker 1: kind of a grand multinational bargain that would effectively end
Speaker 1: with a weaker US dollar that would help US exporters
Speaker 1: style produce around the rest of the world. And the
Speaker 1: name that some analysts are calling it is they'redubbing it
Speaker 1: the Marri Lago accord. After Trump's private club in Palm Beach, Florida.
Speaker 1: As I say, this is all early days and it's speculation,
Speaker 1: but the thinking is that at some point President Trump
Speaker 1: will turn his attention towards the currency and look for
Speaker 1: some kind of a big deal on that front.
Speaker 2: Okay, So that's on weakening the dollar. What could this
Speaker 2: possible concept agreement attempt to accomplish beyond that?
Speaker 1: So here's the thing. The US trade deficit has blown
Speaker 1: out hit a record one point two trillion dollars in
Speaker 1: twenty twenty four. President Trump is not happy with that.
Speaker 1: He sees that as Americas sending money abroad. Part of
Speaker 1: the story here is that the dollar is historically strong
Speaker 1: that undermines US competitiveness by making imports cheaper and of
Speaker 1: course at the cost of their own exporters. And in fact,
Speaker 1: some analysts in the currency market look at the dollar
Speaker 1: today as being overvalued when you say base it on
Speaker 1: a domestic purchasing power of a currency. Now, when you
Speaker 1: consider all of that, the thinking is that President Trump
Speaker 1: might at some point get his advisors together and say,
Speaker 1: how could we meaningfully weaken the dollar to help our exporters.
Speaker 1: And that's where you get into the mechanics of how
Speaker 1: this might work.
Speaker 2: Indeed, how could a Marl Largo agreement work?
Speaker 1: So there are different ways of approaching it. One simple
Speaker 1: way would be that America would reach an agreement with
Speaker 1: key trading partners, asking those trading partners to boost domestic
Speaker 1: consumption of their own goods that they produce rather than
Speaker 1: sell their goods overseas at a cheaper price into America.
Speaker 1: That would reduce their manufacturers or alliance on exporting TODs
Speaker 1: for example. And one case in point there, of course,
Speaker 1: would be China. It's a focus for its exports and
Speaker 1: huge manufacturing base and the fact that it's able to
Speaker 1: export at a competitive price compared to with the US counterparts.
Speaker 1: So the thinking is, look, you foreign trading partners, buy
Speaker 1: more of your own stuff for adam seller to US.
Speaker 1: That's one way to rebalance it. Another way, of course,
Speaker 1: could be to intervene in the foreign exchange of market.
Speaker 1: Get your trading partners to agree on either buying their
Speaker 1: own currency to make it stronger, selling the dollar to
Speaker 1: help weaken the dollar. But you know, the foreign exchange
Speaker 1: market is worth around seven point five trillion, so it
Speaker 1: would take a lot of buying and spending of currencies
Speaker 1: to really make adent in that. And then there are
Speaker 1: some other leavers and tools that governments could pull, But
Speaker 1: you know, it all comes down to what levers could
Speaker 1: they agree on that would effectively weaken the uslar and
Speaker 1: strengthen their own currencies.
Speaker 2: Have similar accords been agreed before?
Speaker 1: Yes, In nineteen eighty five we had what was called
Speaker 1: the Plaza Accord that was named after the hotel in
Speaker 1: New York where officials met, and it was a broadly
Speaker 1: similar backdrop and idea. The story back then was high inflation,
Speaker 1: high interest rates, and a strong dollar, so the US
Speaker 1: needed an agreement with At that time it was France, Japan,
Speaker 1: UK and then West Germany that they would allow their
Speaker 1: currencies to strengthen against the dollar and allowed the dollar
Speaker 1: to a weekend, because the thinking was back then that
Speaker 1: the strong greenback was hurting the global economy. Now, of course,
Speaker 1: back then the central casting villain, so to speak, was
Speaker 1: Japan because they were dominating the manufacturing and export market.
Speaker 1: They were sparking protections and backlash from US lawmakers in
Speaker 1: a way that Chinese today. So Japan came on and
Speaker 1: signed on to that agreement. Though that deal was later
Speaker 1: blamed in part for some of Japan's own economic demise.
Speaker 2: What did different investors think about this idea?
Speaker 1: There are a couple of ways of thinking about it.
Speaker 1: On the one hand, it's still very early. Investors say
Speaker 1: a lot of this is speculation. To be clear, President
Speaker 1: Trump and his officials do talk about the need for
Speaker 1: a strong continuing the strong dollar policy of the US,
Speaker 1: for example. On the other hand, though the same investors
Speaker 1: will say, you know, President Trump is serious about shaking
Speaker 1: up the way the US is doing business with key
Speaker 1: trading partners. He's already proven to be unconventional with some
Speaker 1: of his policy decisions and announcements. His Treasury Secretary Scott
Speaker 1: Besant has before he took office, spoken of the need
Speaker 1: for some kind of a grand economic reordering. So at
Speaker 1: the very least, the idea that Trump and his officials
Speaker 1: won't be thinking about what they could do around a
Speaker 1: strong dollar doesn't sound completely implausible. But that's where, you know,
Speaker 1: the rubber hits the road when it comes down to
Speaker 1: what exact levers can the US pull, How effective would
Speaker 1: it be, How realistic is it that they could agree
Speaker 1: in accord with trading partners, and indeed trading rivals to
Speaker 1: allow a dollar a week and in their currency strengthen.
Speaker 1: On paper it sounds duable, but in practice be very difficult.
Speaker 1: One to get across the line.
Speaker 2: There's another market that could be affected, the US treasury market,
Speaker 2: the debt market. What would be the consequences of restructuring that.
Speaker 1: So one of the ideas could be that the US
Speaker 1: government could issue government bonds that don't pay interests, so
Speaker 1: called zero coupon, and they mature in one hundred years.
Speaker 1: Some people out there, for example, former Credit Swiel analyst
Speaker 1: Sultan Pozner, is one of those who've made the suggestion
Speaker 1: of maybe an agreement when the US and its military
Speaker 1: partners whereby in return for a security guarantee, allies are
Speaker 1: required by these zero centry bonds. And what would that do?
Speaker 1: It would take pressure off the US repayment schedule, take
Speaker 1: pressure off the US integrate profile industrate burden, which of
Speaker 1: course is one of the key expense out lays for
Speaker 1: the government right now, and it could be bundled up
Speaker 1: as part of his whole grand package of a Mari
Speaker 1: Largo record. As I say, you know, these are all
Speaker 1: talking points, these are what Alas say could be done.
Speaker 1: But getting all of these agreed, it seems to be
Speaker 1: I think, a way of just yet, So.
Speaker 2: What are the downsides to this agreement, if any, and
Speaker 2: who would have to deal with them.
Speaker 1: So when we had the Plows Accord back in nineteen
Speaker 1: eighty five, it sounded like a good idea at the time,
Speaker 1: and Japan signed on, but ultimately they blamed it for
Speaker 1: allowing the end to become too strong, and that played
Speaker 1: a role in Japan's own economic demise, and in fact
Speaker 1: they had to follow up with another agreement, the Lure
Speaker 1: of Accord, in nineteen eighty seven, to try and draw
Speaker 1: a line under that. So there's history that these accords
Speaker 1: don't necessarily work according to plan. And then more practically,
Speaker 1: for American consumers under one hand, right now they have
Speaker 1: a strong currency that means they can buy products from
Speaker 1: around the world at a competitive price, and of course
Speaker 1: when they travel and go overseas, it's a good time
Speaker 1: to go on holidays. A weaker currency means they're going
Speaker 1: to be importing higher prices. That means, of course, potentially
Speaker 1: higher inflation, and that will erode their purchasing power. And
Speaker 1: if we did get to a point where the dollar
Speaker 1: was weakening, sharply, it might lose some of its appeal.
Speaker 1: For foreign investors who don't like volati, they like strength
Speaker 1: and strong currencies, they like stability, they might look at
Speaker 1: maybe alternative assets, maybe the Euro, maybe elsewhere. That's if
Speaker 1: the US dollar was to get into a weakening spiral.
Speaker 1: Those are some of the downsides that could come out
Speaker 1: of an agreement like this.
Speaker 2: Thanks to our Global Economy correspondent and a current for
Speaker 2: more explanations like this from our team of three thousand
Speaker 2: journalists and alys around the world, search for Quick Take
Speaker 2: on the Bloomberg website or Bloomberg Business app. I'm Caroline Hepga.
Speaker 2: This is his why. We'll be back next week with more.
Speaker 2: Thanks for listening.