WEBVTT - Here's Why 'Mar-a-Lago Accord' Chatter Has Everyone's Attention

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<v Speaker 1>Bloomberg Audio Studios, Podcasts, radio News.

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<v Speaker 2>I'm Caroline Hepkee, and this is Here's Why, where we

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<v Speaker 2>take one news story and explain it in just a

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<v Speaker 2>few minutes with our experts here at Bloomberg. Most followers

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<v Speaker 2>of US politics now know Mara Lago, the Summer Residents,

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<v Speaker 2>and bolthole of President Donald Trump. But financial markets are

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<v Speaker 2>starting to talk about the resort for a different reason.

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<v Speaker 3>It's about taking your creditors into a room for the

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<v Speaker 3>United States of America and actually saying you've got to

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<v Speaker 3>swap your treasuries for long term debt. Now, this is radical.

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<v Speaker 3>Nobody's saying that this is actually going to happen.

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<v Speaker 4>Now, why are we doing this? The idea is to

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<v Speaker 4>reorient to trade the world global trade system, which we

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<v Speaker 4>seem to be trying to do with tariffs, to bring

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<v Speaker 4>down the value of the dollar, to bring down interest rates,

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<v Speaker 4>and to make the US more competitive. That's what goal is.

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<v Speaker 5>I don't think anybody's really taken a really creative approach

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<v Speaker 5>to problem solving with regard to this debt and what

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<v Speaker 5>we're seeing out of the Trump administration and so many

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<v Speaker 5>different parts is a very creative and new thought approach.

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<v Speaker 2>Trump is rewiring global trade with threats of tariffs. He's

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<v Speaker 2>upended geopolitics, NATO, and the global security framework. Given the

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<v Speaker 2>presidents unconventional at high stakes maneuvers, some on Wall Street

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<v Speaker 2>are wondering if the international financial system may be next.

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<v Speaker 2>The concept of deliberately weakening the US dollar to help

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<v Speaker 2>the American economy is causing a stir in the markets.

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<v Speaker 2>So here's why the idea of a Mara Largo accord

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<v Speaker 2>has everyone's attention. Our global economy correspondent Endacuren joins US

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<v Speaker 2>now to explain, Hi, Ender, what is this phrase Mara

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<v Speaker 2>Lago accord and where is it come from?

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<v Speaker 1>At its core, it's all about how President Donald Trump

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<v Speaker 1>wants to shake up the way the US trades with

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<v Speaker 1>the rest of the world, and at the core of

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<v Speaker 1>that is the US dollar as America's currency, and that's

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<v Speaker 1>driving speculation that perhaps President Trump will look for some

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<v Speaker 1>kind of a grand multinational bargain that would effectively end

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<v Speaker 1>with a weaker US dollar that would help US exporters

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<v Speaker 1>style produce around the rest of the world. And the

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<v Speaker 1>name that some analysts are calling it is they'redubbing it

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<v Speaker 1>the Marri Lago accord. After Trump's private club in Palm Beach, Florida.

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<v Speaker 1>As I say, this is all early days and it's speculation,

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<v Speaker 1>but the thinking is that at some point President Trump

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<v Speaker 1>will turn his attention towards the currency and look for

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<v Speaker 1>some kind of a big deal on that front.

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<v Speaker 2>Okay, So that's on weakening the dollar. What could this

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<v Speaker 2>possible concept agreement attempt to accomplish beyond that?

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<v Speaker 1>So here's the thing. The US trade deficit has blown

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<v Speaker 1>out hit a record one point two trillion dollars in

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<v Speaker 1>twenty twenty four. President Trump is not happy with that.

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<v Speaker 1>He sees that as Americas sending money abroad. Part of

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<v Speaker 1>the story here is that the dollar is historically strong

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<v Speaker 1>that undermines US competitiveness by making imports cheaper and of

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<v Speaker 1>course at the cost of their own exporters. And in fact,

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<v Speaker 1>some analysts in the currency market look at the dollar

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<v Speaker 1>today as being overvalued when you say base it on

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<v Speaker 1>a domestic purchasing power of a currency. Now, when you

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<v Speaker 1>consider all of that, the thinking is that President Trump

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<v Speaker 1>might at some point get his advisors together and say,

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<v Speaker 1>how could we meaningfully weaken the dollar to help our exporters.

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<v Speaker 1>And that's where you get into the mechanics of how

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<v Speaker 1>this might work.

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<v Speaker 2>Indeed, how could a Marl Largo agreement work?

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<v Speaker 1>So there are different ways of approaching it. One simple

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<v Speaker 1>way would be that America would reach an agreement with

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<v Speaker 1>key trading partners, asking those trading partners to boost domestic

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<v Speaker 1>consumption of their own goods that they produce rather than

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<v Speaker 1>sell their goods overseas at a cheaper price into America.

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<v Speaker 1>That would reduce their manufacturers or alliance on exporting TODs

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<v Speaker 1>for example. And one case in point there, of course,

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<v Speaker 1>would be China. It's a focus for its exports and

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<v Speaker 1>huge manufacturing base and the fact that it's able to

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<v Speaker 1>export at a competitive price compared to with the US counterparts.

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<v Speaker 1>So the thinking is, look, you foreign trading partners, buy

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<v Speaker 1>more of your own stuff for adam seller to US.

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<v Speaker 1>That's one way to rebalance it. Another way, of course,

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<v Speaker 1>could be to intervene in the foreign exchange of market.

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<v Speaker 1>Get your trading partners to agree on either buying their

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<v Speaker 1>own currency to make it stronger, selling the dollar to

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<v Speaker 1>help weaken the dollar. But you know, the foreign exchange

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<v Speaker 1>market is worth around seven point five trillion, so it

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<v Speaker 1>would take a lot of buying and spending of currencies

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<v Speaker 1>to really make adent in that. And then there are

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<v Speaker 1>some other leavers and tools that governments could pull, But

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<v Speaker 1>you know, it all comes down to what levers could

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<v Speaker 1>they agree on that would effectively weaken the uslar and

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<v Speaker 1>strengthen their own currencies.

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<v Speaker 2>Have similar accords been agreed before?

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<v Speaker 1>Yes, In nineteen eighty five we had what was called

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<v Speaker 1>the Plaza Accord that was named after the hotel in

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<v Speaker 1>New York where officials met, and it was a broadly

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<v Speaker 1>similar backdrop and idea. The story back then was high inflation,

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<v Speaker 1>high interest rates, and a strong dollar, so the US

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<v Speaker 1>needed an agreement with At that time it was France, Japan,

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<v Speaker 1>UK and then West Germany that they would allow their

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<v Speaker 1>currencies to strengthen against the dollar and allowed the dollar

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<v Speaker 1>to a weekend, because the thinking was back then that

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<v Speaker 1>the strong greenback was hurting the global economy. Now, of course,

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<v Speaker 1>back then the central casting villain, so to speak, was

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<v Speaker 1>Japan because they were dominating the manufacturing and export market.

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<v Speaker 1>They were sparking protections and backlash from US lawmakers in

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<v Speaker 1>a way that Chinese today. So Japan came on and

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<v Speaker 1>signed on to that agreement. Though that deal was later

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<v Speaker 1>blamed in part for some of Japan's own economic demise.

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<v Speaker 2>What did different investors think about this idea?

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<v Speaker 1>There are a couple of ways of thinking about it.

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<v Speaker 1>On the one hand, it's still very early. Investors say

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<v Speaker 1>a lot of this is speculation. To be clear, President

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<v Speaker 1>Trump and his officials do talk about the need for

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<v Speaker 1>a strong continuing the strong dollar policy of the US,

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<v Speaker 1>for example. On the other hand, though the same investors

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<v Speaker 1>will say, you know, President Trump is serious about shaking

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<v Speaker 1>up the way the US is doing business with key

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<v Speaker 1>trading partners. He's already proven to be unconventional with some

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<v Speaker 1>of his policy decisions and announcements. His Treasury Secretary Scott

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<v Speaker 1>Besant has before he took office, spoken of the need

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<v Speaker 1>for some kind of a grand economic reordering. So at

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<v Speaker 1>the very least, the idea that Trump and his officials

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<v Speaker 1>won't be thinking about what they could do around a

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<v Speaker 1>strong dollar doesn't sound completely implausible. But that's where, you know,

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<v Speaker 1>the rubber hits the road when it comes down to

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<v Speaker 1>what exact levers can the US pull, How effective would

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<v Speaker 1>it be, How realistic is it that they could agree

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<v Speaker 1>in accord with trading partners, and indeed trading rivals to

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<v Speaker 1>allow a dollar a week and in their currency strengthen.

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<v Speaker 1>On paper it sounds duable, but in practice be very difficult.

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<v Speaker 1>One to get across the line.

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<v Speaker 2>There's another market that could be affected, the US treasury market,

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<v Speaker 2>the debt market. What would be the consequences of restructuring that.

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<v Speaker 1>So one of the ideas could be that the US

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<v Speaker 1>government could issue government bonds that don't pay interests, so

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<v Speaker 1>called zero coupon, and they mature in one hundred years.

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<v Speaker 1>Some people out there, for example, former Credit Swiel analyst

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<v Speaker 1>Sultan Pozner, is one of those who've made the suggestion

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<v Speaker 1>of maybe an agreement when the US and its military

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<v Speaker 1>partners whereby in return for a security guarantee, allies are

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<v Speaker 1>required by these zero centry bonds. And what would that do?

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<v Speaker 1>It would take pressure off the US repayment schedule, take

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<v Speaker 1>pressure off the US integrate profile industrate burden, which of

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<v Speaker 1>course is one of the key expense out lays for

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<v Speaker 1>the government right now, and it could be bundled up

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<v Speaker 1>as part of his whole grand package of a Mari

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<v Speaker 1>Largo record. As I say, you know, these are all

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<v Speaker 1>talking points, these are what Alas say could be done.

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<v Speaker 1>But getting all of these agreed, it seems to be

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<v Speaker 1>I think, a way of just yet, So.

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<v Speaker 2>What are the downsides to this agreement, if any, and

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<v Speaker 2>who would have to deal with them.

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<v Speaker 1>So when we had the Plows Accord back in nineteen

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<v Speaker 1>eighty five, it sounded like a good idea at the time,

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<v Speaker 1>and Japan signed on, but ultimately they blamed it for

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<v Speaker 1>allowing the end to become too strong, and that played

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<v Speaker 1>a role in Japan's own economic demise, and in fact

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<v Speaker 1>they had to follow up with another agreement, the Lure

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<v Speaker 1>of Accord, in nineteen eighty seven, to try and draw

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<v Speaker 1>a line under that. So there's history that these accords

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<v Speaker 1>don't necessarily work according to plan. And then more practically,

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<v Speaker 1>for American consumers under one hand, right now they have

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<v Speaker 1>a strong currency that means they can buy products from

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<v Speaker 1>around the world at a competitive price, and of course

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<v Speaker 1>when they travel and go overseas, it's a good time

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<v Speaker 1>to go on holidays. A weaker currency means they're going

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<v Speaker 1>to be importing higher prices. That means, of course, potentially

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<v Speaker 1>higher inflation, and that will erode their purchasing power. And

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<v Speaker 1>if we did get to a point where the dollar

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<v Speaker 1>was weakening, sharply, it might lose some of its appeal.

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<v Speaker 1>For foreign investors who don't like volati, they like strength

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<v Speaker 1>and strong currencies, they like stability, they might look at

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<v Speaker 1>maybe alternative assets, maybe the Euro, maybe elsewhere. That's if

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<v Speaker 1>the US dollar was to get into a weakening spiral.

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<v Speaker 1>Those are some of the downsides that could come out

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<v Speaker 1>of an agreement like this.

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<v Speaker 2>Thanks to our Global Economy correspondent and a current for

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<v Speaker 2>more explanations like this from our team of three thousand

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<v Speaker 2>journalists and alys around the world, search for Quick Take

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<v Speaker 2>on the Bloomberg website or Bloomberg Business app. I'm Caroline Hepga.

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<v Speaker 2>This is his why. We'll be back next week with more.

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<v Speaker 2>Thanks for listening.