WEEKLY - It's a Pact, not an Accord
plus, Assorted Links, and great guitar riffs from the 70s
Hello everyone, I hope you’re all doing well!
You’re reading the free weekly Crypto is Macro Now, where I reshare/update a couple of posts from the week, offer some interesting links I came across in my weekly reading, and include something from outside the crypto/macro sphere that is currently inspiring me (it’s a fascinating world out there).
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The latest episode of Bits & Bips is out! Alex Kruger, Ram Ahluwalia and I chat to Felix Jauvin, host of Forward Guidance, about the market correction, tariff uncertainty, consensus narratives and more. You can watch that here, or listen here (Spotify link).
In this newsletter:
It’s not a Mar-a-Lago Accord, it’s a Mar-a-Lago Pact
Assorted links: reading, China in space, songwriting, ChatGPT and more
Weekend: great guitar riffs from the 70s
Some of the topics discussed in this week’s premium dailies:
Coming up: what to keep an eye on this week
Macro-Crypto Bits: tariffs, Germany, Ukraine, EU, China and more
The security blunder wake-up call
New tariff targets that could backfire
Macro-Crypto Bits: US PMIs, India’s drills, the crypto rally, a Ukraine agreement and more
It’s a Mar-a-Lago Pact, not an Accord
Macro-Crypto Bits: US debt warning, confidence hit, SOL spot ETF, force mobilization and more
The stablecoin frenzy is getting started
The SEC’s big re-think
Macro-Crypto Bits: inflation not transitory, US debt ceiling limits, Tether diversification, futile EU stubbornness and more
Macro-Crypto Bits: geopolitical realignment, the Arctic, waning support for democracy, gold, US PCE and a whole lot more
The death of American Exceptionalism
It’s a Mar-a-Lago Pact, not an Accord
Epoch-shifting global agreements are often romantically named after the place in which they were signed, transforming a location into a concept that spans continents and centuries. Almost all who went through the Western curriculum know the names “Versailles” and “Bretton Woods”, even though they may not have a clue where these places are.
Let’s take Bretton Woods as an example – a picturesque town in New Hampshire, surrounded by forest, its name is now synonymous with global financial structures and coordination. In 1944, 730 delegates from 44 allied nations gathered at the town’s Mount Washington Hotel to hammer out the shape and pillars of the new international order.
What emerged was a system of fixed exchange rates pegged to the US dollar which in turn was pegged to gold.
The agreed coordination fell apart in 1971 when President Nixon suspended the dollar’s convertibility into gold, ushering in a system of free-floating currencies.
This led to a strong appreciation of the dollar, which continued US growth and demand for a convenient settlement unit for global trade have pushed higher over the years. Today, economists agree that the US dollar is significantly overvalued relative to its economic output, largely because of non-economic demand (settlement currency, safe-haven assets) – this makes US exports less competitive, hurting its domestic manufacturing base.
Restoring US manufacturing was a key part of President Trump’s campaign platform, and the barrage of tariffs either applied or about to be applied on imports from long-time trading partners since he took office shows he meant it.
Tariffs are just part of his plan, however. On their own, they are damaging. Combined with a restructuring of currency relationships and foreign ownership of US government debt, they could – with skilful execution and a lot of luck – achieve the necessary reset of the global economy.
That’s the idea, anyway. If you listen to what Trump and his economic team have been saying, the chessboard is being cleaned and new pieces are being brushed off and put into position. In this intertwined world, any bold strategy coming from the US will impact and require the participation of partners, willing or not. And any new global agreement deserves an epoch-defining name.
Since tradition links key frameworks to the place in which they were conceived, we’re witnessing the potential birth of a “Mar-a-Lago Pact”.
Why “Accord”?
Some commentators are choosing to refer to the emerging strategy as the “Mar-a-Lago Accord”, to evoke the Plaza Accord, which reset global trade almost 70 years ago. In September, 1985, central bankers and finance ministers from the US, UK, Japan, Germany and France gathered at the Plaza Hotel in New York (which, in a poetic timeline twist, Trump bought in 1988, although he had to sell it at a loss after the hotel declared bankruptcy a few years later – let’s pray that’s not an omen).
At the time, dollar demand had pushed its value up relative to the currencies of key trading partners, and US politicians were agitating for protectionist measures. However, these would weaken President Reagan’s political base given his focus on free trade.
To fend off building resentment, the meeting participants agreed to depreciate the US currency via the markets, buying yen and deutsche marks while selling dollars. It worked – within two years, the dollar had dropped almost 50% against the yen and 45% against the deutsche mark. This triggered the 1987 Louvre Accord (which broke the rule about naming, the meetings were not actually held at the Paris museum), with the original group plus Canada agreeing to intervene again, this time to support the dollar in the market by buying.
(photo by Pavel Brodsky on Unsplash)
So, using the term “Accord” suggests the strategy is all about currency coordination – I think this is too narrow an inference, as what Trump’s team seems to be working on is much broader. I’m going with Mar-a-Lago Pact, for reasons I’ll now get into.
Plus, “accord” implies a relatively vague agreement, with participants voluntarily working towards an agreement in everyone’s best interests, even though these have not been detailed. All present at the Plaza and Paris meetings wanted things to change, and a plan emerged relatively quickly.
What President Trump wants is not in the rest of the world’s best interests, not at all. Participants in the realignment are being dragged to the table, loudly protesting and occasionally throwing a tantrum. There’s no common goal here – the US wants to rewrite global agreements, while recognizing it will hurt partners.
A “pact”, on the other hand, sounds more formal and specific, with obligations spelled out on each side. Throughout history, they have often involved military considerations – for instance, the NATO Pact of 1949 created a collective defence commitment between the US, Canada and Western Europe, while the Warsaw Pact of 1955 did the same for the Soviet Union and seven Eastern bloc countries (this dissolved in 1991).
What does weakening the dollar have to do with military agreements? Glad you asked…
It’s not just about the dollar
Trump’s team understands that any move to lower the dollar needs to be done without triggering investor panic, as that could lead to disorderly currency markets which no-one wants.
So, any reduction in demand needs to be gradual, and tied to the budget deficit – a weakening dollar with runaway debt could spread concern about US solvency.
The key is bringing the US deficit down.
There are various strategies in play. One is to boost revenue through tariffs (which are paid into government coffers) and eventually through higher GDP which should deliver higher tax revenue, tax cuts permitting.
Another is to cut costs. The savings found by Elon Musk’s DOGE office will help but will be small potatoes compared to a possible reduction in two of the key components of federal expenditure: interest on outstanding debt, and defence.
How do you bring down interest costs? By bringing down bond yields, and/or by reducing the amount of debt outstanding. This is circular: bringing down the deficit reduces the amount of necessary issuance which helps to bring the deficit down further – there would be fewer bonds in circulation on which to pay interest. And, reducing the amount of government bonds in circulation should push the price up, bringing down the yield which means less interest is paid on those bonds. But there are other nudges as well.
An idea being floated is to encourage foreign investors to switch out of interest-bearing securities into zero-coupon long-dated (eg. 100-year) bonds. Foreign money is still coming in, but it’s not being parked in high-cost assets. Why would any partner agree to that? A good question, we’ll come back to this point.
How do you bring down defence costs? By insisting that allies pay for their own defence. We’re already seeing this strategy starting to play out, with Trump’s speech at Davos warning NATO allies that he expects them to move defence spending up to 5% of GDP, from just under 2% today. At the time, most didn’t take him seriously, but Vice President Vance’s speech in Munich jolted them out of some complacency, and the suspension of aid to Ukraine did the rest. Over the past month, we’ve seen unprecedented (and swift, by European standards) moves to incur more debt to boost investment and production.
We even recently saw Trump openly wonder why the US was protecting Japan when it wasn’t getting what he sees as a fair deal in return. Japan has been beefing up its defence spending over the past few years anyway, effectively doubling it in 2022 – but at around 2% of GDP, the Trump team thinks this isn’t enough.
By withdrawing its military presence and aid around the world, the US can reduce defence spending. And, since it produces some of the most advanced equipment in the world, still enjoy procurement revenues while allies develop their own production capability.
Increased spending on the part of allies will have a further benefit – lowering the trade surplus that flows back into US assets, reducing the demand for dollars.
Trump is also talking about how “unfair” it is that the US has provided so much military protection over the years, with little in exchange. (Statesmen and historians will have their head in their hands at this stage, but we have to remember Trump is all about the deal.) For instance, in 2010 the US was spending 4.5% on defence, while the EU was at around 1.4%. The gap has narrowed, with the US down to around 3% and the EU, as I mentioned earlier, almost at 2%. Trump wants this gap to close further, and wants payback for earlier arrangements.
Why would allies agree to this? In part, they won’t have a choice. Trump will yank military presence and promises of support, and with Russia and China flexing, many will see greater self-sufficiency as a matter of survival.
Also, Trump could offer a deal: continued support in exchange for the purchase of zero-coupon perpetual bonds. Above, you may have wondered why trading partners would rotate out of more flexible, higher-yielding dollar assets for one that bears no interest and may not be liquid – this is one reason.
Plus, Trump has shown a willingness to use tariffs as a “stick” with which to encourage certain behaviours.
So, some protection assurances and lower tariffs in exchange for a commitment to participate in the restructuring of US government debt.
See why this is a “pact” and not just an “accord”? In part, because it’s not friendly, it’s an agreement that is being forced onto participants. And in part, because it involves military umbrellas.
The end game
The goal is an ambitious one: a materially lower US deficit and a lower dollar mutually supporting each other as well as reinforcing international and domestic faith in the long-term economic outlook.
What could go wrong? Oooo, plenty.
For one, it’s disruptive – Europe recently experienced was one of its most volatile bond market weeks in modern history. Market disruption plus escalating uncertainty tends to increase the demand for safe assets such as the US dollar.
Also, it is going to hurt the US economy in the short term, through hits to consumption as fiscal spending drops, and through higher inflation as imports get more expensive. In his first address to Congress, Trump warned of pain to come – we can expect more of this sort of messaging in coming months.
And hurting the exports of trading partners could push already teetering economies into recession, affecting global demand for US goods as well as the financial stability of foreign exchange markets.
It’s a bold move, though, and in times of crisis, they are necessary. When even the Chair of the Federal Reserve breaks his own rule about not commenting on fiscal policy and says in public that the US deficit is “unsustainable”, you know something has to change.
If it works out, Trump’s team will have pulled the global economy back from what would have been an agonizing decline punctuated by increasing social unrest and market scares. If it doesn’t, the global economy will rapidly get even more chaotic, with more governments resorting to short-term stimulus and populism as quick fixes, possibly perpetuating imbalances and further weakening structures.
In coming years, the role of safe haven assets such as gold, US debt and Bitcoin, will become more important than ever. Of the three, only one stands to benefit from network growth as well as the pivot of institutional interest – and it’s not gold or US debt.
ASSORTED LINKS
Introducing a new section where I share, you guessed it, assorted links that I found interesting over the past few days. There’s a high risk this ends up getting too long as I read a lot* and most of it is jaw-dropping, brow-furrowing, view-changing or just plain inspiring, but I’ll do my best to keep this list varied and relatively concise.
Oliver Bateman pushes back on claims that “reading is dying”, that the addictiveness of scrolling and video has erased the quiet contemplation benefit we got from books, arguing that was never a widespread thing anyway. Most communication throughout history has been oral and short-form print – it still is, just delivered in a more solitary format. Knowledge is diverse; so are the ways we handle it. (The Work of Pre- and Post-Literacy – Oliver Bateman Does The Work)
A fascinating look at how the Beatles composed their songs, which will resonate with any writers out there. (3 Ways to Write a Song – Noted)
Russ Greene argues that it wasn’t Trump’s election victory that pushed DEI, ESG and other moralistic positions out of corporate statements, earnings calls and portfolios – it was the end of low interest rates. (How Easy Money Bred Bad Ideas – The Free Press, paywall)
While we still don’t fully understand what happened or why, this account by The Atlantic’s Editor in Chief of how he was added to a high-level Administration group chat discussing the US airstrike on the Houthis is an astonishing piece of reporting. (The Trump Administration Accidentally Texted Me Its War Plans – The Atlantic, paywall)
This report from Behind the Balance Sheet dives into the economics of finance newsletters on Substack and provides a broad look at price bands vs rank, Most charge $30-$40 per month, which makes me feel a lot more confident about my humble $12 per month – I know I’m not technically “finance” and I don’t offer trading ideas, but I do operate in a much less crowded niche (crypto + geopolitics + econ + blockchain). (The Substack Gold Rush: Who’s Winning and Why? – Behind the Balance Sheet)
Scrolling through X can be either a drain on emotional energy, or a richly rewarding firehose of ideas – this post from the newsletter Best of EconTwitter helpfully highlights the latter and just might add new “must follows” to your quality list.
This X post from Balaji looks at the impact of ChatGPT’s image generation – the fun of giving a vintage makeover to your favourite photos is not even scratching the surface.
And here’s an X post from David Perell on AI and writing – not along the lines of “destruction!”, rather it’s more new processes, some thought experiments and “how can AI help?”.
Google ran an experiment that showed sharing European news has virtually no impact on its revenue – the implication is that, if the European Union starts to demand Google pay news sources, it will just stop sharing European news. (Google In Europe)
China’s Deep Space Exploration Laboratory has published its road map for the coming years, and the US had better get a move on. Tianwen-3 is scheduled to set off for Mars around 2028. Tianwen-4 will aim for Jupiter the following year. In 2033, a mission is expected to head to Venus and bring samples back to Earth. A research station on Mars is pencilled in for 2038, and a launch to search for habitable worlds around Neptune is targeted for 2039. (Space News)
HAVE A GREAT WEEKEND!
(in this section, I share stuff that has NOTHING to do with macro or crypto, ‘cos it’s the weekend and life is interesting)
At the end of each premium daily email, I share a Spotify link to a song I’ve been listening to or thinking about – it feels fitting since music is generally part of my writing process.
Yesterday, the chosen piece was a blast from the ‘70s with a guitar riff that grabs your entrails, and I started wondering what made the sound so different from solos in earlier eras – it and others that I share below feel heavy and sweaty, assertive but not aggressive, and in each the guitar is more the driver of the vibe than the singers. What what was behind this evolution, beyond more powerful amps? Thoughts?
Black Betty, by Ram Jam
Black Dog, by Led Zeppelin
Smoke on the Water, by Deep Purple (cool video!)
DISCLAIMER: I never give trading ideas, and NOTHING I say is investment advice! I hold some BTC, ETH and a tiny amount of some smaller tokens, but they’re all long-term holdings – I don’t trade.