Wall Street Can't Stop Talking About the 'Mar-a-Lago Accord'. Here's How the Currency Deal Would Work.

The 'Mar-a-Lago Accord' has been the talk of Wall Street lately, with analysts and strategists debating the potential implications of a grand multinational bargain that could deliberately weaken the dollar. But what exactly is the 'Mar-a-Lago Accord,' and how would it work? Let's break down the concept and explore the potential impact on global markets.

What is the 'Mar-a-Lago Accord'?

The 'Mar-a-Lago Accord' is a proposed agreement between the United States and its trading partners to address economic imbalances driven by persistent dollar overvaluation. The accord aims to create a more balanced and stable global trading system by weakening the dollar, making American exports more competitive, and reducing the US trade deficit.

How would the 'Mar-a-Lago Accord' work?

1. Reducing reliance on exports to the US: American trading partners would pledge to boost domestic consumption of the goods they produce, reducing their manufacturers' reliance on exports to the US. This would help balance trade and ease the pressure on the dollar's exchange rate.
2. Foreign exchange market intervention: The accord could incorporate agreements to intervene in the foreign-exchange market to forcefully tilt currencies in the desired direction. However, this would be challenging due to the market's gargantuan volume of daily trading, which was last counted at $7.5 trillion.
3. Interest-rate adjustments: While central banks are more independent today than they were in the 1980s, the accord could include provisions about interest-rate adjustments to help manage global financial stability. This could involve coordination among central banks to ensure that monetary policy supports the goals of the accord.
4. Diminishing the source of upward pressure on the greenback: The accord would need to address the inelastic global demand for reserve assets, which drives the persistent overvaluation of the dollar. This could be achieved by reducing the demand for dollars as a reserve currency or by increasing the supply of alternative reserve assets.



What role would US debt play in the negotiations?

US debt would play a significant role in the negotiations surrounding the proposed 'Mar-a-Lago Accord.' The Trump administration has been exploring ways to reduce the US debt burden and lower borrowing costs to support American industry. One idea discussed is the issuance of century bonds, which are 100-year, non-tradeable zero-coupon bonds. These bonds would not pay interest, but would be sold at a deep discount, allowing the US to raise funds without increasing its annual debt servicing costs.

The proposed debt swaps, as suggested by former Credit Suisse strategist Zoltan Pozsar, would involve the US encouraging its foreign creditors to swap their existing Treasury holdings for these century bonds. In return, the US could offer security guarantees or other incentives. This would effectively reduce the US's annual debt servicing costs, as the century bonds would not require interest payments.

However, the impact of these century bonds and debt swaps on the US economy and global financial stability is a topic of debate. Some argue that these measures could help reduce the US's debt burden and lower borrowing costs, potentially stimulating economic growth. On the other hand, others express concerns about the potential impact on global financial stability, as the US is the world's largest economy and its debt is a significant component of global financial markets.

In conclusion, the 'Mar-a-Lago Accord' aims to address economic imbalances driven by persistent dollar overvaluation by implementing a combination of measures, such as reducing reliance on exports to the US, foreign exchange market intervention, interest-rate adjustments, and diminishing the source of upward pressure on the greenback. US debt would play a significant role in the negotiations, with the proposed century bonds and debt swaps potentially impacting the US economy and global financial stability. As Wall Street continues to discuss the potential implications of the 'Mar-a-Lago Accord,' investors should stay informed about the latest developments and consider the potential impact on their portfolios.