Yanis Varoufakis, former finance minister of Greece and professor of economics at the University of Athens, wrote an analysis stating that if the elected president of the United States successfully eliminated the U.S. trade deficit, real estate prices in Miami and Manhattan would plummet, the cost of repaying government debt would soar, and the Dow Jones index would decline significantly.
From the beginning of his first term, Trump has been steadfastly committed to eliminating the U.S. trade deficit. However, Varoufakis notes that the U.S. trade deficit is deeply rooted, and since the collapse of the Bretton Woods system, this deficit has been deeply embedded in the structure of the U.S. economy, exceeding the capacity of the new administration and contradicting its core objectives.
According to Varoufakis, Trump has two major 'heavy weapons' at his disposal to combat the trade deficit: one is traditional import tariffs, and the other is Section 232 of the Trade Expansion Act of 1962, which allows the U.S. government to take retaliatory measures against countries or economies that engage in protectionism under the guise of national security. For example, the EU imposes a special 10% tariff on all imported cars and takes other administrative restrictions while maintaining a significant surplus in U.S.-EU automobile trade.
However, Varoufakis believes that neither tariffs nor measures under Section 232 can reliably reduce the U.S. trade deficit. Why? Suppose Trump indeed imposed tariffs on Canada, China, and Mexico on his first day in office, along with other punitive measures to restrict imports. Undoubtedly, these measures would reduce imports, but U.S. exports would also decrease significantly.
The adverse effects of tariffs on U.S. exports reflect the international role of the dollar. Even if people in other countries do not wish to purchase products from any American company, they still want to hold dollars. If Trump raises tariffs to a level he believes is sufficient to curb imports from Central Europe and enhance government revenue (thereby reducing domestic taxes), the currency market will inevitably push for a stronger dollar. If domestic tax cuts are also implemented, the dollar may appreciate significantly. Therefore, even if Trump's tariff policies could reduce imports, the strengthening of the dollar would offset this trend, further pushing imports up while weakening the U.S. export capacity. Ultimately, the U.S. trade deficit will remain essentially unchanged.
Next are the goals of Trump's new administration. Varoufakis hypothesizes an unlikely scenario: Trump's measures successfully eliminate or significantly reduce the U.S. trade deficit. In that case, he will face a personal and political 'Waterloo'. Although working-class voters helped him win this victory, the group Trump truly 'loyally serves' is financiers and real estate developers. Satisfying them is Trump's mission. And herein lies the problem: eliminating the U.S. trade deficit would destroy the wealth of these individuals.
By reviewing history, we can understand this more clearly. Varoufakis points out that after World War II, the U.S. maintained a trade surplus by 'dollarizing' Europe and Japan (thus enabling its allies to purchase American export products). This process was achieved through aid (such as the Marshall Plan), loans, and the fixed exchange rates between the dollar, European currencies, yen, and gold under the Bretton Woods system.
As long as the U.S. maintains a trade surplus, this system can operate smoothly. As Europe and Japan purchase cars, appliances, and computers from American companies, the dollars exported by the U.S. gradually flow back, allowing the surplus cycle to continue. However, by 1971, the U.S. trade balance shifted to a deficit. As a net importer, the U.S. economy exported increasing amounts of dollars to Europe and Japan. Meanwhile, the Pentagon's enormous expenditures in the Vietnam War also caused a large amount of dollars to flow into Southeast Asia, Japan, and even Europe. In short, a large amount of dollars accumulated in the vaults of foreign central banks.
At the core of the Bretton Woods system was the U.S. commitment to exchange gold for dollars at a price of $35 per ounce. However, as dollars continued to flow into the hands of non-Americans, confidence in the U.S. fulfilling this commitment began to wane. Ultimately, on August 15, 1971, President Nixon announced the termination of the gold standard, completely dismantling the post-war fixed exchange rate system, leading to a significant devaluation of the dollar, while the currencies of Germany and Japan appreciated substantially.
Soon, the central banks of Europe and Japan found themselves in a dilemma. They were unwilling to exchange the accumulated dollars for U.S. gold, nor were they willing to convert these dollars into German marks or yen, fearing further appreciation of the exchange rate, which would create greater shocks to their exports. Thus, these central banks treated dollars as a substitute for gold reserves, channeling them through financial intermediaries to Wall Street to buy U.S. debt, real estate, and stocks that the U.S. government allowed foreigners to purchase.
Varoufakis said this is the essence of the 'wonderful paradox' of America's global hegemony today: the U.S. trade deficit provides European and Asian capitalists with demand for their net exports while supporting the capital flowing into the U.S. to finance the government and boosting American financiers and developers—Trump's 'friends'.
Therefore, if Trump truly succeeds in eliminating the U.S. trade deficit, real estate prices in Miami and New York's Fifth Avenue will plummet, the cost of repaying government debt will surge, and the Dow Jones index will also decline significantly. Varoufakis said, perhaps Trump needs to be reminded of this: the most ruthless deity is often the one that fulfills his deepest desires.
Article reposted from: Jin Shi Data