Devaluing the dollar is a terrible Trump economic idea

Remind me again why Americans think Donald Trump would be so much better on inflation and the economy?

The former president’s policy team is reportedly scheming to devalue the dollar. This might well be Trump’s most inflationary and economically destructive idea yet. That’s quite an achievement, considering everything else he and his advisers have cooked up (universal tariff hikes, deficit-financed tax cuts, huge reductions in the labor force, etc.).

Trump’s objective, Politico reports, is to boost exports and reduce imports. Basically, if a dollar buys, say, fewer euros or Japanese yen than it currently does, U.S.-made products look a little cheaper and potentially more attractive to European and Japanese customers (among others). So maybe this could help some U.S. companies trying to sell products abroad. That is, until you consider everything else that might happen.

The dollar is unusually strong right now. Exchange rates typically reflect a country’s macroeconomic conditions. We’re doing better than most of our peers. In the words of Kenneth Rogoff, a Harvard professor and former International Monetary Fund chief economist, “The U.S. economy has been on a tear.”

The relative strength of the dollar does make U.S.-made goods less attractive, though with so many other countries in or edging toward recession, our potential global customers might not be feeling terribly flush anyway. I suppose if Trump tanked the U.S. economy that might achieve his objective of swiftly weakening the dollar and shrinking trade deficits.

If not via recession, how would Team Trump weaken the dollar? He might try to force the Federal Reserve to cut interest rates. Or maybe he would bully other countries into raising their interest rates, which seems unlikely to happen. But if it did, it might result in a global recession. Perhaps he would tax foreign financial flows into the U.S. This, too, would likely tank the economy.

A weaker dollar would likely lead to higher prices for American consumers and not just during their vacations to Italy. Americans buy a lot of imported goods. Those would all get more expensive as the purchasing power of the dollar fell.

So much for Trump’s pledge to vanquish inflation. And that’s not the only problem with his plan.

There’s also a risk that other countries won’t want to go along with Trump’s scheme. Our trading partners might engage in countermeasures to keep their currencies from appreciating against the dollar, which we might meet with counter-countermeasures. We might see a sequel to the trade wars Trump initiated before.

Global trade or currency wars would, again, likely be bad for pretty much everyone, including U.S. businesses and consumers.

Deliberately weakening the dollar threatens its role as the world’s “reserve currency.” We have a stable government that has reliably paid its bills and doesn’t do dodgy things to manipulate the value of its fiat currency. The dollar is widely used in international trade. Dollar-denominated U.S. debt is in high demand.

That U.S. dollars are considered a virtually risk-free store of value provides huge privileges.

It enables us to keep spending more than we collect in taxes, since it’s cheap and easy for our government to borrows. Eroding the dollar’s global use might make it more expensive to keep borrowing so much (which means taxes might need to rise, or spending decline, to cover shortfalls).

We might weaken our ability to impose sanctions upon countries, businesses or individuals, since dollars are used so often in international transactions.

Maybe we should give Trump credit. Reducing our global influence, and specifically our ability to punish certain global villains, might be exactly what he wants.