Lots More on JD Vance and the Future of the US Dollar

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1:21Did you watch J.D. Vance's speech last night at the RNC? I saw some clips. Did you watch the whole thing? No, no. But I saw some clips as well. Do you think he has read Trade Wars or Class Wars? Matt, as far as you know, has J.D. Vance read the book you co-authored with Michael Pettis? As far as I know, definitely people on his staff have, and I would not be surprised if he has himself. Oh, there you go. I did a deadlift. One, two, three. Hegemony. Hegemony. Okay, good. What to? Hegemony. Barges. This is an after-school special, except... I've decided I'm going to base my entire personality going forward on campaigning for a strategic pork reserve in the U.S.

2:07Where's the best squid ink pasta? These are the important questions. Is it robots taking over the world? No, I think that, like, in a couple of years, the AI will do a really good job of making the Odd Lots podcast. And people will say, I don't really need to listen to Joe and Tracy anymore. We do have... Cha-ching! The perfect guest. You're listening to Lots More, where we catch up with friends about what's going on right now. Because even when the odd lots is over, there's always lots more. And we really do have the perfect guest. We're here with our friend, multi-time guest Matt Klein. Everyone is reading from your hymnal.

2:46Must be pretty wild. Also, listeners, in addition to reading the book, go check out his newsletter, The Overshoot, which is, you know, it's sort of like, you know how people used to subscribe to The Economist but then never read them and they're famously piled up. That's how I am with Substacks, except Matt's is one of the ones that I regularly open. I thought you were going to say, like, Matt's is one of those newsletters that I don't read, just like The Economist. No, his is really good. Hey, it's not like you subscribe. No, I appreciate that. That's very kind of you guys. So, yeah, one of the things that is extremely trade wars are class wars coded, so to speak.

3:23And this is one of these ideas you don't hear discussed popularly. particularly among politicians or really anyone, but it's like, oh, you're really in the know if you make this point, is this notion that maybe the central role of the U.S. dollar, the reserve currency status is not so great for the U.S. And he has made that point in interviews and I think even in some testimonies that like he's not crazy about the dominance of the U.S. dollar. Yeah, that's right. I mean, I think he asked Fed Chairman Jerome Powell about this a year ago. So yes, that's right. Wait, are you surprised at all that the dollar's reserve currency status has been picked up as like a populist talking point?

4:02I mean, seriously. I mean, I'm going to say no because he's not the first one, right? So Josh Hawley also was, you know, pet his pill, as it were. And I remember when the book came out, like having conversations with people on his staff. I didn't even think before the book was officially released. I mean, they somehow got some, you know, early preprint or something. So it's definitely percolating the ideas in that segment of the Republican, right? It's obviously also, I mean, you probably saw the article that Robinson Mayer wrote and he did. There's a lot of people in the Biden administration who've also read the book and I think gotten some good takeaways from it.

4:34So this is, you know, it's interesting to see that having a really cross-partisan appeal, even if the types of people who've liked it have been very different from each other and very different in their priorities for other things, but they seem to appreciate the analysis we put together. I mean, one thing that is true is it seems like there's been a slight evolution or at least a clarification in Trump's approach to the dollar. So do you remember like in the early days of his administration or when he was running, he used to talk about like, oh, a lower dollar would be better for U.S. trade. But then he would also talk about how, you know, how great the dollar was in the sense of its position in the international financial system.

5:11And so it always felt like there was a little bit of tension there. But I guess as time has gone on, he's sort of migrated towards clearly like this idea that actually the reserve currency status isn't that great for the American economy. Yeah, I don't know if I can, I don't feel comfortable saying what Trump's actual views are on this because it is sometimes part of the words. But yeah, I mean, I think at least it would be more coherent to say, say the way sort of the advance is laid out, that the use of the dollar outside the United States and its popularity as a place for foreigners to save money in dollars, that that has harmful effects in the United States because it makes the dollar relatively more expensive than it otherwise would be.

5:51That at least is a coherent point of view. You can disagree with it, but it's coherent as opposed to saying we want the dollar to be cheaper and it's great that the dollar is a reserve currency. Wait, so full disclosure, I have probably in my life in conversation said something like, well, did you know that the dollar's reserve currency status is not a privilege or a burden? But the only reason I said that is probably because I read it in your book or saw it in one of your tweets. And I actually don't even really remember the argument. I was just trying to sound intelligent and heterodox. No, I'm full disclosure.

6:23You're a smart guy. So if you believe something, I'll just probably accept it on faith. But why don't you remind us, what is the gist here of why maybe it's not so good? Sure. So basically, I mean, first of all, you know, people talk about the reserve currency and that's a little bit of a misnomer. Like the reason people are about the dollars. Right. I mean, the dollar is significant just because the United States is really big, right? There are other countries where their currencies are outside. Like the UK is a really good example. Switzerland is a good example. France in some ways. But in general, what it means is that your financial system, your domestic financial system has evolved and adapted to meet the needs of foreign savers and borrowers, at least as much as people in your own country.

6:59And that means that what people outside your country want to do can potentially have big impacts on your domestic economy because that's where the adjustment ends up happening. And that can be good or can be bad, depending upon or at least it needs it should be managed. If it's not managed in some way, it can lead to a lot of real problems. So in the case of the United States, what this has meant is that over the past 40 plus years or so, the overall preference of foreigners has been they want to spend less than they earn and save the difference by buying financial assets. And what that has meant is that Americans have to be on the other side of this and borrow more selling financial assets to them in exchange.

7:36That's what has happened to been the case for the past 40 plus years. And what that's meant is that Americans have been borrowing more than otherwise they would. That means more debt. And it also means some combination of either incomes being lower than they otherwise would be or spending being higher. Now, whether this is good or bad or how it translates into, you know, what American living standards and living standards in the rest of the world, that depends on a lot of specifics. And that's where it's important to get into kind of the nitty gritty and say, well, we don't necessarily want to just, you know, close the trade deficit by any means necessary.

8:04One way to do that, of course, is you just impoverish Americans so they spend less. That's not good. Right. Which, by the way, used to be sort of the orthodox view of people, oh, well, if you don't like the current account deficit. It's because the federal budget deficit is too big. So we need to raise taxes and cut spending, which is essentially saying that because other people in the rest of the world, for whatever reason, are choosing to live below their means, in other words, spending less and consuming less than they're producing, that therefore Americans have to live worse off. And that doesn't make sense.

8:30Obviously, it would be better if people in the rest of the world live better. And that would encourage a healthy rebalancing in the U.S. where we would generate more income selling to foreigners. But if that's not going to happen, And then the question is, what do you do about it? And, you know, we wrote in the book, most of the book is just sort of explaining all this in more detail, providing some historical context, showing it across different countries and time periods. But, you know, the conclusion, we did say, okay, well, you've read all this. Hopefully you understood it and taken it in.

8:55Like, what is that? What are the implications for a country like the United States? And, you know, Michael and I had a bit of a, you know, discussion about how to put that right in the conclusion was very hard to sort of synthesize different points of view. And I think we came to a good sort of constructive synthesis here and basically saying, if you think that foreigners are not going to change their behavior and they're just going to continually be this net inflow of finance in the United States and the corollary being that people in the rest of the world are going to be producing a bunch of things they're not using for themselves and selling it to Americans, then there are things that the U.S.

9:27can do to make that as beneficial for Americans as possible. The first thing is if someone's going to be borrowing, because someone in the U.S. is going to be borrowing to offset this, it should be the federal government because their ability to service the debt and not face runs and so forth is going to be much better than a private sector. The private sector borrows, even if people still want to buy dollar assets, they're not always going to want to buy those private assets. And that create real problems. That's what happened in the 2000s. There was never a situation where foreigners stopped wanting to hold dollars.

9:52They just wanted to stop holding particular types of dollars. And that created all sorts of runs. If the federal government is less likely to be an issue. Okay. So that's one thing. That's like step one. Then step two is because you want to make sure your private sector is not being unreasonably burdened by this. And then you say, okay, well, we should figure out useful things we can do with the money, right? I mean, if the government has been borrowing a lot more than otherwise would be, we might as well find things that are constructive. So one thing you could do, which I think would make sense, is say, okay, well, obviously, you have a society with some people are poorer than others.

10:20Some people are more financially constrained than others. Some people are more indebted than others. If we can, to a certain extent, increase overall incomes and living standards for people, that would be constructive, right? People would have more money. They'd be more financially secure, less precarious. They could buy more things that would be good for jobs and incomes and wellbeing and social wellbeing and so forth. That's one thing you could do pretty straightforwardly. Another thing you could do is you could say, we have a lot of unmet investment needs. We know what they are just because of various reasons.

10:43There have been backlogs, we haven't done them, or the things we think we're going to need in the future. And you can say, we can borrow, have the treasury borrow at relatively lower rates than otherwise would be the case and support the financing of these investments. That would be productive and hopefully, again, make people's living standards higher in the future. And then the last thing that I think would make sense in this context is to the extent that foreigners are consuming less than you'd otherwise expect based on what they're producing and they're creating relative to that an excess of production and selling it, you just want to make sure that America's ability to produce things or whatever country we're talking about here, it doesn't have to be the US, it could be the UK, isn't unreasonably displaced.

11:19There are reasons why it's good to have a sufficiently large, diversified, complex manufacturing sector in your country for productivity reasons, for national security reasons. And you want to be able to preserve that and not have it unreasonably, obviously there are technological changes or whatever things like that happens, you know, doesn't necessarily make sense for the U.S. to have a huge like t-shirt manufacturing industry, but you don't want to have a situation where because of people's savings preferences, which are totally unrelated, that like the U.S. manufacturing sector or for other countries of the supplies is not unreasonably demolished.

11:52And so it makes sense in that case to have some government spending set aside to make sure there is always demand for American manufacturing. And if you have this perspective, which is what we laid out in the book, you can, I think, reasonably say that in many ways, a lot of what we've seen in the past three years has really been consistent with that, that kind of policymaking. I think that's been constructive. The one thing, well, there are a lot of things that I don't get nowadays, but one thing that I really don't get is like Trump, the Trump administration, like insofar as they've laid it out so far, they seem to want like disparate and conflicting things.

12:27So, you know, a weaker dollar, a change in the dollars reserve status, maybe a reduction in the trade deficit, lower interest rates and lower inflate. Yeah. Lower inflation seems to be like the big contradiction here. And I also feel like you could make a very strong argument that if we've learned anything from the past few years in terms of Americans' economic preferences, it's that Americans hate inflation a lot more than they seem to like full employment, right? So how does all this come together and actually impact prices? Sure. Well, so these are all great questions. First of all, I'll say we wrote the book before it became apparent that people hated inflation more than they hated full employment or underemployment.

13:13So that's, you know, that's our fault, I guess. I still think it's better to have a full employment and a little more inflation than the other way around. But, you know, mileage may vary. But yeah, I agree that it is contradictory. I mean, I think you could plausibly put together sort of a reflationist agenda, the kind of thing that would have made a lot of sense in, say, 2009, 2010. You know, but does that fully make sense now? Or if it does make sense now, like, are people prepared to accept the full consequences of that. And I think the answer is probably no, right? I mean, first of all, compressing the trade deficit, there are two sides to that, right?

13:43You can lower imports, you can raise exports. If you do it by lowering imports, then again, I mean, one way of doing that is you somehow manage to make more things domestically. And so you have less need to import stuff. Okay, fine. Or you do it by just buying less stuff domestically because you're poor or you're just buying less stuff. So again, there's like all these different layers of how this plays out. Also for exports, by the way, you can increase exports because you're selling less stuff in your home market, but you're able to sell it somewhere else or because you're just producing more.

14:10And as a consequence, you know, whatever shares exported goes up. So there's four different possibilities there. You can have different combinations. They all have different implications for living standards, for potential interactions with how much spare resources are available and what that might mean for inflation. And so, you know, it's dangerous to oversimplify these things and just say like, oh, we want to have a narrower trade deficit. I mean, what you should care about is things like financial stability, things like full employment, things like making sure that you're having a diversified, sophisticated domestic production base.

14:41That's tricky. But I mean, that's kind of, I think, how it would make sense to prioritize things. Right. A lot of this is about are you addressing the symptom or the underlying issue? If the dollar were less central in the global economy, would that constrain foreign policy insofar as sometimes we seize the dollar assets of other countries or we cut off individuals, companies, and countries from banks that have access to the dollar system? Does that have a constraining a national security effect? Potentially. If you look back historically, some of the people who were most in favor of maintaining the status quo have been people in the national security establishment who look at from that perspective.

15:24So that's a potential issue. The flip side, though, is what are the other currencies that play a larger role, potentially? I mean, one, I think, obvious one, which nobody talks about anymore for reasons I don't understand, but would be the euro, right? Like, the European economy in the aggregate is very large. It is sophisticated. It's got a lot of stuff. The European financial market in the aggregate is, again, large. It's open. But there's a lot of issues they have in terms of fragmentation, in terms of legal regime, in terms of just weird ideological biases against government borrowing, particularly, again, encourages the fragmentation.

15:57And so that basically, they're really punching below their weight. I mean, that's sort of the most obvious one. You can also talk about Yuan, which is a different story, but Europe's an obvious one. And so from foreign policy, there are situations where sometimes you have disagreements between the US and Europeans about foreign policy. But on the really big stuff that's happened recently, there's been locks up. And same thing with Japan and Switzerland. And so you could have a more diverse, pluralistic regime of financial systems. And nevertheless, for when things matter, I mean, you talk about sanctions and banks, like there's an element where cutting off banks is important, but also what it is is like you are being cut off from a real economy as well.

16:33And so the extent that the real economy of the US and allies writ large is still very large relative to the global total and very, very large when it comes to certain sort of essential high-tech components, you'd be able to swing a big stick. if you wanted to, even if that were not the case. I think that people shouldn't, they should not be so afraid of that outcome that they, you know, ignore what's good in all the policy. And by the way, I should also add that sometimes you hear people make an argument that sanctions are bad because it undermines the reserve status, which is, I mean, that's just circular, right?

17:03Like, the whole value of reserve status or being popular is that you can do sanctions and you can't do sanctions. Like, I mean, that doesn't make sense. So, yeah. You have the threat of sanctions. That's always there.

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18:39Go to public.com slash market and earn an uncapped 1 % bonus when you transfer your portfolio. That's public.com slash market. Paid for by Public Investing. All investing involves the risk of loss, including loss of principal. Brokered services for U.S.-listed registered securities, options, and bonds in a self-directed account are offered by Public Investing, Inc., member FINRA, and SIPC. Crypto trading provided by ZeroHash. Complete disclosures available at public.com slash disclosures. This might be a kind of weird question, but you talked about the conclusions in your book and the idea of, okay, well, we can't really force foreign countries to necessarily change their behavior.

19:19And so if the U.S. really wants to reduce the dollar's role as a reserve currency, then here are some things that the U.S. could do. I guess my question is, is there anything more aggressive that Trump – Right. So yeah, you're absolutely right. And so actually, you're absolutely right. So what I laid out to you was, if we assume that nothing's going to change on the outside world, here's how we can adapt US policy to be as beneficial as possible. The alternative, which we also discussed in conclusion, this is where, again, Michael and I were kind of trying to figure out how to put all this together in a way that was coherent, is you say, you know, screw that.

19:54We're just going to force, you know, it's their problem, right? And basically what you would do is you have some kind of capital controls or what the IMF now calls capital flow management measures, I think, is the term they came up with like 10 years ago. But if it's literally the case that foreigners cannot buy US financial assets, or you make it prohibitively expensive for them to do that, that would have all sorts of other effects. And basically, that would be very chaotic, or could be very chaotic, could be very anarchic, could end up leading to an overall poor world. Certainly, I think, than the one where we have a kind of constructive approach.

20:27But if your view is foreigners are never going to change, and you don't want to do the things we laid out, Because to be clear, the alternative path that I mentioned earlier, I think it's overall beneficial, but it does come with one specific cost, which is that federal debt would probably rise to GDP. I think overall that's not a problem, but that is one specific thing you could point to. And if you, for some reason, really don't want that, then the alternative is to say, look, you, the rest of the world, collectively produce more than you use. You can't sell it unless you sell it to us. So now we're saying you can't sell it to us.

20:57Good luck. Figure it out. Now, that's going to hurt Americans initially at first, but it's going to hurt other people more, probably. And so that's where that is the alternative. I mean, you can sort of see, I mean, the extent that there have been people and across the political spectrum, feeling receptive to what we wrote in the book, I mean, you can see that as being a divide, like which approach you prefer. I mean, I think you can tell from what I'm saying, what I think makes more sense, obviously. Another really good thing would be the places that have these sort of persistent periods of underconsumption, Europe and China most obviously, but not exclusively.

21:29If they increase their own living standards, that would also be very helpful. Increasing consumption and investment were appropriate. But if that's not going to happen or you're not skeptical, if you're not sure it's going to happen, then it's okay. Well, you can really try to force them to try to figure it out. Or you say, okay, we're just going to take advantage of ourselves in a relatively constructive, positive some way. So there was a great interview this week. Trump sat down with our colleagues over at Bloomberg Businessweek and talked about a bunch of things. And I mean this is sort of obvious.

21:58He loves President McKinley. He called him the tariff king. McKinley made this country rich. Can you give like the 30-second, 60-second summary of McKinley's trade policy? And what would it mean in practice or what would the impacts be if we brought out the McKinley playbook today? Oh, man. Well, you know, it happens to be the case. I just actually finished reading a book, A History of the Gilded Age, that ended with the election of McKinley. So unfortunately, I didn't quite get to McKinley. But I will say the big increase in tariffs preceded McKinley. And that was – it was – I'm going to embarrass myself.

22:33But anyway, it preceded McKinley. And in fact, there was an election before where the Democrat won. I guess Garfield was against the tariffs, but they didn't manage to repeal them. So you had a big increase that was from – I'm going to butcher my memory. But the point is the tariffs had been raised in the 1880s, very early 1890s and state high. The thing that arguably was really helpful for McKinley specifically is you had big discoveries of gold reserves in the late 1890s and exploitation of those reserves. and that eased global monetary conditions after a long period in which gold supplies were dwindling relative to financial needs.