Briefing Document: Analysis of Tariff Implications and Global Capital Flows

Date: May 9, 2024 Source: Excerpts from "How Tariffs Will Transform U.S. Dollar Capital Flows Worldwide | Lyn Alden"

Executive Summary:

This briefing document analyzes the potential consequences of the Trump administration's tariffs on global capital flows, the US dollar's reserve currency status, and the broader economic landscape, drawing insights from an interview with Lyn Alden. Alden argues that while the administration's goal of addressing trade imbalances is understandable, the use of tariffs as a primary tool carries significant risks, particularly in the short term. These risks include immediate economic disruption, potential capital outflows from the US, and a challenge to the dollar's global dominance. The interview highlights the intricate relationship between trade deficits (the mechanism for dollar outflow) and the dollar's reserve currency status, suggesting that tariffs alone cannot solve the underlying structural issues. Alden also discusses the potential for inflationary or stagflationary pressures, the impact on global markets, and the long-term implications for the US within the context of the long-term debt cycle and a potentially shifting global monetary order.

Main Themes and Important Ideas/Facts:

1. The Intertwined Nature of Trade Deficits and the Dollar's Reserve Currency Status:

• Alden emphasizes that the US structural trade deficit is a mechanism for dollars to flow out into the world, fulfilling the global demand for the reserve currency.
• "the trade deficit is the mechanism for how the dollars get out into the world to serve as the global reserve currency"
• The global need for dollars (for reserves, cross-border funding, trade denomination) creates an "insatiable demand" and an "extra structural bid" for the currency, making the dollar somewhat artificially strong.
• This strong dollar makes it less competitive for the US to manufacture goods, even compared to other developed nations.
• "especially for lower margin things it's it's generally less economical to produce them in the US even compared to other developed countries"
• Alden posits that even if other countries lowered their tariffs, the US would still face headwinds due to the dollar's reserve status, making US manufacturing less competitive.

2. Immediate Consequences of Tariffs and Potential Market Disruptions:

• Tariffs have an immediate impact, unlike structural changes which take years.
• "the consequences of the tariffs hit right away Whereas some of the things that you're trying to structurally change can take years or in some cases decades"
• Rapidly restricting the outflow of dollars through high tariffs can "seize up the system" and have negative consequences both domestically and internationally.
• Entities holding dollar liabilities may be forced to sell US assets to obtain dollars if their access to dollars through trade is reduced, leading to potential capital outflows.
• "instead of a shift from stocks to bonds it's an outright capital outflow something you typically see in emerging markets"
• This could lead to "illiquid downward moves in US assets" and potentially challenge the traditional safe-haven status of US bonds.

3. The Challenge of Rebuilding US Manufacturing: