A Fine Trumpian Line
A guest piece by Owen Reynolds of Teklas Ventures, the venture arm of the FO associated to Teklas.
Editor’s Note – Andreas Munk Holm, co-founder of eu.vc
Owen is writing the kind of piece only an American living in European exile could. Being the son of an author — and, likely, one of the few in European venture still writing fully non-AI these days — it’s easy to picture him in a Tolkien-esque setting, pipe in hand, crafting these pieces.
This piece makes me think of our upcoming summit talk on The European Counter-offensive with Oliver Holle, Founding and Managing Partner of Speedinvest.
Owen explores both the method and the man (or should we say men?) behind the madness. To be honest — as any good piece should — this one will likely leave you with more questions than answers. We hope you enjoy the puzzlement.
Wonder what all this mayhem in Washington DC is really aiming at?
While Trump may at first seem like a bull in a China Shop, breaking whatever he likes, there are theories swirling of a grander plan. Considering the trillions of market capitalization at stake and millions of lives impacted, it’s worth considering.
Is a “Mar-a-Lago Accord” possible?
“Wha Happen?”
For those who tried to hide under the covers (no judgement, just jealous), the S&P 500 index of the US’ large cap stocks closed at 5,712 on Monday, November 4th, 2024. On Tuesday, Donald John Trump was elected the 47th President of the United States.
Markets immediately surged, with the S&P 500 hitting 6,001 (+5%) by the following Monday. Expectations for freer markets, deregulation, and an investor friendly landscape—the “Trump Trade”—continued to drive the index to new heights of 6,144 on February 19th, 2025.
Trump’s erratic policy-by-tweet storm started within hours of being sworn in, which the New York Times tracks here. In response, after a 3-day rally, the S&P 500 flatlines through the Feb 19th peak.
By February 1st, Trump had signed an executive order imposing 25% tariffs on most goods imported from Canada and Mexico, and 10% on goods imported from China—all in the name of curtailing fentanyl.
On February 14th, Trump announced he would unveil automotive tariffs on April 2nd. A 3-day stalemate precluded a massive market drop, as became obvious that his administration was serious about implementing these tariffs.
The world held their breath until April 2nd. Trump launched a series of tariffs that saw the market lose $2.4 trillion in a day. The biggest one-day loss since the Covid Pandemic left the S&P 500 at 5,074, 17.4% down from the top.
The S&P 500 has recovered some ground at over 5,500 since Trump’s dramatic tariff pause. But the world has shed USD since then. The US Treasury yield curve has gone for a loop.
And the dollar has already weakened. Compared to a basket of trading partners’ currencies, the Dixie Index, USD has dropped by 8,8% year to date.
So that’s where we are today. How the heck could that have been the plan?
Macro Backdrop
A short video from Money & Macro gives a great explanation of the backdrop and what Trump (or his advisors) may be trying to accomplish. It describes a macro scenario I call the Dollar Reserve Discrepancy. This set up starts with the Triffin dilemma.
As the global reserve currency, US Dollar-denominated debt is held by other foreign nations’ central banks and corporations, supporting the medium of international trade. However, as Belgian Economist Robert Triffin described in the 1960s, the issuer of the reserve currency runs a structural trade deficit.
In addition to normal export products, the US essentially exports its currency in US Treasury form. They receive foreign currency in exchange, which is spent on imported goods—more than the traditional equilibrium economy.
Most people consider this dilemma a net positive, making the US effectively richer by fueling cheap consumption and giving its financial industry pole position.
The downside is that the dynamic puts tradable goods like manufacturing at a disadvantage. As USD appreciates, US produced goods (and US Dollar denominated labor) are more expensive relative to the same tradable goods produced in cheaper wage countries, including other OECD countries.
The 1944 Bretton Woods system, the 1971 gold standard, and the petrodollar system of the 1970s all tried to peg the dollar. Today’s tools to alleviate the tension include foreign aid and swap lines, which feed USD back into international hands. But it’s all like Sisyphus, pushing endlessly against gravity.
This is a similar dynamic to the more familiar Dutch Disease, or the paradox of plenty. The natural gas rush of the 1960s in the Groningen gas fields drove up the value of the Dutch guilder. This made manufacturing in the overvalued Dutch guilders less tenable and effectively strangled the country’s manufacturing sector.
In the US, the Dollar Reserve Discrepancy has filtered talent towards over-productive activities like tech and biotech. Nothing that is not inherently uber-productive can thrive in a currency environment propped up as a global reserve currency.
It is one of the key structural barriers behind today’s US tech dominance, which creates a flywheel. However, its continuity may be the flipside of the manufacturing coin.
Is This Truly Mayhem?
Trump’s erratic moves against long-term allies and friends is painful for investors, pensioners, and every market participant.
In a world where your manufacturing sector has been in secular decline for 80 years, protectionism may feel like the right thing to do. For national security and a resilient economy, there’s an argument. And maybe Trump’s logic stops there. Maybe he wants to protect fledgling industries, no matter the cost.
But in a country with a negative trade balance, like the US, consumers of imported goods foot the bill. Those lower on the socioeconomic ladder shoulder more of the burden than anyone else.
Tariffs act as a tax on imported goods paid by the importing country. They increase inflation and come with reciprocal tariff treatments by trading partners.
They were one of the policy tools that made the Great Depression so, ergh… Great. Since the end of the Second World War, tariffs have been whittled away. The entirety of economics literature had concluded they are a tool best left in the scrapheap of history.
And to protect “normal” tradable industries like most manufacturing with trade barriers is to admit they are non-competitive. (Though try convincing Brussels).
Despite all that, despite the economist class wagging its collective finger, there remains a sliver of possibility that it is intentional.
The threat of tariffs alone can be harmful—if only anyone would take such a ridiculous threat seriously. Donald Trump’s book the Art of the Deal coined the term “truthful hyperbole” as an innocent form of exaggeration, and an effective form of self-promotion.
Trump has made hyperbole a critical tool of his arsenal. Tariffs may be another hyperbolic policy tool, an exaggeration made truthful by actual implementation—no matter the consequences.
The Men Behind the Mask
Any speculation as to US President Trump’s motives is often dismissed as putting lipstick on a pig. But whatever your intellectual assessment of Trump, there are some very clever people around him. (Though we’ll leave the “who’s using who” for the political analysts.)
Two people in particular are (1) planning alongside, (2) rationalizing, or (3) simply following behind President Trump to re-order the world. That’s Chairman of the Council of Economic Advisors, Stephen Miran and US Secretary of the Treasury Scott Bessent.
Miran’s paper “A Users Guide to Restructuring the Global Trading System”, in particular, is increasingly cited as the blueprint for Trump’s approach.
The paper also rightly shows the 80 years of a manufacturing employees as a share of total employment, as well as the 30 years or so of fewer employees. This has been the mirrored image of the service industry takeoff—and then the high-tech industry takeoff.
The paper also demonizes trading partners actions in a global exchange rate system the US itself devised after the gold standard became untenable.
In retaliation to that same system, Miran proposes a way to retain USD dominance while boosting manufacturing. Sounds pretty good for the US, right?
Well, it’s not that easy. This FT article by Martin Wolf gets as close as I’ve seen to dissecting Trump’s infinite wisdom. “What is proposed now is recreating a global system of exchange rate management.” — and it threads a very fine line. Wolf even pulls into question whether the Dollar Reserve Discrepancy and the Triffin dilemma are driving the manufacturing drop off, considering all OECD countries have experienced the same.
But at its core, Miran’s plan aims to keep the USD’ reserve currency status while boosting manufacturing, using whatever means necessary:
“Despite the dollar’s role in weighing heavily on the U.S. manufacturing sector, President Trump has emphasized the value he places on its status as the global reserve currency, and threatened to punish countries that move away from the dollar. I expect this tension to be resolved by policies that aim to preserve the status of the dollar, but improve burden sharing with our trading partners.”
He also accepts there will be some pain: “No matter what policy is adopted, there is the risk of material adverse consequences for financial markets and the economy.”
How the H-E-Double-Hockey-Sticks…?
Wolf lays out what seems the most plausible scenario to achieve this—leveraging both loose monetary and fiscal policy. It allows Trump to follow through on his tax cuts and continue pressuring Powell’s Fed to slash interest rates.
But both simultaneously should drive inflation you say? It may yet. But there’s one further twist up the sleeves of our policymakers. Miran lays out the first steps in his paper:
“recall that President Trump views tariffs as generating negotiating leverage for making deals… First, there is the stick of tariffs. Second, there is the carrot of the defense umbrella and the risk of losing it. Third, there are ample central bank tools available to help provide liquidity in the face of higher interest rate risk.”
So that gets everyone on board—albeit by force. But what mechanism could possibly limit dollar appreciation at the same time the US administration is actively pushing it to central bankers?
Miran specifically suggests to “turn short-term borrowing into ultra-long-term borrowing, by “persuading” foreign holders to switch their holdings into perpetual dollar bonds.” While this would sound patently absurd only a year ago, it seems serious policy today. He writes:
“An agreement whereby our trading partners term out their reserve holdings into ultralong duration UST securities will a) alleviate funding pressure on the Treasury and reduce the amount of duration Treasury needs to sell into the market; b) improve debt sustainability by reducing the amount of debt that will need to be rolled over at higher rates as the budget deteriorates over time; and c) solidify that our provision of a defense umbrella and reserve assets are intertwined. There may even be arguments for selling perpetuals rather than century bonds, in this eventuality.”
And that is the easy way. The alternative unilateral way he describes “bring[s] bigger volatility risks, but increased flexibility of action. If the Fed creates dollars with which to buy foreign assets, it may seek to sterilize that money creation, and sterilization has consequences—likely, higher front yields, lower back yields, and a flatter yield curve.” He adds in that if the Fed doesn’t play ball, the administration is prepared for more volatility yet.
They apparently believe that they can get global consensus on US debt treatment, decrease the dollar’s relative value, and entice investors back towards manufacturing.
Miran dubs the target outcome a “Mar-a-Lago Accord”. Like the Bretton Woods and Plaza Accords of past, currency accords seem to be best named after the resorts where they were inked.
Intentionally harming trading partners and disrupting 80-years of commerce is an interesting way to get your way. Not to mention that unwinding the Dollar Reserve Discrepancy could eventually erode the high-water mark of productivity that made the US high-tech economy so appealing in the first place.
Wolf’s takeaway is that “this might be viewed as a “protection racket”.” It sounds a bit similar to the US’ 80-year military protection racket, but under duress.
Assuming this is the plan, any missteps could send the global exchange system reeling. The Yuan and the Euro are ill substitutes for Dollar hegemony. And despite Bitcoin’s recent decoupling from both risk assets and the USD to match gold more closely, it is not a realistic alternative today.
And even if the US administration can thread that diplomatic-financial needle of near impossibility, is it a stable long term power dynamic? Is this a revival of Pax-Americana with a financial twist? Or is it just twisting America’s waning dominance one turn too far?
Passionate about the future of Europe to have made it all the way through?
Don't miss out — our summit is all about charting the path to European progress.
Catch a special teaser of Oliver Holle’s upcoming EUVC Summit speech on The European Counter-Offensive — a must-watch glimpse into how one of Europe’s top VCs sees the battle ahead.
owen, bang-on & eye-opening.
still too many variables to ctrl in this dynamic environment imho.
q: what‘s yr suggestion for EU/ROW to leverage this hyperbole move? where‘s china‘s (hidden) stick here - they may not obey the t-line…