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Why might Trump want to Reset the Global Monetary System?
Two forces are driving Trump 2.0 towards a major reset of the current global monetary system: a justified perception that it imposes an “unfair” economic burden on the USA and an acute awareness that the current trajectory of US debt growth is unsustainable. Trump has long argued that because the USA has run current account deficits every year since 1970, the Dollar must be persistently overvalued. In addition, the main surplus nations – the EU and China – follow other unfair trading practises, including high tariffs – he counts VAT as a tariff – hidden subsidies, and other non-tariff barriers. Trump further argues that the US is similarly burdened by its role as the world’s military superpower, providing a security umbrella for the western world without compensation.
These factors were at play in Trump 1.0, but although they triggered tariff increases they did not lead to monetary reform. Why should it be different this time? The key difference – apart from the fact that the problems have grown bigger – is in the people appointed to key positions. The main figures are Elon Musk, Scott Bessent – the Treasury Secretary – and Stephen Miran – the President’s Chief Economic Adviser. This group, and others, have persuaded Trump of the inevitability of a future debt crisis, and thus the need for radical change. This time around tariffs are not the end game but a starting point.
What Might the Outlines of the New Monetary System be?
The best guide available at this early point is a remarkable paper written by Stephen Miran published in November 2024, entitled “A User’s Guide to Restructuring the Global Trading System”. This paper was written by Miran before he became part of the Trump team, but it clearly impressed the then President-elect because not long after he was in it. The key elements of Miran’s paper, backed by credible economic credible theory and evidence, are:
*The dollar is persistently overvalued, thus creating unsustainable global trading imbalances, because of the dollar’s role as the global reserve currency, which creates an inelastic demand for those reserve assets. Miran argues that “As global GDP grows, it becomes increasingly burdensome for the United States to finance the provision of reserve assets and the defence umbrella, as the manufacturing and tradeable sectors bear the brunt of the costs”. This overvaluation “has weighed heavily on the American manufacturing sector while benefitting financialised sectors of the economy in a manner that benefits wealthy Americans”.
* Miran argues that “Trump has a strong democratic mandate to undertake a substantial overhaul of the international trade and financial systems”. Trump explicitly campaigned on these issues and has long held these positions. It is no coincidence that Trump’s core constituency are the ‘losers’ in the current system – those regions and people that have suffered from the de-industrialisation of America.
*When Trump 1.0 imposed tariff increases on China, inflation did not rise but tariff revenue rose substantially because the dollar rose against the Chinese Renminbi. In effect the Chinese paid for the tariffs through a decline in their purchasing power. Trump’s 2018/19 tariff policy thus achieved its objective of making China share some of the burden of the US’s reserve currency role.
*The key objective of the likely trade and monetary reforms is “burden sharing”, with the costs to the US of the provision of reserve assets and the security umbrella linked together. In the short to medium term trade and security partners will be expected to share that burden more fairly, by contributing to the US Treasury revenues via tariffs, increasing their own spending on defence and security, and reducing barriers to US exports.
*In the longer term the tariff policy can be replaced by a multi-lateral accord devaluing the Dollar while retaining its reserve currency status. Trump has praised reserve currency status – even threatening to punish countries that stop using the dollar for reserve purposes – but has also consistently called for a weaker dollar. His 2018/19 tariff strategy worked because the dollar simultaneously rose – Miran calls this “currency offset” – but this means dollar strength not weakness. How to square these two circles? The answers may lie in both the sequencing of the policies and the methods which bring about ultimate dollar devaluation.
*Tariffs are imposed first and increase Treasury revenue. Before moving to a “soft dollar” policy the administration can wait until supply-side reforms – deregulation, tax reform, increased energy supply, public spending cuts – establish confidence in lower inflation and deficits. Tariffs can then be used as leverage to get trading partners to help achieve the weaker dollar. Miran thus expects policy will be “dollar positive before it becomes dollar negative”.
*How will the dollar devaluation come about? In a multilateral currency accord the countries with “undervalued” currencies – primarily the Euro, Yen, and Renminbi – agree to sell large quantities of their reserve dollars and thus drive the dollar’s exchange value down to some agreed target. Since these dollars are held in the form of US Treasury bonds or bills this risks sending US interest rates higher – hence the prior need to bring down US inflation and deficits. This policy will require considerable cooperation between the Treasury and the Fed, so expect Trump to appoint a new Fed Chairman known to back this approach when the current Fed Chairman Powell’s term ends early next year.
How is the dollar’s reserve status to be preserved in the face of massive dollar selling? This can occur if the dollar selling countries simultaneously agree to increase the duration of the remaining Treasuries that they hold. Instead of short-term US Bills or bonds in the 2–10-year range they can shift to buying much longer dated paper – perhaps “century” bonds” or even “perpetual” bonds (having no maturity date). This would emphasise the credibility of the dollar as a long-term reserve asset and assist US debt management. The US could also issue Treasury bonds backed by US gold reserves.
What Role might Gold Play in this New Monetary System?
It seems likely that gold will play an important role. In 2019 the Bank of International Settlements (“the central banker’s central bank”) announced that gold would henceforth join US Treasury paper as a Tier One reserve asset. Since then, central banks have been heavy gold buyers – over 1000 tons in the three consecutive years 2022-24, equal to around 30% of new annual mining supply – and a primary force pushing the gold price to record highs. Russia and China were already persistent gold buyers, with an obvious strategic need to diversify away from the Dollar, but other central banks have joined them – including Turkey, India, Singapore, Poland, Czech Republic, Qatar, Egypt, Iraq, and Kazakhstan.
Scott Bessent*, the new US Treasury Secretary has talked about “monetising” Treasury assets, understood to be referring to the US’s official gold holdings of 8133 metric tons – by far the world’s largest and worth nearly $800bn at current prices. US gold reserves are still officially valued at the 1973 price of $42 per oz, but if “marked to market” would give a $750bn boost to the Treasury balance sheet and provide collateral for new Treasury financing, perhaps for a US Sovereign Wealth Fund.
The gold market has long been plagued by conspiracy theories that the US gold holdings at Fort Knox** have been sold or leased out, fuelled by the failure to audit these holdings since 1956. However, Trump has now ordered a full audit. Another sign of change in the gold market has been the sudden large flow of gold bars from the London to New York, with settlement taking up to six weeks rather than next day delivery. The Bank of England claims that this outflow merely relates to an arbitrage play between New York and London gold prices, but respected gold observers do not find this explanation fully credible.
A key role for gold would be a powerful attraction for the BRICS (Brazil, Russia, India, China, South Africa) countries to support any new global monetary reform. All of them are either large gold producers, gold buyers or gold holders – in the case of China all three.
Opportunity or Threat to the UK?
Brexit has given the UK an enormous advantage in the emerging “tariff war”. If still in the EU, we would soon be hit by 25% tariffs (at time of writing). Because we are not in the EU, and our trade with the US is roughly in balance, we may escape tariffs, especially if we take up President Trump’s recent offer of renewed trade talks – again only possible because of Brexit. It is ironic to see our Remainer PM skilfully playing the strong hand dealt to him by Brexit, including recently re-starting advanced FTA talks with India and show independent leadership on current crucial foreign and defence policy issues.
If the global monetary reform process proceeds to a multilateral accord this could be a major opportunity for the UK. Some economists argue that a weaker Sterling is needed to rebalance the UK economy away from consumption and towards exports and investment. But how to achieve this without triggering a currency crisis? Sterling is not generally held as a reserve asset but due to centuries of relative political stability, the rule of law, and expertise in financial services the UK is seen as a “safe haven” for investment assets. This may be why the floating exchange rate system has not naturally adjusted sterling down in response to persistent current account deficits. Could the UK “piggyback” on a future US Dollar devaluation? With UK/US trade roughly in balance the current £/$ rate is broadly appropriate.
The danger for the UK is that in a major global currency reset Sterling weakens significantly even against the Dollar. The UK has low foreign exchange reserves – just over one month’s import cover – and pitifully small gold holdings – just 310 tons***, which are only the 19th highest in the world (and that excludes China and Russia) even though we are the world’s fifth largest economy. Furthermore, in recent quarters the UK has become excessively dependent on short term capital inflows (see my previous article: “Labour Must Urgently Change Course to Avert a Major Currency Crisis”). If at the time of any global currency accord the UK is still a low growth economy, we are likely to be a victim and not beneficiary of global monetary reform. Miran’s stipulation that the US must enact supply side reforms and achieve control over its fiscal deficits before devaluing applies to the UK as well, with the additional need to adopt a more realistic approach to net zero.
Conclusion
There are a lot of ifs and buts in this analysis, examining momentous possibilities rather than presenting firm conclusions. Achieving major global monetary reform will be a long process. It may fall at the first hurdle or go in unanticipated directions. What role might Crypto Currencies play? Is a multilateral accord even possible in a bitterly divided world, particularly with China’s participation critical? Might the US then attempt a unilateral devaluation? This could be done by revaluing gold – President Roosevelt unilaterally devalued the Dollar by 60% against gold in 1934 as part of his programme to lift the US out of the Great Depression. The US claims, with justification, that other countries impose VAT on US exports and that this is a disguised tariff. Might the US then introduce its own VAT system, which would help rebalance the US economy away from excessive consumption?
The highly respected commodity research firm, Goehring and Rozencwajg, have pointed out that since 1900 every period of radical commodity undervaluation**** has been ended by “a fundamental shift in the global monetary system”. There have been three such periods. In 1929 the UK Pound was taken off the Gold Standard, presaging the end of that system. In 1968 President Johnson removed gold backing from the US Dollar, signalling the end of the Bretton Woods Agreement. In 1999 many emerging markets ended their US Dollar Peg currency systems. Commodities are now as radically undervalued as they were in those three periods. History tells us we are due another major monetary upheaval. In June 2024 Scott Bessent, well before he took office, said that:
“I could see that in the next few years we are going to have some kind of grand global economic re-ordering….something on the equivalent of a new Bretton Woods”
Watch this space!
Robert Lee March 4th, 2025
* The biggest holding in the hedge fund managed by Scott Bessent prior to becoming Treasury Secretary was……gold!
**The US has gold holdings at West Point military academy and in Denver as well. The gold stored at the New York Fed is held on behalf of other countries. In the 1980’s I was privileged to be taken on a tour of the New York Fed gold vaults. It was a mind-boggling experience. The gold vaults are underground, resting on the granite rock of Manhattan Island, thus ensuring that the vast weight of the gold does not collapse through the floor. The entrance to the vault is a massive steel door – from memory 15 feet thick! The gold of each country is stored in separate steel cages. The vault workers wore steel boots to avoid serious injury should they drop a gold bar on their foot. If country A sold gold, or had to transfer it to meet imbalances, to country B the gold would be shifted from one cage to another by way of reinforced metal trolleys. I spotted one cage that seemed to have a lot more gold than the others. I cheekily asked if that was Saudi Arabia’s and was met by a non- committal smile!
***Gordon Brown infamously sold more than half of the UK’s gold reserves around the turn of the century at an average of $250 per oz – rudely known in the gold trade as “Brown’s Bottom” – it is currently nearly 12 times higher.
**** Measured as an index of commodity prices relative to the Dow Jones Industrial Average
