Couverture de AI review: Lyn Alden's take on reserve currencies, tariffs and capital flows

AI review: Lyn Alden's take on reserve currencies, tariffs and capital flows

AI review: Lyn Alden's take on reserve currencies, tariffs and capital flows

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 Lyn Adlen was interviewed by Monetary Matters and it is jam packed with insight. I myself had to leverage NotebookLM to unpack it all after the 1 hour interview which I have included here: Hope you enjoy and get value from both the source interview and the AI generated summary with debrief and study guide. One thing is for sure, it is getting more complicated than simply “buy the dips and yolo” as a strategy.Not Your Advisor is a reader-supported publication. To receive new posts and support my work, consider becoming a free or paid subscriber.Debriefing 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:Revitalizing US manufacturing requires significant investment in facilities, automation, skilled labor, and energy infrastructure – a "multi-year thing."Simply imposing tariffs does not automatically create the necessary domestic capacity at scale."You have to build more manufacturing facilities. You have to have tons of automation or skilled workers to to run them you generally have to have more energy infrastructure."4. Potential for Inflation or Stagflation:Sustained higher inflation generally requires money supply growth.Tariffs on goods, particularly from China, are likely to be inflationary in the short term.However, reduced economic activity due to tariffs could lead to disinflation in other areas and potentially weaker asset prices.A stagflationary scenario could arise if tariffs disrupt supply chains while large fiscal deficits are monetized by the Federal Reserve."if they go back to QEA increasing their balance sheet to support some of those fiscal deficits and the and the bond market in particular if that were to happen then that's how you get a stagflationary scenario in my view"5. Impact on US-China Trade Relations and Global Order:While the US trade deficit with China is significant, it represents a ...
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