Joe Gagnon on Currency Manipulation, Trade Imbalances, and Libra (Macro Musings with David Beckworth, 53 min listen)

(You can listen to the podcast by clicking here)

A weak dollar policy has entered US political discourse. First it was President Trump, and now Democrat presidential hopeful Elizabeth Warren has also called for a weak dollar to reduce the US trade deficit. In her justification, Warren referenced Senior Fellow at the Peterson Institute Joe Gagnon’s work on the subject, so we’ve brought you Macro Musings’ interview of him. Gagnon argues that over one third of trade imbalances across countries can be explained by both their currency trade activity and fiscal policy. As a precaution, The US actually has an Exchange Stabilisation Fund of $100bn, which could be used to offset the currency intervention of other countries. He argues this is more effective than imposing import tariffs on specific sectors. Currently, however, Gagnon does not believe any major countries are manipulating their currencies. Turning to Facebook’s Libra, Gagnon sees it as a potential safe haven which is likely to be based on the IMF’s currency (Special Drawing Rights).

Why does this matter? A weak dollar policy could have support in both US parties, which suggests that the election may not derail it. In the mid-1980s, a weak dollar policy was a critical driver of the dollar, and it seems that we could be entering a similar phase again.

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