Weaponizing the Dollar: The Nuclear Option, Part I

Last month, we wrote a two-part report on weaponizing the dollar.1 The continued strength of the dollar has become newsworthy recently, prompting us to provide an update to those earlier reports and include an analysis of groundbreaking new legislation that was introduced in the Senate.

In Part I of this report, we will review the U.S. current account problem and examine how that persistent deficit affects the economy. We will also include how the U.S. current account deficit is tied to American hegemony and the way the deficit could be addressed. In Part II, we will introduce the Competitive Dollar for Jobs and Prosperity Act (CDJPA). Along with details of the proposed law, we will introduce the macroeconomics of the CDJPA and discuss how it would affect the dollar’s reserve currency status. We will then examine the potential political effects of the bill, the likely retaliation from foreign nations and, as always, conclude with potential market ramifications.

The Current Account Problem

Since the U.S. left the gold standard in the early 1970s, current account deficits have become the norm.

This chart shows the U.S. current account deficit relative to GDP. The current account is a broad measure of “current” international flows and includes trade in goods and services, net investment income from abroad and net remittances. The bulk of the account comes from trade. Here is a table showing the data for Q1.

The negative components are trade, as the U.S. runs a persistent trade deficit, and net remittances, as the large foreign-born population tends to “send money home.” On the other hand, U.S. investments abroad are positive and have been reducing the current account deficit most years since the early 1970s.

On the above chart, we have placed a vertical line at the point where President Nixon removed the U.S. from the Bretton Woods gold standard. Although not every quarter has a deficit, since that decision, surpluses have only occurred 12.6% of the time. And, since, 1980, there have only been nine quarters where the current account was positive, or only 5.7% of the time.