Trump policies could force debt plan on other nations

As the US tariffs policy continues to disrupt global trade, there is a theory that the end game is to force other countries into accepting an American debt restructuring plan and the devaluation of the US dollar for a trade advantage.

Luis Castillo, a fixed income strategist with RBC Dominion Securities, outlined this possibility as he addressed the recently concluded Barbados Risk and Insurance Management (BRIM) conference hosted by BIBA, the Association for Global Business, staged at the Wyndham Grand Sam Lord’s Castle Resort , St Philip.

Speaking on the topic Fixed Income Investing – Despite a Painful Path, the Destination is a Good One, Castillo told a packed conference room of delegates from across the world, that America’s biggest challenge was its “gargantuan level of federal debt”.

In fact, the United States federal debt now stands at 120 per cent of gross domestic product or about US$35 trillion, with an extremely high proportion going to interest payments on that debt.

“Is the end goal really tariffs or are tariffs just a pawn in a broader chess game and broader longer-term plan . . . that the Trump administration is looking to engage in?” he queried.

The finance expert noted that while the media’s narrative suggests the Trump policies are “delusional”, he cited the Mar-a-Lago Accord, a hypothetical blueprint crafted by Stephen Mirren, the US president’s pick to lead the US Economic Council.

“What role do tariffs play in all of this? Well tariffs are used again as a leverage in negotiations. To get a lot of this done you need a lot of multilateral cooperation between different countries. Tariffs and security blankets are leverage play and are used as threats to get people to sit at the negotiating table.

“So perhaps tariffs are not the end goal; they’re just a pawn in a broader chess game.”

Castillo posited that the US administration sees a high debt burden as “okay, if it is backed by assets”.

He told the rapt audience: “This is where the idea of a sovereign wealth fund for the U.S. administration has come in and the potential monetization of the 8,000 tonnes of gold that are currently sitting at Fort Knox at the moment. How can we monetise those assets? Assets that are currently sitting still and marked at the 1973 price of US$42 an ounce.”

According to the Canadian Fixed Income Strategist, the plan appears to include “turning dormant assets into potential debt collateral”.

Castillo disclosed the next step would be to force countries holding US debt instruments to take part in a debt restructuring process that would convert short-term US treasuries into long-term bonds.

“The second pillar [of the Mar-a-Lago Accord] is any sort of debt restructuring does not have to come from within. It can be forced on other nations. . . . What they’re looking to do is force restructurings on other nations. Keep in mind, about 20 percent of the U.S. federal debt is held by other countries, Europe in particular. This is where the idea of potentially turning a lot of those treasuries into 100-year bonds that are non-marketable and non-coupon payment in order to really kick the can down the road. Now why would these sovereign nations agree to this? Well, otherwise we’ll hit you with tariffs.”

The BRIM delegates were also told: “A big pillar of the Mar-a-Lago Accord is the continued use of tariffs to achieve broader goals, which in our mind is de-levering what has become an extremely levered nation. The fourth major pillar is dollar devaluation.

“I think the Trump administration has been fairly clear about this point, bringing manufacturing back to America . . . . That’s also something that will require getting many nations to . . . really negotiating these things and multilateral agreements to bring the dollar down.”

Castillo reiterated the disruption being caused by the Trump policies were real, however, he believed it was still too early to confirm that people’s expectations of the future impact will be realized in the actual figures.

“The Trump administration has been fairly clear that we’re probably expected to see a period of transition, ‘a detox period’ are the words that have been used. . . . Now will the hard data corroborate the soft survey data that we’ve been seeing?” he outlined.

The RBC Dominion Securities analyst affirmed, however, that inflation is expected to rise and there was flux in most markets, though companies were still making major profits. (IMC1)