Mirran in CEA Cements Mercantilists in White House

With the announcement that Donald Trump has named Stephan Miran to head the Council of Economic Advisers, we reprint our discussion of the Harvard-trained economist's unconventional thinking on tariffs and currency which has won widespread acceptance among the president-elect's advisors:

Rejection of the premise that tariffs are a consumption tax starts at the top, with the President Elect's "most beautiful word" musings, and the intellectual basis has been articulated in a recent paper by Stephan Miran of the Manhattan Institute and Hudson Bay Capital. What may be under appreciated is Miran's thinking on the sanctity of repaying government debt.

Tariff boosters note that during President Trump’s first term, the effective tariff rate on Chinese imports rose by 18 percentage points, yet inflation declined.

A 14% depreciation of the renminbi (USDCNY) offset over three-quarters of the tariff impact. Importers also absorbed some costs through reduced profit margins, especially in retail goods.

 Miran contends that mechanism will persist, and any tariff increase will be offset by the seller's currency declining.  Whether this would hold true at the proposed elevated levels, or with commodities priced in dollars, has not been tested.

A "Tariff Wall"

A tiered tariff strategy could apply varying rates to trading partners, incentivizing alignment with U.S. trade or security goals. This could create a “global tariff wall” around China, with high-risk but potentially high-reward outcomes if coupled with security agreements.

"Joining a tariff wall with a security umbrella is a high-risk strategy, but if it works, it is also high reward," Miran writes.

To address dollar overvaluation, Miran proposes a “Mar-a-Lago Accord” for coordinated depreciation. Foreign countries could sell U.S. bonds to weaken the dollar, raising interest rates.

To counter this, advocates suggests pairing a currency pact with a duration agreement, where foreign holders extend the maturity of their U.S. debt. Treasury could issue century bonds to replace shorter-term debt.  

Unilateral Treasury Defaults

If (when) foreign governments resist, Miran says,  the U.S. could use the International Emergency Economic Powers Act (IEEPA) of 1977 to reduce the appeal of reserve accumulation by "withholding a portion of interest payments on Treasury securities."

These strategic defaults on Treasury debt, or “user fees,” could vary by country., according to Miran.  Coordination between the Treasury and the Federal Reserve would manage interest rate impacts and ensure financial stability.  

The soundness or workability of the above argument is less important than the fact is is broadly accepted among credible, Ivy-League educated policymakers like Trump, Lutnick and Bessent.    

As the latter two have made immense fortunes betting on financial volatility, we can expect their tenure in Washington to present a like opportunity.