During the first years of the 1980s, the U.S. dollar (henceforth, “the dollar”), appreciated rapidly against major counterparts such as the British pound, French franc, German mark, and Japanese yen. The dollar’s strength was primarily an effect of the Federal Reserves iron will to break the rampant, 1970s inflation. However, as U.S. exporting companies such as Caterpillar, IBM and Motorola felt the pain of an ever strengthening dollar, a lobbying effort was launched in order to persuade the Reagan administration to take action.
President Reagan, and especially sitting Federal Reserve chairman Paul Volcker, was initially critical of the cries from the country’s exporters. With inflation still an issue, Volcker wanted to maintain a tight monetary policy. However, by 1985 the dollar had increased some 50 percent against other major currencies. And, as congress, under the influence of exporting companies, began to threaten the market friendly administration with protectionist laws—designed to stave off foreign competitors enjoying weak local currencies—Reagan took action.
In a meeting at the New York City’s famous Plaza hotel on September 22nd, 1985, the finance ministers of the U.S., Britain, France, Germany, and Japan, decided to collectively intervene in the currency markets in order to devalue the dollar. During the following two years, central banks, accompanied by trend following currency speculators, successfully drove down the relative value of dollar to such levels that its weakness would subsequently become an issue. But that’s a story for another time. The important parallell is the fact that the dollar is yet again strengthening against international counterparts. With the current Federal Reserve staying hawkish, continued dollar strength is not unlikely.
However, critics would note that few economist predict a repeat of the Plaza Accord, with many saying such an event is in fact out of the question.1 China’s Ambassador to the United States, Cui Tiankai, has even stated that the country would not accept the imposition of another Plaza accord.
How we could arrive at a second Plaza Accord?
So what’s different this time, and why would foreign central bankers become interested in a second Plaza Accord? Debt, huge quantities of debt. But not just any debt, dollar denominated debt.
If the dollar keeps strengthening, the debt will become increasingly burdensome for an ever growing group of countries. We’re already seeing this in Argentina and Turkey, but countries such as Brazil may follow.2 The problem is the following: Since the debt is denominated in dollars, these countries’ central banks can’t print themselves out of the economic crisis. In fact, they need to raise interest rates to combat a falling currency and inflation, which in turn slows down the economy even more. This may lead to contagion where other countries start toppling like dominoes.
Finally it’s also worth mentioning that the U.S. may have even stronger incentives to intervene this time around. This is because U.S. exports of goods and services as a percentage of GDP has almost doubled since 1985. Sooner or later, the country’s exporters may sound the alarm yet again.
What about China? Although the country may have little to gain from a weakening dollar, no country stands alone in the interconnected global economy. As Chinese trading partners start feeling the pain from the increasing burden of dollar denominated debt, the country may have little choice but to join, or at least stay neutral, as other central banks carry out a concerted intervention to weaken the dollar.
Furthermore, Ambassador Cui’s statement that China would never accept the imposition of another Plaza Accord, only tells part of the story. The ambassador also stated:
“But at the same time, China is always ready to engage in serious, substantive and pragmatic negotiations and consultations to address the economic and trade issues on the basis of mutual respect and a balanced approach to resolve the concerns of both sides.”
The impact on gold
Since we are mainly interested in how a second Plaza Accord would influence bitcoin, we need to study the first Plaza Accords effects on its analog relative, gold. As can be seen below, the coordinated actions by central banks had a predictive effect on the precious metal:
|Year||Change in price|
Given bitcoins behavior during the post 2008 quantitative easing, its price would most likely emulate or outperform that of mid-80s gold. The question that remains to be answered is if the dollar will continue to strengthen. Right now, this is the only question that matters.
- Exporting nations prefer a weaker currency. ↑
- Fitch Says EM Is Vulnerable as Debt Balloons to $19 Trillion, Bloomberg, May 17, 2018. ↑