Wall Street warms up to the "Mar-a-Lago Agreement": a variant of "Plaza Accord 2.0," devaluation, defaulting, and playing tricks?

A clue to the reconstruction of the international financial order is quietly reflected in the recent rapid appreciation of the yen.

This week, the yen rose to around 148.5 against the US dollar, reaching its strongest level since October last year. Since the beginning of the year, the USD/JPY has cumulatively fallen by 4.88%.

This is naturally driven by expectations of interest rate hikes from the Bank of Japan, while Citigroup believes that the movement of the yen also implies market pricing for a potential "Mar-a-Lago Accord" that the Trump administration may initiate.

Citigroup analysts, including Osamu Takashima, stated that while it cannot be confirmed whether the "Mar-a-Lago Accord" truly exists, Trump currently holds more influence over the yen than Bank of Japan Governor Kazuo Ueda. Given that US Treasury Secretary Janet Yellen is dissatisfied with the yen's weakness and the slow normalization of the Bank of Japan's monetary policy, it is not ruled out that the US may push for exchange rate adjustments through political pressure.

Wall Street Discusses the "Mar-a-Lago Accord"

The concept of the "Mar-a-Lago Accord" can be traced back to a report published last November by Stephen Miran, an economist at the Manhattan Institute and a senior strategist at hedge fund Hudson Bay Capital Management LP, titled "A User's Guide to Restructuring the Global Trade System."

This report elaborates on the potential plans the Trump administration may adopt to restructure the global trade system, including tariff strategies, monetary policies, and their potential impacts on financial markets.

Miran served as a senior economic policy advisor at the US Treasury during Trump's first term. Just a month after the report was published, he was nominated by Trump to chair the White House Council of Economic Advisers.

The hypothetical "Mar-a-Lago Accord" initially circulated only in small circles but has now attracted widespread attention on Wall Street.

After all, from the establishment of the Bretton Woods system to the signing of the Plaza Accord, every historical change in the monetary system has been accompanied by market turmoil and great power competition. If the "Mar-a-Lago Accord" comes to fruition, it will undoubtedly become another significant turning point in the international financial system.

Jim Bianco, founder of the renowned research institution Bianco Research, recently convened a webinar for clients to discuss this topic. During the approximately one-hour meeting, Bianco emphasized: "'The Mar-a-Lago Accord' is not actually a specific entity, but a concept. It is a plan to restructure parts of the financial system."

Compared to the Plaza Accord, Bianco believes that the core of the "Mar-a-Lago Accord" is broader, potentially involving not only the depreciation of the dollar but also debt restructuring, the establishment of sovereign wealth funds, and the reallocation of defense spending, among other measures.

Although Bianco himself does not believe that the accord will be realized in the near term or even in the future, he clearly stated that the Trump team is likely to completely restructure the global financial order in the next four years, and Wall Street needs to be prepared

"Plaza Accord 2.0"? The Core is Completely Different

If there really is a "Mar-a-Lago Accord," its biggest similarity to the Plaza Accord might be in the name.

This name draws from the 1985 Plaza Accord and the 1944 Bretton Woods Agreement, both of which are significant milestones in the modern global economic system, named after the vacation resorts where the negotiations took place.

Aside from that, compared to the "Plaza Accord," the "Mar-a-Lago Accord" has essential differences. As Citigroup pointed out:

"The 1985 Plaza Accord, under the leadership of U.S. Treasury Secretary James Baker, used a multilateral approach to force the overvalued dollar to depreciate. Looking back at history, Reaganomics was the starting point of neoliberalism. Now, as people seek to change the direction of neoliberalism, President Trump has emerged. His approach to monetary policy is not just multilateralism (somewhat like Plaza Accord 2.0), but leans more towards unilateralism."

In other words, if the traditional "Plaza Accord" was based on multinational cooperation to promote the depreciation of the dollar, the "Mar-a-Lago Accord" may involve the U.S. unilaterally taking aggressive measures to force a change in the global financial order.

Additionally, while the Plaza Accord focused on exchange rates, according to Bianco's explanation, the core content of the "Mar-a-Lago Accord" is broader and may include:

Dollar Depreciation: The dollar index has fallen by 5% over the past 40 years; however, the trade-weighted index of the dollar, which includes 26 currencies, has risen by 218% over the past 40 years, putting U.S. manufacturing at a disadvantage in the global market. To enhance the competitiveness of U.S. manufacturing, the trade-weighted value of the dollar needs to be lowered. This can be achieved by renegotiating international financial agreements.

Debt Restructuring: The U.S. currently has $36 trillion in debt, most of which stems from military and security spending during the Cold War. The accumulation of this debt has placed the U.S. at a disadvantage in the global financial system. A significant restructuring of the U.S. debt structure is part of the Trump team's agenda, aimed at reforming global trade through tariffs, weakening the dollar, and ultimately lowering borrowing costs, with the goal of placing U.S. industries on a more equal footing with other countries.

Sovereign Wealth Funds: The U.S. has a large amount of underutilized assets, such as gold reserves (8,010 tons) and Bitcoin (207,000 units), which can be revalued and included in sovereign wealth funds. By revaluing and utilizing these assets, the financial situation of the U.S. can be improved, reducing the debt burden. For example, revaluing gold reserves from a book value of $42.22 per ounce to a market value of $2,090 per ounce could add approximately $900 billion in assets.

Allies Sharing Security Costs: Trump has called on NATO member countries to increase defense spending from 2% of GDP to 5%, which would help reduce the military burden on the U.S. This request has already received responses from some NATO member countries

U.S. Debt Restructuring, Defaulting, and Rogue Behavior?

The massive U.S. government debt is seen as a sword of Damocles hanging over the U.S. economy, potentially triggering a major crisis.

This month, Jeffrey Gundlach, CEO, CIO, and founder of DoubleLine, known as the "Bond King," warned in a podcast that the current U.S. deficit accounts for 7% of GDP, a borrowing level typically reached only during severe economic recessions. If this figure continues to rise to 13%, it could lead to a catastrophic debt crisis.

Gundlach believes that the U.S. will have to seriously consider how to restructure this debt.

So how to restructure?

The papers by Bianco and Miran both reference research by Credit Suisse star analyst Zoltan Pozsar. Pozsar has been advocating for a "Bretton Woods III" for years, arguing that the dollar's dominant role in global finance will significantly diminish over the coming decades.

A key point from Pozsar is that other countries should pay more for the security and stability provided by the U.S. One method is to convert some U.S. Treasury bonds into 100-year, non-tradable zero-coupon bonds. If these countries need quick cash, the Federal Reserve could temporarily provide them with cash through lending facilities.

Miran mentions in the paper that the core issue facing the modern global financial system is the "Triffin Dilemma" brought about by the dollar's status as the world's reserve currency: the overvaluation of the dollar harms the competitiveness of U.S. manufacturing, leading to persistent trade deficits; at the same time, the U.S. bears an increasingly heavy burden to provide reserve assets and global security.

Based on Pozsar's theoretical framework, Miran proposes that the "Mar-a-Lago Agreement" could be based on three key principles:

1) The security zone is a public good, and internal countries must fund it by purchasing Treasury bonds;

2) The security zone is a capital good; the best financing method is century bonds rather than short-term notes;

3) The security zone has a barbed wire fence: unless you exchange your bills for bonds, tariffs will keep you out.

In practical terms, the "Mar-a-Lago Agreement" would require foreign central banks to make two key adjustments: on one hand, sell some dollar reserve assets to boost their own currency; on the other hand, convert the remaining reserves into ultra-long-term U.S. Treasury bonds. This mechanism is designed to moderately devalue the dollar, enhancing U.S. export competitiveness while ensuring stability in the Treasury bond market and avoiding a debt crisis.

To alleviate the risk concerns of participating countries, the agreement may include swap lines established with the Federal Reserve to provide necessary liquidity support for countries holding long-term U.S. Treasury bonds. This arrangement allows participating countries to access dollar liquidity even during market volatility without worrying about mark-to-market losses on long-term bonds.

Seemingly Distant, Yet Happening?

Despite the grand vision, Miran acknowledges in the report that the "Mar-a-Lago Agreement" faces numerous challenges to be realized. Firstly, today's dollar reserves are primarily concentrated in Asian and Middle Eastern countries, rather than the European allies of the Plaza Accord era Secondly, U.S. Treasury bonds held by the private sector are not bound by the agreement, and potential sell-off actions by investors may offset the effects of official actions. Furthermore, the success of the agreement also requires cooperation from the Federal Reserve to ensure financial stability during changes in currency value.

If successfully implemented, both the dollar and long-term yields may decline simultaneously, alleviating the financing pressure on the U.S. Treasury, improving debt sustainability, and reinforcing the interconnection between the defense protection and reserve assets provided by the United States.

Bianco believes that the debt conversion proposed by Pozsar may not actually occur; if the U.S. truly intends to advance this, it will require significant international cooperation and may impact global financial stability. At least so far, the bond market has not reflected such concerns.

However, Bianco emphasizes that both the debt conversion and other more radical proposals in the "Mar-a-Lago Agreement" deserve serious consideration. Although this may not be a specific roadmap and may not happen in a step-by-step manner, the underlying ideas and goals have already been partially reflected in the policies of the Trump administration:

"You must start thinking boldly and macroscopically to understand what is happening."

Risk Warning and Disclaimer

The market has risks, and investment should be cautious. This article does not constitute personal investment advice and does not take into account the specific investment goals, financial situation, or needs of individual users. Users should consider whether any opinions, views, or conclusions in this article align with their specific circumstances. Investing based on this is at one's own risk