August 15th, 1971, was an auspicious day in global financial history. Then-US president Richard Nixon interrupted the evening broadcast of the US’s most popular TV show – Bonanza – to announce the dollar (as a currency) was delinking from gold, a move that remade the global monetary system in an instant.
The announcement effectively dismantled the Bretton Woods system that had prevailed since the end of the second World War.
It had pegged the dollar to the value of gold (at $35 an ounce), with the rest of the world’s currencies pegged at various (adjustable) rates to the dollar.
Nixon’s decision to detach the US currency from gold was driven by a simple anomaly in the global financial system. The US did not have enough gold to cover the volume of dollars in worldwide circulation.
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[ Trump puts US dollar’s role as dominant world currency up for grabsOpens in new window ]
This meant the dollar was overvalued. It also meant the US was starting to run big trade deficits (on account of imports being cheaper and exports less competitive), something the country hadn’t experienced since the 19th century.
The overvalued dollar was also subject to speculative runs against it, which was undermining the country’s foreign trading position.
Without warning, Nixon jettisoned the Bretton Woods arrangement, ushering in a system of free-floating exchange rates that still prevails today.
The move also exploded what many saw as the “Marshall Plan mindset” whereby US economic interests seemed to chime with the economic interests of its allies in Europe and elsewhere.
Despite the seriousness of the announcement, Nixon apparently fretted about the potential downside of alienating those addicted to the adventures of the Cartwright family, the fictional family upon which Bonanza was based.
But his advisers convinced him that the announcement had to be decisive, reach the widest possible audience and go before the markets opened the following morning.
Nixon, like Donald Trump, believed the overvalued dollar was hurting US exporters and workers and blamed the rest of the world for the US’s predicament.
As well as abandoning gold, he announced two other measures: a 10 per cent import tax (or tariff), designed to force countries that had a trade surplus with the US to accept the adjustment; and a new system of price and wage controls aimed controlling inflation, which had begun to surge.
The “Nixon shock” – at it was called – was a unilateral attempt to devalue the dollar and rewire the US’s trading relationships while maintaining US economic hegemony.
The parallels with today and the “Trump shock” are striking.
The Mar-a-Lago accord, the supposed blueprint to correct the US trade deficit through deliberate dollar weakening, is key to understanding Trump’s disruptive economic agenda.
The dollar has lost more than 10 per cent of its value against the euro, the pound and the Swiss franc since Trump came to office in January.
Like Nixon, Trump believes the strong dollar has made local manufacturing uncompetitive, forcing the US to import more, leaving it dependent on foreign countries and lumped with big trade deficits.
This has been amplified by what Washington sees as China’s unfair trade practices.
Approximately five million “well-paying blue-collar jobs” have been lost in so-called Rust Belt states, Trump’s power base, since 2001, the year China joined the World Trade Organisation.
Another problem feeding into this, in Trump’s eyes, is the US role as global policeman and underwriter of European security, which leaves it with a large military expenditure, another driver of US deficits and debt.
But where the Trump/Nixon comparison falls down is the country’s current debt pile: $36 trillion and counting. This is tipping into an out-of-control zone and testing the limits of the US economy’s reserve status.
And it can’t be simply blamed on the strong dollar or rigged trading relationships. It stems – in the main – from fiscal indiscipline, fuelled by several factors, including tax cuts under Trump’s first administration.
The “forever wars” in Iraq and Afghanistan – estimated to have cost the US $8 trillion – similarly are not a function of the US’s role as global policeman but part of the post-9/11 “neocon” agenda.
In investment parlance, bonds hedge stock market risk.
What that means in practice is that when stock markets drop, investors flee to safe-haven assets such as bonds. US bonds – known as Treasuries – are backed by the globe’s strongest economy and are traditionally seen as the safest of safe securities.
However, this relationship has begun to fracture.
After Trump’s “Liberation Day” tariff announcement in April, stock markets nosedived but the yield on US bonds – essentially the US government’s borrowing costs – which should have fallen as investors piled in, actually rose.
Soured by Trump’s tariff turbulence and his “big, beautiful” tax Bill, which will add more debt to the pile, investors sold US bonds when, historically, they should have been buying them.
In what was dubbed “America’s Liz Truss moment”, the negative market reaction prompted an immediate U-turn in Washington.
The US bond market used to be a boringly predictable segment of global financial markets, now it’s a flashpoint.
Like Nixon before him, Trump is attempting to use American economic might to bend the global economy to his will, but he is being hamstrung by the country’s deteriorating financial situation.
