Trump’s Strategy to Kill Two Birds with One Stone
Donald Trump aims to tackle two seemingly contradictory goals simultaneously: reducing the fiscal deficit and weakening the dollar to revive the competitiveness of U.S. companies. A potential solution lies in a policy reminiscent of the Tobin Tax, a concept proposed by Nobel laureate economist James Tobin.
“Don’t Put All Your Eggs in One Basket”: From Investment Wisdom to Economic Theory
The famous investment adage, “Don’t put all your eggs in one basket,” was popularized by James Tobin, the 1981 Nobel Prize-winning economist. During a press conference explaining his portfolio theory, Tobin used this metaphor to advocate for diversification. His groundbreaking work also introduced the Currency Transaction Tax (CTT), or Tobin Tax, designed to curb speculative short-term capital flows.
“Throw sand in the wheels of excessively efficient international financial markets.
A moderate tax can slow down the hyperactivity of global capital.” – James Tobin
The Double-Edged Sword of Capital Mobility: Freedom vs. Control
The debate over capital mobility has long divided economists. Proponents argue that free capital flows fuel growth in developing nations, while critics, like economist Ragnar Nurkse, liken foreign capital to “an umbrella that must be returned as soon as it starts raining”—highlighting how capital flees at the first sign of crisis. Research by Carmen Reinhart and Kenneth Rogoff further revealed that every financial crisis since 1800 coincided with surges in capital mobility.
Tobin’s solution was “moderate regulation”: imposing a small tax on short-term speculative transactions while protecting long-term investments.
Brazil’s Experiment: The Rise and Fall of the Tobin Tax
In the late 2000s, Brazil faced a surge in foreign capital inflows, driven by high interest rates and growth potential. This caused the Brazilian Real to strengthen, hurting exports. In 2009, Brazil introduced a 2% Tobin Tax, later raising it to 6%. Initially, the tax weakened the Real, boosted exports, and improved fiscal revenue.
However, unintended consequences emerged. Foreign investment plummeted from USD 63 billion in 2010 to USD 8.8 billion by 2012, stifling long-term growth. By 2013, Brazil scrapped the tax entirely.
Trump’s Hidden Card: The “External Revenue Service” and a Tobin Tax Revival
Trump’s recent pledge to create an External Revenue Service—tasked with collecting “all revenue from foreign sources”—hints at a broader agenda. While markets focused on tariffs, Trump ally Steve Bannon hinted at a deeper motive:
“The U.S. is the world’s most profitable market.
Foreigners shouldn’t get free access to it.” – Steve Bannon
This suggests a Tobin Tax-style levy on foreign investments in U.S. assets. If implemented, reduced demand for dollars could weaken the currency, aiding exporters, while tax revenue would trim the fiscal deficit. Unlike Brazil, the U.S. benefits from its status as the global financial hub, minimizing the risk of capital flight.
The Ripple Effect of a Weaker Dollar
For example, if Japanese investors face a Tobin Tax when buying U.S. bonds, they might reduce dollar conversions. This would increase dollar supply, driving its value down and strengthening currencies like the yen or won. U.S. exporters would gain a competitive edge, while the government collects revenue from the tax—a dual win for Trump’s agenda.
Conclusion: Watch Trump’s Early Moves Closely
If Trump prioritizes establishing the External Revenue Service and testing a Tobin Tax, markets must prepare for dollar volatility and shifting capital flows. Financial capital, much like an umbrella loaned only in fair weather, could face new rules under Trump’s policies—this time, with a price tag for accessing America’s lucrative market.
One-Line Take away :
Trump’s proposed “External Revenue Service” and potential Tobin Tax adoption aim to weaken the dollar and reduce the fiscal deficit simultaneously, leveraging the U.S. market’s unique global dominance.