Robin Brooks on the Dollar, Fiscal Dominance, and Geoeconomics

Robin Brooks is a senior fellow at the Brookings Institution. Robin returns to the show to discuss his previous appearance in March of 2020, life at a think tank, the changing or not-so-much status of the dollar, Trump’s trade war, the current landscape of geoeconomics and much more. 

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This episode was recorded on August 7th, 2025

Note: While transcripts are lightly edited, they are not rigorously proofed for accuracy. If you notice an error, please reach out to [email protected]. 

David Beckworth: Welcome to Macro Musings, where each week we pull back the curtain and take a closer look at the most important macroeconomic issues of the past, present, and future. I am your host, David Beckworth, a senior research fellow with the Mercatus Center at George Mason University, and I'm glad you decided to join us.

Our guest today is Robin Brooks. Robin is a senior fellow at the Brookings Institution and previously was the chief economist at the Institute of International Finance. Robin also served at Goldman Sachs and the IMF. Robin joins us today to discuss the dollar, the trade war, geoeconomics, secondary tariffs on Russia, and the outlook for the US economy. Robin, welcome back to the show.

Robin Brooks: It's great to be here, David. It's great to see you in person.

Looking Back at the Pandemic War and Fiscal Dominance

Beckworth: In person! We did a show back in March 2020, just as the pandemic was taking off, and you were a machine during that time, if I remember correctly. You had chart after chart, day after day, just prolific. You remember those days of the pandemic?

Brooks: I remember them. I think I was just learning how to figure out Zoom when you and I did that episode. Back then, I was at the IIF, as you said, and our specialty was capital flows to emerging markets. We spent a good amount of time talking about emerging markets, and COVID saw outflows that were so big that I thought were, frankly, completely unimaginable. I remember asking my staff, "Are our algorithms broken?" We spent all kinds of time digging into that stuff. It was the pandemic. It was so crazy. Crazy stuff started happening.

Beckworth: I can't remember if it was in May or June, but we started doing two episodes a week during that time.

Brooks: Amazing.

Beckworth: You may have been part of that, and now we've come back. During that period, I want to bring up a memory I have of you, Robin. You and Hanno Lustig were the two, I think, most vocal people about the Federal Reserve buying up all the net new issuance, at least at some window in there. I was like, "Ah, what's the big deal? Bah humbug," like dismissing it.

Brooks: Whatever.

Beckworth: Whatever. I was like, "This is an unusual time." It is. I think I would look back now and say this was a pandemic war, world war. In fact, we've had George Hall and Tom Sargent, and they compare the pandemic to World War I, World War II. How do we finance big wars and stuff? What really now seems correct and wise to me, which you were saying at the time, is effectively we were in a brief period of fiscal dominance during this time where the Fed had to buy up that net new issuance.

Again, I think looking back, it's understandable, and that's what happens during wars. It's less hard to make sense of what's going on now in terms of deficits and stuff. But back then, you were right, and I acknowledge—it’s my mea culpa here, Robin—you were calling it as you saw it, and you got it right.

Brooks: Man, I thought you and I were going to start talking about our breakfast and ease into this. This is a seriously heavy point, because I think the Fed did emergency Treasury buying, mostly bills, but also across the curve in March 2020. I think within seven weeks, it bought like $1.2 trillion in Treasuries. It was absolutely gargantuan and massive. A point that I make again and again—and this is not specific to the US, it's a general problem, I make it in the European context a lot—is when in bad shocks, you and I, we spend a lot of time thinking about fiscal space: What is a responsible budget? Do we need to save firepower for the future?

All these questions come to a head in a bad shock. They don't matter in good times because everything is good. You need the fiscal space when stuff is going south, when it's going pear-shaped. If we have central banks that calm things down in bad times, then that inevitably will have repercussions for how policymakers behave in good times. What we've seen since COVID—and this again, it's not specific to the United States, it's a global phenomenon—is that budget deficits around the world remain way wider than they ever were.

The idea that you have counter-cyclical fiscal policy—that you run deficits in bad shocks, but then you run a surplus and you bring debt—that's all gone out the window. I think Hanno is infinitely smarter than I am and has rigor on this that I could never pretend to have. I have my German intuition, which has to be worth something. I have 50% German gene material.

Beckworth: There you go.

Brooks: If you use your central banks for this kind of stuff, that has all kinds of unintended consequences. You mentioned fiscal dominance. I think that's where we are.

Beckworth: Yes, that is my worry going forward. I guess we're jumping ahead here, but I see all the signs. We've talked about this a lot on the show recently. All the rhetoric, at least, is pointing towards fiscal dominance.

Donald Trump's call for rate cuts is not about full employment. It's about lowering the cost on the debt interest payments. The supplemental leverage ratio tweaks, those are to what? To make it easier to absorb debt on the balance sheets of these big banks. Ted Cruz's call for ending interest on reserves. Why? To make it easier to get, in his mind at least, a trillion dollars. I don't think it would work out that way.

Just all these symptoms that really are suggesting that we're getting to the place where we've got to make tough choices. I want to be fair to Trump. Now he did sign into law the One Big Beautiful Bill, which adds more fiscal pressures. I think any president, whether it was Kamala Harris or somebody else, would be facing these tough choices now. He's just the one. He adds more theater and more rhetoric. But this is something we've built up really since the 2000s.

Again, I want to be fair to the Fed and the government during the pandemic. There was a lot of uncertainty. During World War II, the Fed stepped in and was pegging yields, buying up bonds. I think we would both agree they did it too long and could have stopped sooner. But now we're in peacetime. We're in full employment. There's no reason for this. It is a concern. In any event, you and Hanno were really good on this early on.

Brooks: Thank you.

Beckworth: I stand corrected. Good for you to keep us on our toes. That was back in 2020. Had a lot of fun conversations.

Robin’s Career: From Wall Street to Think Tank

I want to go back to your work, because you are at a think tank like I am. You're now at the Brookings. I just had your boss on, Ben Harris. In fact, Ben, his hope and dreams for fiscal policies is that we start running primary surpluses during the good years, like make it a goal of government to do that. Again, we can come back to this later. Tell me what it was like going from Wall Street to a think tank, even at two. Your previous one was also a think tank.

Brooks: A little bit, yes.

Beckworth: Trade association, slash think tank. This is definitely a think tank world. What is it like at a think tank world versus Wall Street?

Brooks: I really, really love markets and what they represent. Let me give you an example. I sat during my time at Goldman—where I ran the foreign exchange strategy team—I sat on the training floor in the new Goldman building at 200 West Street, which is basically the southern tip of Manhattan in Battery Park. Importantly, there's a Whole Foods right next door. You're all set in terms of food, et cetera. There's about 200 people on the fifth floor, which is the fixed income and currencies and commodities trading floor.

You can imagine there is just a constant hum of human conversation about everything. All kinds of markets are intersecting. There's metals traders. There are emerging market currency traders. There's US STIR traders, short-term interest rate traders. All of them are having these conversations. The energy of that is incredible. I find it to be, from a simple psychological point of view, like you and I, we spend a lot of time thinking about, how do these interest rates or these prices get set? That's where they get set.

I remember the single most exciting moments on the trading floor for me were, for example, reliably, the first Friday of every month, payrolls, 8:30. In the two minutes before that release, the trading floor goes completely silent. Because everyone is watching the screen, and it's just like, this is the number across all countries, across everything, all markets. Then, when the number is good, you would often have like, "USA," or if the number is bad, you would have this collective groan, "Oh," and that's the animal spirits. I love this feeling of this collective wisdom of deferring to that, to how people process information. I soaked it up. I really loved it.

Beckworth: Speaking of markets, let me go there for a minute and talk about fiscal dominance again.

Brooks: You're sounding very German.

Beckworth: I want to go there since you are someone who's been on Wall Street, and I haven't. You know the mindset, the temperament, this excitement. You feel it. In 2021, another big mistake I made is I wrote an op-ed, and I have mentioned this before on the podcast, about inflation. I was invited to write one for The New York Times, and the title of the op-ed was, “Stop Worrying About Inflation” or something like that, I forget the exact wording. It was terrible in hindsight.

My coauthor and I wrote this relying heavily on break-even inflations. The bond markets really did me wrong there. The same thing today: You and I both see all the fiscal pressures that are emerging, the trajectory of debt to GDP. I just mentioned fiscal rhetoric, which seems troubling. And yet—I look at break-evens, I look at 10-year Treasury yields—there doesn't seem to be a whole lot of alarm, at least the way I see things, but maybe you can help me.

Brooks: First of all, David, I think you do an amazing job, and you're trotting out these instances that you got wrong. But actually, I really love it when people come out with strong views. The worst economist is the economist that hides behind the, "There's this side and there's the other side." The two-handed economist, it drives me bonkers. You're supposed to have a view, and it is totally fine to be wrong. Everyone understands that forecasting global macro is a fool's game. But we all have to do it. The complexities in forecasting inflation during COVID were absolutely massive. I think you deserve a pass on that one.

I say that partly in self-defense, because I'm wrong on a lot of stuff myself. I think one takeaway is that markets are just human. We are not great at looking around the corner. Especially on something like COVID, it was such a shift in the regime, and it was such a structural break from what we had before that—existing correlations, existing models. Just think about you and I at the time looking at delivery times, how stretched they became, and the entire debate about, "Is that a supply shock or is it a demand shock? What does it mean for inflation?" Yada yada yada.

There was endless prevarication on this issue instead of just bottom lining it. I'd say that. The deeper thing, and this is one of my pet focuses or peeves, is groupthink in economics. We are all in this environment where there is this collective wisdom, which is often promoted by some of the leading figures in the profession. There's a groupthink that coalesces around that. When you disagree, you're often branded as a kook or a little bit of a whack job, whatever.

I think that for people like you and me it’s actually an opportunity because now, for example, just think about how the consensus was back then: We've come from a decade of low inflation, how could inflation ever rise? Now, it's almost the same thing. We have tariffs, which have gone to frankly unimaginable levels. We are seeing inflation, which is totally somnolent, and markets are basically saying, "Yes, I really don't care about this issue. It's a nothing burger."

That brings us to the last point, which is that markets are just human. People are not going to price this stuff until it stares them in the face. We're getting components in the CPI now, the stuff that's heavily imported from China or Asia, where inflation is really starting to pick up, but it's going to have to pick up a lot more for markets to really pay attention.

Beckworth: Markets are human, too. We're talking about your career here. One last thing before we move into some of these topics in more depth: At the think tank, at Goldman Sachs, like when you wake up in the morning, how do you process news? How do you make decisions? What type of output does someone at a think tank do?

Brooks: At Goldman, I ran a meeting every morning at 7:00 AM, where I basically had to talk about what happened the day before, and what's coming up today. I just loved that. The pressure of that is kind of crazy. These are not small egos. They will call you out on all kinds of stuff, and you end up looking like a complete fool.

Beckworth: You got to be prepared.

Brooks: You got to be prepared. I also thought that this is it. This is like the real, the debate. I thought that was amazing. My days in think tank world are somewhat more relaxed than that. But I still really love markets. I love the energy. I have built data infrastructure—we had China data overnight, obviously, how China is circumventing US tariffs now is a big issue—I can just hit the button, and all these data will flow in, and I can fairly quickly see, "Okay, what's what." The think tank experience, that started at the IIF. As you can tell, I love markets, and I love the psychology of it and the collective wisdom.

The Ukraine invasion: I was on a ski trip in February 2022, when the Russians went into Ukraine. It was a shock. It blew my mind. I remember thinking like, "Oh my God, my head is going to explode. This cannot be happening." Of course, at the time, the White House and the CIA had given us plenty of warning. But again, it was like one of those things, you're in the groupthink, like you're, "It can't happen." And I have become passionate about how we, as Western democracies, confront bad regimes or autocracies. One of the things I'm really hung up on is that we have had many decades of maximum globalization.

We have lots of people who depend on that maximum globalization to make money. When we now are talking about deglobalization, when we're talking about tariffs, or we're talking about sanctions, these are all basically frictions that we're throwing into that money machine. So obviously, in the West, there's going to be a huge lobby of people who are arguing about, "You can't do that. That's not going to work. It can't work because you're interfering with markets." These are people who, at the same time, out of the other side of their mouths, praise OPEC for setting oil prices.

My personal experience, my education over the last three, four years, watching how sanctions have been implemented, and Ben Harris at Brookings and I, we feel equally: We're both at heart data nerds and are passionate about how can we learn from the mistakes that have been made over the last couple of years. The key mistake is that we—the US and Europe are a little bit different but we—have allowed our own implementation of sanctions to be completely undermined by our profit-seeking vested interests.

Beckworth: Yes. We'll come back to that in a minute because you and Ben have done some really interesting work on that as it relates to Russia.

Brooks: Sounds like we're going to cover that and fiscal dominance.

Beckworth: We've got a lot to cover, in fact, in the time we have left here.

The Status of the US Dollar

Let's jump into something that you've been covering that I wanted to spend some time discussing with you, and that is the dollar, the status of the dollar. As you know, it took a dive really since April 2nd. Is it 10% or more?

Brooks: 10%, yes.

Beckworth: 10%, and people really freaked out in early April because not only did it go down, but Treasury yields went up. We had this divergence, woe is us, the dollar's days are numbered. Help us make sense of it, really, what is happening here?

Brooks: So, first of all, I think it's an ongoing huge debate. If you think again about the trading floor: The trading floor is just a venue for all these people to get together and use a computer screen to have a debate. The price of the exchange rate, that is the variable that they're debating. Let me say a couple things. First, let me explain how weak the dollar really is, and I think the debate overstates that. Then let me talk a little bit about why it has moved, and reserve currency status. Three things.

First, the dollar, after the election, between November 5th and January 20th, the inauguration, it rose about 6%. Since then, it's fallen about 10%. Basically, a year to date, it's down 10%. Net, it's down about 4%. People tend to forget that the dollar has been on an insane tear in recent years. This whole “everything is falling apart” story, that's just flat out wrong. The fall in the dollar is also overstated because the Europeans, in particular the Germans, in early March, did something very unusual for Germans. They weakened the debt break that they have and announced a big fiscal stimulus. That caused the euro to jump. That makes the dollar look weaker also. That was a 4% fall in the dollar.

Again, if you take that out, the dollar between the election and inauguration went up 6%, take out that 4% from the 10% drop since inauguration, we're basically plus 6, minus 6, flat. First of all, I think it’s time to chillax a little bit.

Beckworth: It's a wash, huh?

Brooks: The second question is, why has the dollar fallen? The fact that it's fallen is super weird. Because tariffs—any model will tell you—tariffs are basically this negative shock that we're imposing on other countries. Markets should trade that as the dollar going up and foreign currencies going down to offset some of that hit from tariffs. The reaction that I had expected, and most of the other thought bubble that we're all in, was the dollar should go up.

Beckworth: Yes.

Brooks: That will mute the inflation impact from tariffs. We've seen the opposite. Markets are trading, basically, that tariffs will boomerang on the United States, that the United States is so import-dependent that tariffs will hurt the American consumer, drive the US into recession, and the Fed will cut way more than other central banks. If you look at the path of the dollar, one of the charts that I put up a lot on X is the dollar versus interest rate differential. That basically is about the Federal Reserve's policy vis-à-vis other central banks. Markets are pricing way more cuts, especially after the huge negative revisions on Friday to payrolls.

Last thing: reserve currency status, total non-issue. If anyone starts noodling on to you about how the US is about to lose reserve currency status, you can walk away from that discussion without missing anything. It took decades for the US to become a reserve currency. It is crazy to think, even with some of the volatile policy that we've had, that it goes out the window within a couple days, or months.

Beckworth: Yes. These are all fascinating points. Something I've looked at is, and you alluded to this, is the dollar for a while has been on a tear. Really, since 2014, 2015, it just took off. It was up 20-plus percent. We're still high relative to historical norms.

Brooks: Massively high, yes.

Beckworth: In that grand scheme of things, deep breath, like you said, don't get too worked up. If I understood you correctly, you said the decline that we have had, though, is tied to the expected path of the Fed versus the ECB and other central banks. They expect more rate cuts to come. It's a pretty rational response.

Brooks: Yes. I think it comes back to this question that you were talking about before on inflation. Ultimately, markets are pricing policy differentials. That's the decline of the dollar. They are pricing, currently, that tariffs will adversely impact the United States. They will weigh on activity. Recession risk is very high. The Fed will cut a lot. Markets today are pricing, over the next year and a half, so through the end of next year, 2026, they're pricing 140 basis points in Fed rate cuts, way above any other central bank.

They're pricing an asymmetry that the US basically is shooting itself in the foot. I think you want to take into account two things. First, the US economy. You and I, what have we been through? The SVB blowup, everyone, including me, thought that was going to be recessionary. It wasn't. COVID, the recovery was way stronger than any of us expected. Per capita GDP growth in the United States has outperformed every other G10 economy, consistently, for the past five years.

I think we have to factor in that the American economy is incredibly resilient, and it's also true that some of these tariffs, we can get into that, haven't bitten as much as you would think right away. But the real thing is inflation. If inflation picks up in the United States, does it make sense for markets to price almost three rate cuts this year from the Fed? I don't think so. That's before we even get into all the politics of the Fed-bashing and what Jay Powell thinks he'll do.

Beckworth: The new potential Fed chair coming up. On the dollar, before we move on, it's reserve status. I completely agree with you. I think all the hyperventilating, and concern, and woe is us in April, really overstated the reality. Not only that, I look at some of the data, too, not as extensively as you do, but just the amount of dollar-denominated assets in the world is so huge. Everything next to it is a small comparison. There literally is no way for a competitor asset to scale up.

We're not talking just about Treasury bonds, but private bonds, repo, bank accounts. It's like this scale is just, it's a huge first-mover advantage. I think that's often overlooked. The other thing I think that was overlooked—and I mentioned this before in here, in fact, we just had a great conversation with Rashad Ahmed, he used to be at Treasury, he's now at the Anderson Institute here in DC—is the stablecoins.

Brooks: I saw the episode.

Beckworth: You can point a finger at Trump's policies. They're volatile. Maybe that's undermined the dollar a little bit. But long-term, what's his true legacy going to be for the dollar? I think it's stablecoins. I think stablecoins may extend the reach of the dollar to the extent there's net new demand for dollar assets, like Europeans. I had Luis Garicano on here—great conversation.

Brooks: That was amazing.

Beckworth: In fact, I heard about him at Hoover first, very passionate speaker. I knew how to get him on the podcast. I went and I looked this up, and it was right. ECB officials are freaking out about dollar-based stablecoins because of the policies they're pushing in Europe. To the extent we do see this happen, we do see net new demand for dollar-denominated assets via stablecoins, I think that would be Trump's legacy for the dollar more than any trade worries.

The Trade War

Let me use that as a segue now into trade, geoeconomics, which is your new thing you and Ben have been working on. Let me ask a big-picture question here. Trump won't be around forever. Maybe you could say J.D. Vance will be around longer. Even next year, we're going to have midterm elections that could affect how or what he can do. He'll be done at some point. Will we go back to globalization as we knew it before him? The rest of the world is still globalizing, still trading. How big of a bump on the road? Is this a structural shift in global trade? What do you see happening in terms of the bigger, longer-term arc of history?

Brooks: Amazing question. Let me speak narrowly about what happened in April and the trade war as it now stands. Then let me zoom out and do a bigger-picture answer on de-globalization and so forth. We started talking about the Treasury market blowup in March 2020. We came close to something like that in early April. The reason that March 2020 became a mess is because at the time—and this goes to the basis trade, which you've flagged and done great episodes on—in March 2020, as I said, at the IIF, we were seeing huge outflows from emerging markets.

All emerging market currencies were under pressure to depreciate massively, and central banks in Brazil and everywhere else were saying, "Holy cow, we've got to do something to calm this down. We've got to sell our Treasuries to get dollars, and then we're going to use those dollars in the foreign exchange market to buy back our own currency to stop this drop." That selling of Treasuries, which was really just a knock-on effect from these outflows and the destabilization of emerging markets—that selling of treasuries destabilized the basis trade, which is really just massively levered long short positions in the Treasury and swaps market, yada yada yada.

When you have a massively levered carry trade, that depends on the underlying assets being very stable. If there's a big shock and that stuff gets disrupted, then you are going to be looking at huge losses. Fast forward to April 2025, when Trump escalated tariffs on China to 150% on April 2nd, or that week, the Chinese started to devalue their currencies. That is toxic for markets, because the RMB basically against the dollar is pegged. At 150% tariff, if you do the math, the devaluation that's required to offset that in any meaningful measure is massive.

When the Chinese started to devalue that week—and they only devalued 2%, nothing. The market, of course, has an imagination. The market is looking at this and going, "Oh my God, stuff's about to happen. It's about to go down"—in that week, we saw emerging markets again come under a lot of pressure. Central banks and emerging markets sold their Treasury holdings to buy back their own currencies. That again caused wobbles in the Treasury market. You'll remember, like in March 2020, counterintuitively, US interest rates started going up when they should have been going down.

That, again, is a symptom of our underlying vulnerability. You started with this. You started this, David. We keep bailing out people who are doing highly leveraged trades in the Treasury market. We are completely dependent on this stuff, because we're running irresponsible fiscal policy. We keep digging ourselves deeper and deeper into the hole. When Trump backed off, and remember, at the time in early April, he was tweeting about the Treasury market going yippee, and it's all back under control. I don't like it when people talk about TACO, because I think that doesn't describe Trump at all.

But on this particular issue, he really did back down. It is because leverage in our financial system is our Achilles' heel. China very skillfully used that. It is a symptom of Chinese leverage over the United States. The trade war with China, in my opinion, is the only one that matters. Everyone else is collateral damage, the Europeans, the Japanese. No one else really matters. Trump's put 50% tariffs on Brazil. He's put a 25% punitive tariff on India. Markets don't care. Nothing's happened.

Beckworth: The stock market's still doing well.

Deglobalization

Brooks: It's a total non-issue. On the bigger issue, deglobalization, I don't think there's much difference. There's a bigger trend, which is that globalization ran out of control. I dislike the debate that we have in some circles here in DC where there's a full-scale embrace of globalization in some circles, and everyone touts the benefits of it. You don't have to drive far out of DC to see extremely poor communities. The United States has a lot of poverty. This efficiency global trade perspective misses that just didn't work out great for a lot of people.

We are dealing with a political backlash. That backlash isn't unique to the United States. It's the same in Europe. The only difference is that in Europe—so coming from Germany, in Europe—in Germany, the establishment parties, the CDU, which is the Republicans of old, and the SPD and the Greens, which are like the progressive Democrats here, they've all gotten together, and they've said, "We will, under all circumstances, prevent the AFD, which is Trump, from coming to power by doing coalitions." They're calling that the firewall, the Brandmauer in German. We don't have a Brandmauer in the United States because Trump basically took over the Republican Party. That's the only difference.

The underlying issues are inequality, dissatisfaction with the process, and, of course, immigration is also a big issue. They're all the same. I think the underlying dynamic is for less mobility on capital, it is for less mobility on labor. The faster countries move to address that, the less threat you have from right- or left-wing political extremism.

Beckworth: So many directions I could go with this. Let me come back to this conversation about globalization. Let's talk about the April response of Trump. He didn't back down when the stock market collapsed or fell sharply, but he did back down when the Treasury market got jittery and things were happening. You tie it to China's response. Is that not something China could do again going forward?

Brooks: Totally.

Beckworth: They have the cards they could play if they wanted to with Trump.

Brooks: Yes. Each country has its vulnerability. We are running reckless fiscal policy, and this is not a Trump issue. The Biden administration ran huge deficits. It shortened the maturity of issuance in ways that were surprising. Of course, there were special circumstances also, but I think there was a number of things that were not what you would call responsible fiscal policy. That's our Achilles' heel, and we really need to fix it. What happened in early April is a perfect illustration that we need to get our act together because of geopolitics.

Do we really want to be beholden to China for our long-term interest rate levels? That's not a place I think we want to be. I think the president and whatever administration we have going forward will need to address that. It's just inevitable. The Chinese are similarly vulnerable on their Achilles' heel, which is they have an economy that's massively export dependent. That is their one growth engine. They are a heavily planned, directed economy. Of course, there's market elements, but there's been massive overinvestments in certain sectors of the economy, like real estate, as you know. There's no growth there, so they need exports.

If you now look at Chinese trade data, what's happening is totally insane. You have a huge drop in direct exports to the United States, but that's been almost one-for-one offset by a rise in exports to tons of other places, like Vietnam, Thailand, Indonesia, Singapore, Hungary, Paraguay. The list is endless. I got all kinds of hate on X for posting Chinese exports to Nauru in the Pacific, which is the third smallest country in the world after the Vatican and Monaco. I love these hockey-stick charts where something just goes completely stratospheric. Chinese exports to Nauru were up 6,000%. Usually, it's nothing. You can get these crazy numbers.

It's just a symptom of China's export machine. If you put 50% tariff on those exports from the biggest export destination, obviously, China has to find ways to get its products to market. It's not like the rest of the world is going to have this huge demand surge to absorb those goods. Either you cut the price, or you transship and indirectly send to the United States.

Beckworth: You're saying the US is still getting the goods. It's just through some third parties.

Brooks: That's a big reason why the inflation impact has been relatively muted so far. Now, then we've got trade deals with Vietnam that threaten punitive tariff rates on transshipments. All of that is just to say, China's super vulnerable, too, because this is a huge hit to the profitability of its export sector. That's the growth engine.

Beckworth: That's all they've got.

Brooks: It means that as we, the United States, start to clamp down on these transshipments, the inflation impulse to the United States should rise. That takes us back to the Fed and the dollar.

Beckworth: Really, Trump, knowingly or unknowingly, is really walking a fine line here, a catch-22. He can pursue his dream, his misguided dream, in my view, of eliminating all trade deficits. Then he's going to have higher prices. We know, from the last election, that's going to be very costly. I think some of the criticism economists have got, "Where was the inflation you warned us about?" I think it's coming. The more we crack down on these third parties or countries that intermediate.

Geoeconomics

Let's move into your work on geoeconomics, particularly your work on Russia and sanctions. You're working with Ben. Tell us about that.

Brooks: I met Ben when he was still at the Treasury. I really admired the work that he did for then-Secretary Yellen on the price cap on Russia and the sanctions work that was done under the Biden administration. Zoom out, we are dealing with a bunch of countries, Russia, China, maybe Saudi Arabia, who all run huge current account surpluses, but don't necessarily share our values. In particular, our belief that democracy is a good form of government. In particular, better than their forms of government.

Their current account surpluses, the countries, this is really important, because, for example, in 2018, so just before we did our last discussion together on your podcast, the US and Trump 1.0 put tariffs on Turkey. And Turkey blew up. The sanctions that were imposed were peanuts compared to what's been happening on Russia recently. But they caused the Turkish economy to completely implode, because Turkey is a current account deficit country, which means it's always importing more than it's exporting. It always has to borrow on global markets.

Therefore, any whiff of disruption to financial flows, which sanctions are, is an existential threat. It's the opposite for China, for Russia, or for Saudi Arabia. These guys export capital. They export more than they import. They are lenders to the rest of the world. Intuitively, are financial sanctions going to work to constrain those guys? No. It's actually, I think, Don Quixote, like tilting at windmills. You have misdiagnosed the problem. You're treating the patient with the wrong medicine. The medicine that you want to use is what Ben was doing at the Treasury. You want to hit these current account surplus countries on the export side. That's where their money is coming from.

That's China. China is exporting a ton of stuff to us. Russia is exporting a ton of oil to global markets. Ben's idea at the Treasury was, "Let's cap the amount of dollars that Russia gets for every barrel of oil it exports." Let's say global market price is $85 a barrel. Let's make that price $30 a barrel. That effectively means the current account surplus that Russia has, you're shrinking that, like with the stroke of a pen. That means that since the exchange rate is basically a price that anticipates the current account surplus, the Russian ruble will collapse. Russia will have very high inflation. The central bank will have to hike interest rates.

In other words, financial conditions in Russia will tighten sharply. It's a heck of a lot harder to fight a war when your economy is imploding. That was the basic idea of the price cap. It hasn't really worked. What drives me completely bonkers is people saying, "That just shows sanctions don't work." That is like saying a town puts in place a speed limit, the cops don't enforce the speed limit, and then concluding speed limits don't work. That's insane. No one would draw that conclusion. It's the same with sanctions.

The problem was that, in particular in Europe, you have vested interests that are super powerful. For example, at the time of the invasion, about 60% of oil tanker capacity out of Russia was Greek. Greece has a veto over foreign policy decisions in Brussels at the EU. We don't know exactly what happened, because none of this is documented. There are no minutes, like for Fed meetings, where you can see who said what. This is all like smoke and mirrors. We're trying to piece things together from the outside.

About 10 families in Athens control a huge number of ships. They obviously have a lot of money riding on the West not doing anything super coercive that would disrupt their shipping trade. They used their power in Brussels, and Brussels listened. That meant that the sanctions that we imposed and the price cap that was put on Russia was way too soft. When people say to me, "Oh, sanctions don't work," I'm like, "You do need to read the fine print on this stuff, because it really matters." China, same thing. I don't know if you think this, but it feels to me like in the Western press, there's always this, "Oh, China has the longer lever here. They don't have elections. Xi is so brilliant. He's going to run circles around the West."

Beckworth: You hear that explicitly in the press sometimes.

Brooks: Yes, totally. It reminds me of Russia. When Russia went into Ukraine, first of all, most analysts at the time didn't see the invasion coming. There's very few. Tim Ash at RBC Blue Bay was one of the few people who did. All of them were like, "Putin's a genius. He's going to wrap this up in no time." "Oh, you want to do a price cap? Actually, Putin's a genius. That's not going to work, because he's a genius."

A lot of the discussion that is now happening on China on tariffs, that's so stupid, because we're shooting ourselves in the foot. The Chinese are very smart under Xi. They're going to run around. Maybe, but I think a lot of this is also just weird and misguided. We've become very dependent on this country. It doesn't share our values. We've got to do something. What Ben and I have been banging on is, first of all, to really learn the lessons of what we did wrong on Russia, which is that we allowed ourselves, our policymakers, to be undermined, to be lobbied by our own commercial interests. The Greek ship owners, in particular, I like to call them oligarchs.

I think that goes back to institutional failures in Europe, the fact that you're giving veto right to Greece. It's like giving a veto right to the state of Washington over Pentagon aircraft purchases. That would be insane. They would only buy Boeing. I think we need to learn the lessons and do some backward looking and clean up the narrative that sanctions don't work. Then going forward, Ben and I—this is like I could talk about this for hours, which we don't have—we do all kinds of nitty-gritty tracking on which ships are leaving where, when, and who's going where, how.

We have done, I think, the only analysis that's public on how impactful sanctions are. When you sanction an oil tanker, it's an OFAC blocking order, basically, it just says, "Don't do business with this ship." It'll give the name and the VIN number of that ship. It's called the IMO.

Secondary Sanctions

Beckworth: Is that a secondary sanction?

Brooks: Yes, I'm coming to that. That actually does nothing. If people still want to do business with this ship, they can go ahead. The thing that is impactful is the fear that if you are an Indian port operator and you're allowing the sanctioned Russian Sovcomflot ship into your port, you might get cut off by US banks from any kind of payments. It is back to the role of the dollar, this massive, dollar-centric global financial system that we have, that it's this fear of secondary sanctions that makes US sanctions in particular so potent.

Ben and I have written a bunch of things on this, and we've briefed policymakers on this, and the EU, the UK have been really pushing sanctions lately, I like to think—it's probably not true, but I like to think—our work played a little bit of a role in convincing people to go in that direction. When we look at how have sanctions actually performed, US sanctions basically cut activity in US-sanctioned ships to zero. It's amazing. By comparison, EU sanctions cut activity by about half. It's this fear of secondary sanctions, the dominance of the dollar, that gives what the US is doing the extra push.

Beckworth: President Trump has been talking about this, too. What does he want to do? This really full-court press, secondary sanctions, and make it hard for anyone to buy oil from Russia?

Brooks: Yes. Trump yesterday put a 25% secondary tariff, which is a punitive tariff, on India, because India, it's well known, has been importing a ton of Russian oil, often on shadow fleet ships, and refining it, processing it, and re-exporting it with a nice profit back to Europe. This would all be fine if this happened under the auspices of the G7 price cap on Western oil tankers, if Russia were only getting the price cap. It's happening on shadow fleet ships, which, of course, thanks to our Greek shipping oligarchs, they sold Russia these ships.

It allows Russia to make more money. The Indians are fine with that, because they're still making a big fat margin. Trump's instinct to disrupt that is the right one. You got to do something about it. Global markets, again, have not really reacted to any of this. What should happen conceptually is that if you're imposing this tariff on consumption of Russian oil, the price of Russian oil relative to the global benchmark should fall. This wedge should widen, and it should hurt Putin. The problem is that India and global markets, even though it's got 1.4 billion people, it's still a relatively small economy. Markets basically ignore this.

If Trump does secondary tariffs on China also, then I think things start to get more serious. China tariffs at the start of the year were 20%. They are now 50%. If Trump does a punitive tariff of 25% on China also, we're going up to 75% again. We're on the way back to where we were in early April when stuff started to really go pear-shaped. What Ben and I have proposed, and we did a blog for the Russia Matters blog at the Kennedy School, the EU and the UK have now sanctioned 360 oil tankers that the US has not sanctioned. The last time the US sanctioned Russian ships was back in January in the last days of the Biden administration.

Sanction those ships. It will really hit Russia, and it has the advantage that it doesn't hit a third party to get at Putin. It just hits Putin directly. Why are you dragging these other countries into this confrontation with Russia when you can just get at Russia directly? Why are you causing collateral damage when you don't really have to? The impact on Russia would be very similar. The euro's oil price would fall. The wedge would widen to Brent. Putin gets less money. That's what we want to accomplish.

Beckworth: Go after known ships that are transporting this oil. We have the ability to do that. You say you've been tracking them, you and Ben, certainly the CIA has been tracking them as well. It's something that could be done. It's feasible. Then this idea of a secondary sanction—so the way I understand it is you go after companies or individuals who are transacting illegally with some entity, and you prevent them from having access to dollar markets.

Brooks: Correct.

Beckworth: We could be doing more with that as well.

Brooks: Totally.

Beckworth: There's plenty of tools available.

Brooks: Totally. Here's the thing. This is all about political will. I don't like the constant bashing of the United States. The Europeans have really done a terrible job over the last couple of years. In the end, Ukraine is a European war. This is your issue. I say this as a proud European. I get called anti-European all the time. Bugs me to no end. Get your act together. What we're seeing now on Trump and the US, I think we're getting to the point that markets really care about.

The big question is, is Trump really willing to go after Putin? Is he really willing to sanction these 360 ships? That could cause some serious trouble for Putin. Is he going to do shadow boxing and do a punitive tariff on India and not on China? Then we're all like, "Okay, what's going on?" I think the underlying question that markets have is, if I think about dollar weakness, who are the US allies these days? Is the US opposed to Russia? Is it opposed to China, or not?

I think, depending on how the US behaves, how the US administration behaves in coming weeks, this Russia issue is coming to a head, because Russia is making big gains on the battlefield in Ukraine. Something has to be done. As I was explaining, we have the VIN numbers for these ships, the IMOs. They're known. Pick up the phone. The UK and the EU have sanctioned these ships. They can be sanctioned tomorrow. It can be done. If it isn't done, that tells us and the market something about, maybe they just don't want to. Then the market starts to think, "Why?" This is the million-dollar question.

Beckworth: There's a lot more we could talk about. We have come to the end of our time. We didn't get to the Fed, to inflation.

Brooks: Yes, we didn't talk about fiscal dominance.

Beckworth: We talked a little bit about fiscal dominance up top. We'll have to have you back on to continue the conversation later. Our guest today has been Robin Brooks. Robin, thank you so much for coming on the program.

Brooks: Yes, thanks for having me. It was great.

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Beckworth: Macro Musings is produced by the Mercatus Center at George Mason University. Dive deeper into our research at mercatus.org/monetarypolicy. You can subscribe to the show on Apple Podcasts, Spotify, or your favorite podcast app. If you like this podcast, please consider giving us a rating and leaving a review. This helps other thoughtful people like you find the show. Find me on Twitter @DavidBeckworth and follow the show @Macro_Musings.