Odd Lots Podcast Summary: Perry Mehrling on Trump's Echoes of the Nixon Shock

Podcast Information:
Title: Odd Lots
Host/Author: Bloomberg
Description: Bloomberg's Joe Weisenthal and Tracy Alloway explore the most interesting topics in finance, markets, and economics. Join the conversation every Monday and Thursday.
Episode: Perry Mehrling on Trump's Echoes of the Nixon Shock
Release Date: May 14, 2025

Introduction

In this episode of Odd Lots, hosts Joe Weisenthal and Tracy Alloway engage in a thought-provoking discussion with Perry Mehrling, a professor of international political economy at the Pardee School of Global Studies at Boston University. Recorded on May 2 at Princeton University, the conversation delves into the parallels between former President Trump's recent economic policies and the historic "Nixon Shock" of the early 1970s.

Exorbitant Privilege: Definition and Relevance

The term "exorbitant privilege" surfaces prominently in the discussion, reflecting on the unique position of the U.S. dollar in the global financial system.

Tracy Alloway initiates the topic:
"Joe, do you feel like you are hearing the term exorbitant privilege a lot more than you used to?" [01:45]

Joe Weisenthal responds:
"You heard it a lot... whether it can last or whether it can be exhausted." [01:56]

Perry Mehrling elaborates on its origins and implications:
"This exorbitant privilege thing, okay, was coming from Europe, okay? So clearly Europe... was a net positive for the United States and a negative for themselves." [05:07]

Historical Context: The Nixon Shock and Bretton Woods

Perry Mehrling provides a comprehensive backdrop of the Bretton Woods system established in 1944, which positioned the U.S. dollar at the center of international finance, mirroring London's pre-World War I dominance with the pound sterling.

Mehrling explains:
"One way to understand Bretton Woods 1944 was that this was a pass off from sterling Pre World War I to the dollar to build the post World War II international monetary system." [05:24]

He traces the political resistance in the U.S. during the 1960s, culminating in the Nixon Shock on August 15, 1971, when President Richard Nixon unilaterally terminated the direct convertibility of the U.S. dollar to gold, effectively ending the Bretton Woods system.

Mehrling states:
"The denouement of all of this was 1971, okay, August 15th, actually, 1971, when Richard Nixon took the dollar off gold... intended as leverage for forcing our allies to revalue their currencies." [06:04]

Trump's Policies and Their Echoes of the Nixon Shock

Drawing parallels between Nixon's actions and President Trump's recent economic measures, Mehrling emphasizes the scale and global context of today's policies.

Weisenthal summarizes:
"Nixon playbook times 10 is a very promising headline." [08:40]

Mehrling responds:
"Mr. Trump is replaying the Nixon handbook, but but times 10 because he's doing much more tariffs." [08:44]

He notes the expanded global landscape today, contrasting it with the U.S.-Europe focus of the 1970s, highlighting the more comprehensive and multi-faceted nature of current shocks due to globalization.

The US Dollar's Role in the Global Financial System

The conversation shifts to the sustainability and impact of the U.S. dollar's dominance.

Weisenthal probes:
"The premise that the dollar is this global reserve asset leads to an overvaluation... Does that actually bear out?" [09:23]

Mehrling expresses skepticism about the overvaluation theory in the modern context:
"I incline to say no. And in particular, no now." [09:26]

He discusses the evolution of the dollar system, especially the rise of the offshore dollar market, which decouples international dollar transactions from U.S. shores, thereby complicating traditional arguments about dollar overvaluation influencing domestic policy.

Potential Impacts on Global Trade and Currency Stability

Mehrling delves into the immediate and long-term effects of Trump's tariffs on global trade and the stability of the international monetary system.

Mehrling warns:
"The first order effects will be surprising... there will be less exports and less imports. The net is the difference between those." [26:16]

He emphasizes that while net trade figures might remain stable, the reduction in both imports and exports signifies increasing inefficiency and a drift towards autarky, which is detrimental to global economic growth.

Alloway reflects on historical resilience:
"You've had multiple instances where the dollar system has been tested and it's sort of like... snaps back or gets even bigger." [28:29]

Conclusions and Future Outlook

Wrapping up, the guests contemplate whether the current political climate and policy decisions will lead to a fundamental shift in the dollar's supremacy or merely test its resilience.

Mehrling remains cautiously optimistic:
"It was given a big boost by the global financial crisis. And now we have the Trump shock that's happening. And so I think that the lesson of history may be that the bankers won't let them. But it's going to be painful, it's not going to be pleasant." [19:50]

Weisenthal synthesizes the discussion:
"America's rule of law, yeah. Institutional strength, then it does seem different this time." [30:45]

The episode concludes with an acknowledgment of the complexities and uncertainties surrounding the future of the U.S. dollar amid evolving global and political dynamics.

Notable Quotes:

• "Mr. Trump is replaying the Nixon handbook, but but times 10 because he's doing much more tariffs." — Perry Mehrling [08:44]

• "The first order effects will be surprising... there will be less exports and less imports." — Perry Mehrling [26:16]

• "It was the old guys who remembered, you know, and they had to teach the young things." — Perry Mehrling [22:41]

This episode offers a deep dive into the historical and contemporary forces shaping the U.S. dollar's role in the global economy, drawing insightful comparisons between past and present policy decisions. Perry Mehrling's expertise provides listeners with a nuanced understanding of the potential trajectories for international finance amidst political shifts.