The world is once again on edge as the U.S. government, under Donald Trump’s leadership, reignites global trade tensions with a fresh wave of tariffs. From China to Europe, retaliatory measures are being drafted, supply chains are bracing for disruption, and markets are jittery.
Against this backdrop, the ghosts of past economic battles — like the Plaza Accord of 1985 — loom large. But this time, the stakes are higher, the players more fragmented, and the rules of the game far less predictable.
History rarely repeats itself exactly, and 2025 is not 1985. The global economy is now a tangled web of competing interests, digital currencies, and geopolitical rivalries. Yet the fundamental question remains: Can the world address its imbalances without triggering a financial or trade war?
To understand the risks ahead, we must revisit the Plaza Accord—not as a blueprint, but as a cautionary tale. This newsletter offers historical context and explains its relevance today, so I hope you’ll read through till the end.
What Led to the Plaza Accord in 1985?
The early 1980s were turbulent for the U.S. economy. Inflation was rampant, the manufacturing sector was weakening, and global trade imbalances were widening.
The dollar, paradoxically, was surging — appreciating over 50% between 1980 and 1985. Why?
- High U.S. interest rates: Under Fed Chair Paul Volcker, the U.S. hiked interest rates—peaking at 20% in 1981—to combat the surging inflation of the late 1970s. These high interest rates drew in global capital, boosting demand for the dollar.
- Reagan-era policies: The fight against inflation caused an economic slowdown, prompting tax cuts and increased defense spending in the early 1980s to revive growth.
- Weak growth abroad: Economies like Japan and West Germany were growing more slowly and had lower interest rates, making the dollar more attractive by comparison.
These factors made the dollar so strong that American exports became prohibitively expensive, damaging domestic industries. Meanwhile, countries like Japan and West Germany were running large trade surpluses — helped by what the U.S. saw as weak currencies.
The Accord: What Happened at the Plaza Hotel
On September 22, 1985, the finance ministers and central bank governors of the U.S., Japan, West Germany, France, and the U.K. agreed to intervene in currency markets to bring the dollar down.
A key reason for their cooperation was the growing threat of U.S. protectionist measures, including potential tariffs on imports.
The dollar fell sharply in the following years — over 40% against the yen and deutsche mark. But the ripple effects were more far-reaching than anyone had predicted.
Consequences of the Plaza Accord
- Japan’s Bubble Economy: To offset export pain from a rising yen, the Bank of Japan loosened monetary policy. That liquidity fueled a massive asset bubble in stocks and real estate. By the early 1990s, it all collapsed — ushering in Japan’s “Lost Decades.”
- Currency Diplomacy Becomes Real: The Plaza Accord marked a turning point. It wasn’t just about trade policy anymore — currencies became tools of strategic statecraft.
- Temporary Fix, Long-Term Drift: Though it addressed immediate imbalances, structural issues like the U.S. trade deficit didn’t disappear — they simply evolved. The players changed, but the game continued.
Could Plaza Accord 2.0 happen?
There’s growing speculation and even some conspiracy theories, with talk of a potential “Mar-a-Lago Accord” — essentially a modern-day version of the Plaza Accord.
But, the world has changed. And any effort to coordinate a global currency reset today would face entirely new dynamics.
Here are a few questions worth pondering:
- Can a Plaza Accord 2.0 work in a multipolar world — where trust is thin and power is distributed?
- Can governments coordinate currencies in a time when markets are faster, larger, and algorithm-driven?
- Can a global accord succeed when China is central to the imbalance but not always at the negotiating table?
Then vs. Now: A Quick Comparison
Walking Wildcard: Donald Trump
The Plaza Accord was a response to an unsustainable imbalance. Today, the imbalances are still here — but the mechanisms to address them are more fragile, more politicized, and more complex. Even more so since the U.S. is also facing a huge Fiscal imbalance that it needs to resolve.
This time though, the playbook seems to be different. Instead of a currency fight, the Trump administration is trying to solve this problem through Tariffs with one of the intended consequences to be the depreciation of the Dollar.
We’re living in highly uncertain times which have been exacerbated by Trump’s social media posts ;). While history offers useful reference points, any fresh round of intervention today could trigger ripple effects far beyond what we’ve seen before — thanks to the deeply interconnected supply chains and increasingly complex global financial markets.
So while the question might be, “Can it happen?” — the more important one is, “If it does, are we truly prepared for its consequences?”
I hope you enjoyed this newsletter and if you did, feel free to share it with your friends and family.
Also, if you have any topics that you would like us to cover or any other feedback, do write to us at connect@incredmoney.com
Till the next time,
Vijay
CEO – InCred Money
P.S. I share my thoughts on Investing and the Economy regularly. You can follow me here.
