Thursday, August 22, 2019

What did Donald Trump do today?

He got basic economic facts about as wrong as it's possible to get them.

Relative to the last few days, at least, Trump had a quiet day in public: he stayed out of sight except to give an award to basketball legend Bob Cousy—and he followed the teleprompter for that.

On Twitter, though, it was a different story. Aides have admitted to reporters that Trump is privately worried about the political implications of the looming recession. He's even taken some steps to try to undo some of the economic damage caused by his trade war. But a Twitter rant he posted today on the subject ranged from the incorrect to the incoherent, which isn't likely to increase confidence in the U.S. economy. 

Trump wrote:

Germany sells 30 year bonds offering negative yields. Germany competes with the USA. Our Federal Reserve does not allow us to do what we must do.

The part about the negative yields is true, as far as it goes. Yesterday, Germany offered 30-year bonds paying zero interest at just slightly above face value. This works out to a yield of -0.11%. (The U.S. 30-year bond has a yield of +0.04%. From a practical standpoint, both bonds are paying nothing.)

But Trump seems to think that Germany (and the U.S.) is the one setting the price of their bonds. In the real world, the market does that. If a bond's yield is too low, buyers will stay away. That's what happened yesterday: the Bundesbank, Germany's equivalent of the Federal Reserve, was forced to buy most of that offering when few investors were interested.

Trump continued:

They put us at a disadvantage against our competition. Strong Dollar, No Inflation! They move like quicksand. Fight or go home!

The dollar is relatively strong against other currencies. (There is, in fact, some inflation—which is a good thing, which Trump seems unable to understand.) But the United States can't do very much to weaken the dollar, which is for all practical purposes the reserve currency for the entire world. And if it could, it would face reprisals from countries that can, like China. That is exactly what happened a few weeks ago, when China allowed its artificially strong currency to depreciate against the dollar, sending American financial markets into a mini-crash.

The Economy is doing really well.

Trump himself does not believe this.

The Federal Reserve can easily make it Record Setting! The question is being asked, why are we paying much more in interest than Germany and certain other countries?

Trump is saying that he wants the Federal Reserve to cut interest rates. It's not surprising that he does: every time interest rates go down, he personally saves millions of dollars in servicing on the enormous personal debt he carries. (That's not counting the billions of dollars his businesses owe.) For people who don't owe hundreds of millions of dollars to foreign banks, however, the real use of a rate cut is to interrupt the downward spiral of a recession—and it's only effective if it's saved until it's necessary.

In other words, if Trump's stewardship of the economy continues on the same path, he's likely to get his wish, because the economy really will be collapsing.

Why should I care about this?

  • It's really bad if the President of the United States is completely wrong about basic facts related to the economy.
  • The economic health of the United States is more important than saving Donald Trump a few million dollars in debt payments.