Thursday, August 8, 2019

What did Donald Trump do today?

He threatened to expand his trade war into a currency war.

Trump, who has spent the last 18 months learning the hard way that trade wars are not "good and easy to win," is now threatening to start a currency war with China. This morning, he tweeted:

As your President, one would think that I would be thrilled with our very strong dollar. I am not! The Fed’s high interest rate level, in comparison to other countries, is keeping the dollar high, making it more difficult for our great manufacturers like Caterpillar, Boeing,.........John Deere, our car companies, & others, to compete on a level playing field. With substantial Fed Cuts (there is no inflation) and no quantitative tightening, the dollar will make it possible for our companies to win against any competition. We have the greatest the world, there is nobody even close, but unfortunately the same cannot be said about our Federal Reserve. They have called it wrong at every step of the way, and we are still winning. Can you imagine what would happen if they actually called it right?

(Side notes: Trump appointed all but one member of the current Fed leadership who he thinks "have called it wrong." There is inflation for the moment, which is a good thing. Interest rates are very low, and dropped last week because the Fed knows that there are serious indications of a recession on the horizon. Trump personally saves millions of dollars in servicing his enormous personal debt when interest rates fall.)

The tweet reflects Trump's recent flirtation with the idea of taking action to weaken the dollar, which would help U.S. exporters but make foreign goods more expensive for American consumers.

The problem is that China has an even bigger advantage in a currency war than it does in the trade war. The value of the yuan is essentially dictated by Beijing on a nightly basis; no such control is possible with the much more widely held dollar. When China allowed the value of its currency to drop below a certain benchmark on Monday, it triggered massive disruption in American markets—and the fair market value of the yuan is much lower than that. All China has to do is stop manipulating its currency in order to provoke catastrophic short-term damage to the U.S. economy. The more barriers to trade Trump piles up in the form of tariffs and currency manipulation, the less incentive there is for China to refrain from doing that.

Trump once called his national security advisor in the middle of the night because he couldn't remember whether he was supposed to be for a strong or weak dollar.

So what?

  • It is very bad if the president can't or won't learn the basics of how the economy works.
  • Presidents are supposed to act in the best interest of the country, not just their own personal interests.