Monday 5 August 2019

Trump's alternative monetary policy

(Firstly, having been away for a couple of weeks my thanks to Nick and BQ for covering the blog, less thanks for putting up such good stuff that now I need to up my game!)

In the USA, much like the UK, the Federal Reserve is an independent body. They make decisions on their own balance sheet and set decisions on interest rates by dint of their reading of the market. The US President and rest of the Government are just bystanders.

Of course, it is not in the President's interest to endure this. After all, the Fed has no elections to win and the current President is very focused on winning one in October next year.

Now as we all know, economics and a good economy is not everything or else in the UK we would not have had Blair as Prime Minister in the late 1990's. However, there is a small correlation with plenty of jobs and a growing economy helping incumbent Governments.

As such, Mr Trump does not want the Fed to raise rates. In the Fed's view the US economy is at the end of a long-expansionary period. They have had very low rates and a huge amount of Quantitative Easing to juice the economy after the Financial Crash of 2008. Now the banking system is nearly recovered and the US is steadily creating plenty of jobs. House prices are rising and the stock market sits at all time highs.

So taking away the punch bowl would seems a logical thing to do. But raising rates may slow the economy and Trump does not want that with only 14 months to an election. Interest rate rises are delayed action too (though I doubt now the old mantra of taking 2 years to feed into the economy, modern tech and communications will have seriously reduced this).

What is Trump to do when all this is out of his control? Well, he could start a trade war with China. This is in his gift as President. Slapping Tariff's on China has the effect of slowing trade and taking the shine off the economy. As a result, it makes the Fed's predictions about the economy change and so with their change in viewpoint, comes a change in policy.

Last week, the Fed lowered interest rates, in due course this will come to be seen as a poor policy move, just as raising rates in early 2007/8 was the wrong thing to do (and as we wrote back then too!).

They lowered rates because a $300 billion trade war with China is not good for the US economy.

However, Trump can, and indeed has, fluctuated wildly with the trade war rhetoric and has the power to end the trade war tomorrow. He is far more flexible than the Fed and has fewer constraints (no monthly meetings or pesky Boards to convince).

Trump can game the system this way for domestic monetary policy. It is a very clever way to get change, albeit literally playing with the livelihoods of Americans in the process - but hey, what else is a President supposed to do?


andrew said...

If you asked an electorate to choose between the gnomes of the Eccles building playing with their lives and the elected leader of their country playing with their lives, I am fairly sure that they would say

"I think we have had enough of experts"

People have had enough of (undemocratic or democratic) technocratic dismalism, at least until they see that the alternative is much worse.

One of the problems with current democracy is that decisions are made by people whose term of office is out of step with the impact of the decision, but when it takes decades for a project to come to fruition, what do you do?

Raedwald said...

We can all feel it - it's all coming to a head. People vs Experts, People vs political class, People vs the 1%, People vs Parliament. The unsustainable asset bubbles are barely burbling along, QE and interest rate cuts just postpone things for ever-decreasing can-kicks. Hysteresis, periodicity ... frequency and amplitude are shrinking and soon there will be nowhere left to go.

Politicians such as Trump (and Boris) are making sure they're on the right side when the coprotic storm hits - and that's the side of, erm, the People.

It's all now getting VERY interesting.

Anonymous said...

I see China has returned a volley of rounds back towards Trump with a hefty devaluation.

The US is gearing up for an election, so I wonder just how far Trump wants to take his little trade war? How much economic damage can he weather before his true believers start checking his feet for signs of clay?

BlokeInBrum said...

One of Trumps virtues (as a politician) is his utter shamelessness.

If his strategy doesn't make any headway I'm quite sure he's more than able to turn around and do the opposite tomorrow.

It's quite interesting though in a way.
Einstein said the definition of insanity is doing the same thing over and over and expecting different results.

Trump is quite happy to throw the rulebook away and stir the pot.

Too many of todays leaders are managerialists and too timid or scared to try anything risky.

Anonymous said...

As for "the problems with current democracy", I see that Dominic Grieve has a solution to that. Come September in the House of Commons, he is proposing to replace the current UK government with a new Vichy regime.

Well, he is half-French, so I suppose it makes sense.