Written by Chris Marcus of Arcadia Economics
U.S. president Donald Trump recently issued some pointed comments about the Federal Reserve and some of the currency policies of China and the Eurozone. Which highlight the underlying flaw in the Federal Reserve’s management of the money supply, that the entire world is on the verge of finding out about in a big way.
When the Federal Reserve lowered interest rates and printed several trillion dollars a few years ago, even former chairman Ben Bernanke acknowledged that the purpose was to promote easier financial conditions and the appearance of wealth. Of course it would logically follow though that when interest rates rise and the printed money is retracted, that you would get the opposite effect. Which is never particularly politically palatable.
Mr. Trump, a Republican, said he was “not thrilled” because every time the economy strengthens “they want to raise rates again.”
President Trump obviously has the right to feel however he chooses about the credit cycle. Yet if the purpose of lowering interest rates is to temporarily support the market during times of recession, either rates eventually have to come back up, or else you just print the currency into oblivion.
Amazingly, it’s almost as the tag-team combo of the politicians and bankers has managed to pull off both at the same time.
Which is why while Trump’s comments about China and the European Union manipulating their currencies are not entirely incorrect, it’s a little bit like the pot calling the kettle black given the past decade of Federal Reserve monetary policy.
“China, the European Union and others have been manipulating their currencies and interest rates lower, while the U.S. is raising rates while the dollars gets stronger and stronger with each passing day — taking away our big competitive edge,” Trump tweeted on Friday. “The United States should not be penalized because we are doing so well.”
I want to be careful not to take his comments out of context. But at least given that quote, it seems as if president Trump is implying that the nation’s big competitive advantage is simply in having a weak currency.
Which is not out of line with the prevailing Wall Street Keynesian economic mentality, yet nonetheless is just the latest clue that when push comes to shove, some form of money printing/asset guarantee program is eventually the plan. Whether that comes from the White House, the Federal Reserve, or some combination of the two.
The last item of note is that Trump actually did mention how rising interest rates further compounds the government deficit Due to all of the short-term borrowing, which means that as rates go up, the government’s interest expense rises as well..
In an apparent reference to Fed rate increases, Trump added, “Tightening now hurts all that we have done. Debt coming due & we are raising rates — Really?”
At times it isn’t easy to read or extrapolate what Trump really knows, is aware of, or what he might really be thinking. He’s talked about auditing the Fed, but at other times like now, he makes statements that indicate that he wants low interest rates, and is not at least publicly explaining how a stable dollar and debt load will ever be achieved. So it’s hard to know exactly how it will all play out.
But what has not changed is that the debt load and devaluation of the currency have left the current financial system long passed the point of no return. Which does not mean that life or commerce is going to stop, but rather just that there is going to be a shift in the balance of power and wealth among the various asset classes.
With a continued loss of faith in paper being replaced by commodities and hard assets. Similar to what Russia just did. And what is mathematically guaranteed to happen at some point in our lifetimes.
With this latest news providing more evidence that it is likely to be much sooner than later.
–Chris Marcus
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