The U.S. is growing faster than other major developing countries. The dollar has gained against seven of its Group-of-10 peers this year and “is having its best decade on record,” reports Bloomberg’s Viven Lou Chen. Foreign money is pouring into the U.S. That’s the bad news.
The strong dollar, which hurts exporters and reduces the dollar-value of overseas earnings of American multinationals, is a drag on economic growth. That comes when talk of a recession is mounting. Which is why Trump, his eye on the election now only 14 months hence, noisily favors a lower dollar in the hope of stimulating growth. He wants a strong economy and a weak dollar, not normally as closely linked as ham and eggs. And is annoyed that the Chinese renminbi dropped 3.8% in August against the dollar, its largest monthly plunge in more than 25 years. That reduces part of the competitive disadvantage created by tariffs for Chinese goods exported to America. “Manipulation,” cried Trump.
Other countries share Trump’s desire for a weaker dollar: they are required to buy dollars to pay interest on dollar-denominated debt, and buy commodities priced in dollars. It is taking more and more of their local currencies to buy the dollars they need.
The President will probably get what he wants from the Federal Reserve’s monetary policy committee when it meets on September 17-18, although not because he has upped his attacks on Jay Powell by adding the Fed chairman to his list of enemies of the people. The Fed is almost certain to lower interest rates later this month. Powell is worried not only about the stifling effect on investment of Trump’s erratic trade tweets, as Xi Jinping swings from presidential pal to Trump’s enemies’ list, on which Xi joins Powell. The Chairman also fears the ripple effects of the slowdowns afflicting many economies, and that other central banks’ decisions to lower the value of their nations’ currencies by cutting interest rates will make U.S. firms less competitive. But those factors have been insufficient to persuade many of his colleagues to agree that interest rates should be lowered in a fully employed, growing economy.
The President does have the power to order the Treasury to intervene in currency markets to attempt to lower the value of the dollar. But Treasury Secretary Steve Mnuchin says “right now we are not contemplating an intervention.” Very wise. The Exchange Stabilization Fund available to the Treasury contains only about $100 billion, while five trillion dollars are traded every day. Mnuchin would be doing the equivalent of tackling a rogue elephant with a pea-shooter. He might succeed if he could mimic the 1988 Plaza Accord, when President Reagan coordinated a depreciation of the dollar with France, West Germany, Japan and the United Kingdom. Our allies might have considered Reagan to be a mere actor, but they had not suffered from him the slings and arrows that Trump has launched against his trading partners on so many issues that they probably have stopped keeping count. Trump critics who persist in recommending that he form an alliance with partners on many issues do not seem to realize that “America First” combined with the President’s insensitivity to the needs of anyone except himself makes such alliances virtually impossible.
There is, of course, the possibility of loosening fiscal policy, for which Trump needs no allies or congressional approval. But the nation’s deficits are already high and rising. The Congressional Budget Office expects total deficits to total $12.2 trillion over the next decade, some $809 billion more than it predicted only a few months ago. Government debt, now at 79% of GDP, is expected to reach 95% in 2029. If interest on that debt should rise, sopping up more of the government’s current revenues, it will have difficulty meeting the obligations to which its welfare state has committed it, while funding the inevitable increases in military spending needed in our dangerous world.
CBO director Phillip Swagel says that for the nation’s finances to be put on a sustainable course “lawmakers will have to make significant changes … making revenues larger … reducing spending … or adopting some combination of those approaches.” Neither is likely. Republicans are mooting plans for further tax cuts, and the Democratic candidates are demanding that additional trillions be spent on health care, a Green New Deal, and whatever else their progressive brains might conjure.
Unless the current debt-fueled economy finally grows so rapidly that Treasury receipts swell, and unless a re-elected Trump reverts to his 2016 promise to eliminate the deficit – and, yes, pay off the national debt – politicians will eventually fall back on their old friend: inflation. Print money to cover the deficit, and use cheap dollars to repay the lenders who are, for reasons best known to themselves, shoveling money at the government at interest rates close to or below zero. Those devalued dollars won’t buy as much as the dollars earlier lent to the government, but heavily indebted governments have never shied from transferring wealth from lenders to borrowers. No matter that inflation also transfers wealth from people holding assets, which more or less move up in price to keep pace with inflation, to wage-earners and small savers, paid in dollars of reduced value.
Remember: private-sector property developer Donald Trump styled himself “The King of Debt”, and presided over several entities that, unable to repay their loans, declared bankruptcy, leaving some lenders unpaid and the Trump entities freed from their debt obligations. Now The King of Debt has significant control over the presses that churn out the nation’s currency. No need to default. Let inflation ease the burden of improvident borrowing by depreciating the value of the dollars used to repay lenders.
Of course, talk of an imminent recession might be premature. Consumers account for about 70% of economic activity. “While other parts of the economy may show some weakening, consumers have remained confident and willing to spend,” says Lynn Franco after completing the Conference Board’s latest survey of consumer confidence. U.S. households increased their spending at a 4.7% annual rate in the second quarter, the strongest pace since late 2014. Cheap gasoline is always a morale booster for motorists. Low interest rates are prompting many consumers to refinance higher-interest mortgages, freeing up cash for other spending, helping retailers (Target, Lowe’s, Walmart, Dollar General) offering value-for-money and consumer-friendly internet ordering systems to report good earnings. Lower interest rates also sparked a pickup in sales of existing homes last month.
There is little doubt that the economy is not purring along at a 3% growth rate. But a second-quarter slowdown to 2%, and a third quarter likely to clock in at 2.2% (Macroeconomic Advisers) or 2.3% (Atlanta Fed) in a 10-year-old recovery is not a recession.
One thing is certain: the American economic system will never be the same. Free trade, R.I.P. Neither Trump nor Xi can make the concessions the other needs to declare victory, and Democrats broadly agree with Trump’s tariffs. Nor will free markets play as large a role as in the past. On the Left, Democratic progressives are unhappy with the way markets allocate resources and distribute wealth, and plan to direct resources to what they believe to be more socially desirable uses. On the Right, Trump believes that allowing supply and demand to allocate resources is for wimps; his is the strong-man theory of economics. Like the leaders he admires – Xi Jinping, Vladimir Putin – he wants to set interest and exchange rates, and tell companies where they may locate their businesses.
Then there is Jamie Dimon and his CEO Business Round Table. They have jettisoned maximizing shareholder value as their corporate objective in favour of maximizing the happiness of stakeholders – workers, greens, et al. – a much more malleable basis for determining their compensation. Milton Friedman’s “Capitalism and Freedom” has been removed from the economics section and relegated to the history section.