Trump vs. the Dollar Part 2: Madmen in Authority
Sunday, 11/17/2024 11:08
No, the Fed chair hasn't read the book. Not yet...
SO the U.S. DOLLAR still rules the world, even though nobody wants it to,
says Adrian Ash at BullionVault, picking up where he left off looking at Trump 2.0 vs. the greenback's reserve currency status.
Well, not apart from US consumers maybe. And Chinese manufacturers.
"It may be correct to say that the role of the Dollar allows Americans to consume beyond their means," wrote former US investment banker and now China-trade-and-economy specialist Michael Pettis back in 2011.
"But it is just as correct, and probably more so, to say that
foreign accumulations of dollars force Americans to consume beyond their means."
That 2011 article from Pettis was called 'An Exorbitant Burden'. It contrasted with the more regular view that the Dollar represents "an exorbitant privilege"...
...a phrase used by the French Government of Charles de Gaulle to complain about US monetary dominance in the 1960s, and an idea repeated today by Russia and China every time they complain about having to pile up Dollars while risking loss of access to those piles through financial sanctions.
Pettis' more domestically-political view became a book in 2021, co-written with US financial columnist Matthew Klein:
Trade Wars Are Class Wars.
Pay attention. This might matter.
Trade Wars Are Class Wars is an arresting and important book, up there with David Graeber's
Debt: The First 5,000 Years and Liaquat Ahamed's
Lords of Finance as a must-read for anyone working or interested in money since the global financial crisis. But its power and timing is such that, as a must-read for anyone in politics, it's right up there with Carmen Reinhart and Kenneth Rogoff's
This Time is Different.
Among other things, that 2011 blockbuster famously said that too much government debt kills economic growth. In fact, the economy stops growing and starts shrinking when the state's total debt rises above 90% of GDP.
You might recall this claim from such political campaigns as the UK Conservatives' in 2010, 2015, 2019 and 2024, or US presidential hopeful Paul Ryan in 2013, or the European Commission time and again. Thing is, it wasn't true.
Reinhart & Rogoff first
presented the 90% rule in New Year 2010. It was seized on by Western governments, most especially in Europe, to cut spending and impose 'austerity' on voters after the banking bail-outs of 2008-2012. But the data rested on a mistake in the Harvard duo's Excel spreadsheets. They took the average of only 15 instead of 20 case studies, missing big success stories which turned that small GDP decline into solid growth overall.
A
post-grad student spotted the error (he also thought they should have better weighted each country's GDP history in their XLS, too), and the news broke out in 2013. That
led Rogoff & Reinhart to revise their data in public. But by then, it had already become truth.
So as John Maynard Keynes said...a man who tried to avoid the Dollar ruling the world after WW2, albeit to defend the UK's fading imperial star:
"Practical men, who believe themselves to be quite exempt from any intellectual influences, are
usually the slaves of some defunct economist. Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back. I am sure that the power of vested interests is vastly exaggerated compared with the gradual encroachment of ideas."
Defunct is harsh. But here comes J.D.Vance anyway.
"I think you can argue that the Dollar's reserve currency status is a massive subsidy to American consumers but a massive tax on American producers."
Now Donald Trump's vice-president,
Vance said that in March last year as a junior Senator for Ohio.
Hearing Vance's comments on the Dollar, "I think
he is a threat to our constitutional government," said Pettis' co-author of
Trade Wars, Matthew Klein.
"But he did read the book."
Washington's ruling elite, in contrast, has not. Not yet.
"We have the world reserve currency because of our democratic institutions, because of our control over inflation over many, many, many years, and the world trusts the rule of law."
So said US central bank boss Jerome Powell last year, replying to Vance during that Federal Reserve appearance before lawmakers.
The world needs a stable Dollar, in short. And it needs lots of Dollars to keep growing too, because it oils the wheels of global trade and finance. So nothing will change and nor does it need to. Next question.
Maybe Powell should read the book. The big idea is that, as
one review of Trade Wars puts it, preserving the Dollar's No.1 reserve currency status means "Rust Belt cities must dry up and blow away so the President can starve the Iranian citizenry" through sanctions.
Maybe that changes with the new "madmen" taking charge in January.
"We're done sacrificing supply chains to unlimited global trade," declared Vance when he won the GOP's nomination as Trump's running mate at the Republican National Convention in Milwaukee this July.
"We're going to stamp more and more products with that beautiful label, 'made in the USA'. We're going to build factories again, put people to work making real products for American families, made with the hands of American workers. Together,
we will protect the wages of American workers and stop the Chinese Communist Party from building their middle class on the backs of American citizens."
Put another way, "We have a big currency problem," said Trump himself to Bloomberg this summer. "It's
a tremendous burden."
Do you think 60% tariffs on Chinese imports will help? Plus 10-20% on everyone else? Anyone? Anyone?
Anyone seen this before?
Personally I have no expertise or opinion on who's right or wrong. But investors and savers need to play the hand we're dealt, and Trump 2.0 is really going to shuffle the pack.
China and Russia have so far failed to unseat King Dollar. No other currency stands ready to replace it, and judging by its ongoing dominance, the Dollar's monetary power actually suits the rest of the world (sanctions aside), because it means the USA has to borrow to pay for what it buys.
But King Trump II and his 2nd-in-command have other ideas. Bad ones for sure, ill-thought through and currently driving the Dollar higher and higher because of the inflation (and therefore higher Fed interest rates) which everyone agrees massive trade tariffs, unfunded tax cuts and the mass deportation of illegal-but-low-wage workers will cause.
But again...and even as Trump's likely pick for Treasury Secretary says that tariffs are just a negotiation tool, not a promise...King Donald no doubt has other ideas. Lots of them, contradictory and confused, and mostly forgotten between breakfast and lunch. But they're trying to point in the same direction, and they will surely include appointing a new chairman of the Federal Reserve when the current term of Jerome 'high rates' Powell expires in May.
"My only question is, who is our bigger enemy, Jay Powell or Chairman Xi?"
shouted Trump into the air back in 2019 after the Fed failed to slash interest rates as the then-President wished.
Fast forward 5 years, and who's really the bigger threat to the Dollar:
Putin or Trump?
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