The President doesn't subscribe to the rule about both wanting your cake and eating it


ref :- "Trump Might Not Like It, but the Dollar Should Be Strong" , STREETWISE in Markets, The Wall Street Journal 5/3/19

President Trump was teeing off at the Federal Reserve and its Chairman Jay Powell again at the weekend. Nothing particularly newsworthy about that, he does it all the time ..... but the WSJ's slant on Mr Trump's loaded comments is that he picked an odd time to unleash them. True .... and even if it wasn't, the whole "President - v - The Fed" thing is endlessly fascinating not least because most would agree that in the modern era it is entirely inappropriate for the President to be putting pressure on the central bank in this way -- not that such a thing would bother him one bit. In most economists' eyes his logic is also flawed ..... but that too would be of little concern and as it turns out he could at least make an argument that in the light of the lack of inflationary pressure he's been right in saying that the Fed has tightened monetary policy too far and too fast.

No President, even one not pursuing a growth-at-all-costs agenda, wants higher interest rates that make life tougher for most of the electorate, especially with crucial elections approaching. But Mr Trump has always had a contradictory stance on these matters. He seems to measure his performance as President by the performance of the stock market .... and so, of course, favours a benign monetary policy. It's the essence of the so-called "central bank put option" that investors like to feel is insurance against market reversals becoming too damaging. But in the longer term, stock prices will ultimately be led by the performance of companies and of the economy in general .... and if the economy is motoring along, then the Fed must take the appropriate steps to ensure that it doesn't overheat and engender unhealthy inflation. That is part of the Fed's dual mandate. Thus, a strong performance by Mr Trump's preferred measure of how he's doing (the stock market) has inevitably if indirectly led to the Fed imposing a tighter monetary policy that he doesn't like.

Anyway, his particular gripe this time centred around how the Fed's tightening monetary policy (higher rates and reduction of the Fed balance sheet -- or Quantitative Tightening) had brought about such a strong US Dollar. Of course he's right in that the resulting stronger currency is bad news for exporters and not what you want if you're trying to do something about a trade deficit. But he seems unaware that it is his expansive, high-spending tax cuts and spending measures in the search for growth that has in large part been responsible for such a situation coming to pass. It would be fair to say that a sense of irony is not the President's strong suit.

Back to the WSJ, and the curious timing of Mr Trump's latest admonishments. He "accused" Fed Chairman Powell of liking both a strong dollar and quantitative tightening. Whilst he too was fond of a strong dollar, he added, he didn't like it SO strong that it made it "prohibitive" for the USA to do business and nick business from other nations. It's an odd moment to come out with such comments because the Fed has already radically altered its stance on monetary policy. Interest rates have effectively been put on hold and hardly anyone inside or outside of the Fed believes that quantitative tightening, not so long ago slated to be a long-term ongoing process, will not be withdrawn by the end of the year. As the WSJ says, the President is preaching to the converted.

How strong is the dollar anyway ? The President may be justified in describing the currency in that way in the sense that it's strong rather than weak, but historically speaking it's not VERY strong. It's not nearly as strong as it was in 2002 for example, and nowhere near where it was in 1985. In fact, it's 5% above its average against a broad range of trading partners since it floated freely in 1973. Taking the most heavily traded currency pairing in the world, the dollar is just 4% higher than its average against the Euro since the latter's inception in 1999. It's true that the dollar is eight years into a rally that has seen its value increase against its trading partners by about 25% since 2011 (when it was at a post-war low). But that is less than half of the gains that it made in the previous two major bull runs in the early 1980s and late 1990s.

Leaving history aside for a moment, the point that Mr Trump misses is that the dollar is strong BECAUSE IT DESERVES TO BE STRONG. The US economy is performing far better than most of its competitors. It may not have taken off as it might have in the past, but the inflation rate is also broadly on target. Compare that with the US' major competitors like Europe and Japan, whose economic performance is faltering and whose central bank policies are still at or near emergency status with zero interest rates and little sign of any long-awaited inflationary pressure. Once again, one wants to shout at Mr Trump :" If you want strong growth, then you're going to have to accept the interest rate regime and the stronger currency that goes with it ... you can't have it both ways, Mr President !"

Beyond all that, the WSJ argues that we need to be wary of the widely-held assumption that a weaker currency is entirely beneficial to economic health. In the short-term of course, it is, adding greatly to the competitiveness of any exporting nation. But longer-term (and we ARE talking long-term here), it doesn't work that way. Since 1900 the best-performing of 21 tracked currencies have been the Swiss Franc, the Dutch Guilder (now part of the Euro) and the US Dollar -- and both Switzerland and the Netherlands are hugely strong exporting nations.

The theory is that a strong currency forces exporting companies and their workers to "up their game", which ultimately makes the whole nation more competitive. By contrast, the competitive benefits of a weaker currency are soon "eroded by inflation, because companies didn't face the same pressure to improve competitiveness", and that might well bring about further currency devaluation.

We're sure Mr Trump could easily grasp such a theory, but he's unlikely to be interested in either the academic or particularly the long-term nature of it all. He wants lower rates and a weaker currency .... a short-term boost, in other words. In that, if in no other way, he's just like most politicians.

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