Trump as trickster
There’s a theory going around that Trump is playing a game with the Fed, trying to use trade to force them to lower rates. Here’s Yahoo.com:
When the Fed’s reaction function is led by measures of inflation and employment, neither of which the president can control (even if policies can affect them), then there is little Trump can do to force the central bank’s hand. But when the Fed is driven by “global developments” over trade, then he can very directly engineer a cut in rates by threatening new tariffs on key trading partners.
Is Trump really that cynical? We cannot know, but the timing of the announcement, when the official word was that talks with China were proceeding well, is hard to explain unless the Fed was a factor. And we now discover that the Fed is left haplessly in the role played by the European Central Bank during the sovereign debt crisis earlier this decade, or the Bank of England in the Brexit imbroglio, in that it has no choice but to offer insurance in the case that politicians do something really stupid that severely damages the economy. Central banks in this way become direct purveyors of moral hazard, and there is nothing they can do about it.
Disregard the moral hazard claim—good monetary policy doesn’t create moral hazard; it simply refuses to add insult to injury when central banks politicians do something bad to the supply side of the economy. Good monetary policy refuses to pile demand shocks on top of supply shocks.
What about the claim that Trump is trying to force the Fed’s hand? At first glance that makes little sense. It would be like me purposely exposing myself to hepatitis in order to force my doctor to give me a prescription for antibiotics. There’s no net gain from that game.
Does Trump actually think that he gains from a bad policy that depresses the economy, but also triggers a rate cut that leaves the effective stance of monetary policy unchanged? That’s hard to imagine, although with Trump anything is possible.
More likely, Trump might be trying to combine this monetary policy game with the game I proposed in my previous post—boosting China tariffs ahead of an anticipated deal in order to make it look like he “won” the fight. In this scenario, he does the deal right after the Fed cuts rates in September, making the September rate cut effectively more expansionary than anticipated.
Even that is not likely to work. With monetary policy, what matters is the effective future path of policy. If he does a trade deal right after a September rate cut, then the Fed will immediately begin signaling tighter money ahead. But Trump may not know that what matters is the expected future path of monetary policy, he may be a resident of the “concrete steppes”. So I can imagine that he might be contemplating a game similar to what I proposed in my previous post, combined with the Fed manipulation discussed in the Yahoo article.
The bad news is that this stuff won’t work. The good news is that it doesn’t much matter, as long as the trade fight is settled within the next few months, or at least doesn’t escalate further.
PS. The New York Times correctly reported that Trump had negotiated the Mexican deal long before the late May tariff threat, but for some reason it failed to see the game Trump was playing. Bless their hearts, the NYT is so idealistic that they can’t even conceive of just how evil is the Machiavellian president we have now occupying the White House:
It was unclear whether Mr. Trump believed that the agreement truly represented new and broader concessions, or whether the president understood the limits of the deal but accepted it as a face-saving way to escape from the political and economic consequences of imposing tariffs on Mexico, which he began threatening less than two weeks ago.
Isn’t it pretty clear that Trump imposed the Mexican tariffs knowing he was close to a deal? Sure, he probably hoped to get a bit more than he got:
And over the past week, negotiators failed to persuade Mexico to accept a “safe third country” treaty that would have given the United States the legal ability to reject asylum seekers if they had not sought refuge in Mexico first.
But he obviously doesn’t care about the details; he just wants to look good. And his supporters (including some commenters here) saw a big “win”, not a President who is less effective at controlling illegal immigration than Obama. That’s all that matters (in Trump’s mind.)
PS. Think about Trump’s recent initiative to allow drug imports from Canada. What’s the actual goal?
A year after calling proposals allowing Americans to import cheaper drugs from Canada a “gimmick,” Health and Human Services Secretary Alex Azar said the federal government is “open for business” on such a strategy.
Wait, is he saying that the Trump administration would engage in “gimmicks”? Say it ain’t so!
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3. August 2019 at 12:06
Bingo, Sumner. This is one of the many reasons Trump will not win re-election.
3. August 2019 at 12:16
“This is one of the many reasons Trump will not win re-election.”
E Harding lives in a fake news MKUltra fantasyland.
3. August 2019 at 12:20
“Less effective at controlling immigration”
1. Chart shows 2018 (after enough bad Democrat laws have been thankfully changed) as superior to any Obama year.
2. Apprehensions alone are not even the sole piece of information that would support a conclusion of “effectiveness”.
Obama built the cages that separated families. Fake news posted the pics and lied that they were under the Trump admin.
3. August 2019 at 13:14
Harding, Wrong, You may care about these issues, but most of his supporters don’t pay attention. I’ve heard Trump supporters talk about the good job he’s done bring down the budget deficits.
3. August 2019 at 16:55
I do believe Trump actually believes stabbing himself in order to get sewed up is actually a net gain because it would result in lower nominal interest rates.
Did you mean when politicians do something bad to the supply side of the economy? (second paragraph)
Spoke to a wall street analyst that was completely mind blown that the 10 year had had fallen so dramatically after the fed cut, claimed the bond market was completely wrong. Tried to explain that if the equilibrium interest rate falls by more than the Fed cuts, it actually means the Fed is tightening but he wasn’t having it. Oh well.
Great post, at least Trump gives us something to talk about.
3. August 2019 at 17:05
Thanks Rodrigo, I fixed the typo. Yes, lots of analysts have trouble understanding the link between monetary policy and interest rates.
3. August 2019 at 17:17
It is too bad that the bombastic President Trump is the face of a needed reassessment of US trade policies.
The IMF has advised the US to reduce its trade current account trade deficit, warning that the axiomatic foreign caital inflows bloat asset values which can then collapse, ala 2008. The Hyman Minsky moment. Beyond that, nations that run large chronic current -account trade deficits tend to also have exploding house prices.
I think there are legitimate concerns that globalization has contributed to declining labor shares of income in developed naions.
It is interesting that the financial media presents Trump’s latest round of tariff hikes, that is a 10% tariff on $300 billion of annual Sino exports to the US, as the end of the world.
That amounts to a $30 billion tax hike. The US presently collects about $3.9 trillion in annual taxes.
Here is an interesting thought experiment: Suppose Trump had not tacked tariffs on China, but instead Beijing said it was placing quotas on China exports to the US, as it preferred to do less business with a warlike capitalist nation that was soaking up too much output and resources from the motherland.
Would anybody expect such Beijing quotas to have anything but the most fleeting impact on the US economy, let alone the global economy? Large free markets are famous for their resilience and adaptability, the use of substitutions and innovation driven by the profit motive and price signal.
The US economy will quickly adapt to even permanent tariffs on China exports to the US.
If orthodox macroeconomists do not like Trump’s use of tariffs, they need to come up with a alternative game plan to bring the US current-account trade deficit closer to balance.
3. August 2019 at 19:40
“Wrong, You may care about these issues, but most of his supporters don’t pay attention”
The psychological projection of one’s own ignorance on others is strong with this one…
Fake news narrative sheep victims believe what keeps them under control.
We are the majority. Look at any Trump rally, compare to any Democrat rally.
Reconcile with fake news.
When people arrogate emotions over logic and truth, we get a world where people are almost completely demoralized and ready for harvesting.
3. August 2019 at 19:42
While the media is fixated on tweets and fear mongering here’s are some employment stats for Black American in July.
284,000 returned to labor force.
Participation rate soars 62.7% from 61.9%.
Unemployment gap between Black and White now second lowest on record (record May 2018).
MSM = silence. Why?
3. August 2019 at 19:57
Fake news narrative shift required, Mueller testimony a disaster for the Democrats. FAIL.
“Racist” narrative of Trump pointing out massive corruption in D controlled Baltimore (Cummings district). FAIL. Everyone now SEES w rat infested shithole ruled by King Elijah.
$16 BILLION, with a B, federal aid sent to Baltimore during 2018 alone, STOLEN.
Slush funds everywhere through D party establishment
How did Pelosi and Waters accumulate $ tens of millions in net worth…on career politician salaries?
What were they really selling?
And to whom?
Why did former President Bill Clinton fly to Epstein’s pedo ritual sacrifice cult island “Little St. James” on Epstein’s private jet that was known as “Lolita Express” 26 times (as proven by declassified flight logs)?
https://i.imgur.com/1srngGX.jpg
This photo is proof Clinton lied in his response when that real news went ‘public.’
Fake news = silence.
Why?
To keep their leftist sheep in line with the ‘approved’ narrative that orange man bad.
3. August 2019 at 19:58
Source: https://twitter.com/cvpayne/status/1157643475699077122
Focusing on the numbers didn’t check for spelling…
3. August 2019 at 20:09
Meanwhile, in leftist controlled France:
http://magaimg.net/img/8mtj.png
The left’s war against humanity is real.
These people are sick!
3. August 2019 at 20:13
The D Party cannot. Stop. Projecting.
https://i.imgur.com/O0Trp9u.jpg
3. August 2019 at 20:17
@ssumner “most of his supporters don’t pay attention”
Of course. But what matters is not “most of his supporters” but the MARGINAL supporters.
3. August 2019 at 20:39
“But what matters is not “most of his supporters” but the MARGINAL supporters.”
Good thing that socialist ideological insanity, of viewing people as subject to what is only true for matter devoid of self-consciousness, is defended against by everyone’s vote being accounted for identically to decide election outcomes.
3. August 2019 at 21:46
Ben, You said:
“If orthodox macroeconomists do not like Trump’s use of tariffs, they need to come up with a alternative game plan to bring the US current-account trade deficit closer to balance.”
They’ve already come up with an alternative plan, reduce the budget deficit. But you oppose that, which means I guess that you favor a big current account deficit.
I’m not sure if you’ve noticed, but Trump is making the budget and current account deficits even bigger.
3. August 2019 at 21:56
Did you see the article claiming that he was using the China tariffs as a lever to manipulate the stock market/economy? He hints at a deal when he wants an economic boost and walks it back to gain ammo for later. That way he is not fully subject, or the market is not fully subject, to the Fed’s declared policy intentions.
3. August 2019 at 22:49
The great thing about nationalism, just like social justice, is that it can be applied to any policy. Importing steel: bad. Importing drugs: good. So, putting America First means slapping tariffs on steel to raise steel prices for American consumers, but it also means stopping drug companies from raising drug prices for American consumers.
4. August 2019 at 01:23
“They’ve [orthodox economists] already come up with an alternative plan [to cut the national current-account trade deficit], reduce the budget deficit. But you oppose that, which means I guess that you favor a big current-account deficit.”–Scott Sumner.
I didn’t know I was for larger national budget deficits.
I am for judicious use of money-financed fiscal programs (helicopter drops, not borrowing) if necessary, but prefer monetary stimulus as first resort. I am concerned the first resort may lack ooomph, or be dangerous to the commercial banking system (that is, negative interest rates would tank the commercial-bank business model, reports Moody’s. So does Deutsche Bank, ha-ha).
The IMF does not mention that the US can cut its current-account trade deficits by bringing its federal national budget deficit into line. They advocate lowering labor costs and opening up foreign markets.
I gather the nexus between current-account trade deficits and national budget deficits is controversial. The “twin deficits hypothesis.”
Japan runs trade surpluses, and also famously large and chronic national budget deficits—-they have national debt at 236% of GDP, but the US has debt at 108% of GDP. Japan runs trade surpluses and the US runs the world’s biggest trade deficits.
In some ways, Michael Pettis agrees with you, that a successful developed economy shifts income from labor to business, and business “saves” the income through investment. So you get a higher savings rate, more investment and more exports.
Perhaps you contend Japan has such a high savings rate they can run national budget deficits and still run trade surpluses.
I do not think any Westerner knows if China runs budget surpluses or not. I have been trying to understand their financial system for years, and I gather they print money to buy bad loans, and I think with positive effect.
In conclusion, I say the nice thing about macroeconomics is no one is ever wrong.
4. August 2019 at 05:00
False flags in El Paso and Dayton to shift ‘narrative’ away from Mueller testimony narrative fail and Trump is a racist narrative fail.
Obama FBI committed obstruction of justice
https://www.frontpagemag.com/fpm/274484/new-evidence-unveils-disturbing-facts-about-deborah-weiss
4. August 2019 at 05:23
This doesn’t help me make a prediction at all. I’m still stuck between something like Scott’s prediction about trade with China and the prediction that Trump will keep pushing the trade war, thinking that it’s good for the economy if the Fed doesn’t undermine him. I’ve seen statements from Trump indicating he conflates monetary policy with currency manipulation, and has complained the Fed isn’t “manipulating” the dollar enough to help him win the trade war. Gagnon subtlety on this, he obviously lacks.
So, good hypothesis once again, but I’m still not convinced Trump isn’t dumber than you’re even suggesting, to the point of further risking his re-election prospects
That said, my experience with Trump supporters has been the same as Scott’s. They live in their own, extraordinarily ignorant universe, completely unaware of the exploding fiscal deficits and related exploding trade deficits.
4. August 2019 at 08:07
Ben, You said:
“I didn’t know I was for larger national budget deficits.”
Sorry, maybe it was your roughly 5000 comments calling for coordinated monetary fiscal stimulus that confused me. If you are backing off on that, I’m pleased.
4. August 2019 at 19:58
Scott–
I thought I was calling for (when appropriate, of course):
1. QE
2. QE to offset budget deficits, which is really a form of helicopter drops
3 Or, honest helicopter drops, without the smokescreen of QE+fiscal deficits.
As you know, in Japan, the central bank has bought back half that nation’s heroic level of national debt, without inflationary effect. I call this Mobius strip economics. The government of Japan owes money to the government of Japan (and the world owes Japan lots of money, due to their accumulated trade surpluses).
I have to say, QE alone strikes me as the least effective. The world’s capital markets are globalized and huge. QE by a lone central bank may budge down long-term rates 20 basis points.
Seems much more effective to cut tax rates on wage earners, and make up the difference by the Treasury issuing bonds that are then bought back by the central bank. This avoids build up of debts.
The orthodox macroeconomics profession needs to devise a method for stimulating the economy that does not also result in a rapid build-up of debt. Relying on commercial banks and the endogenous creation of money is a sure-fire way to huge debt build-ups….
6. August 2019 at 09:04
Ben, If you are not calling for fiscal stimulus, then I haven’t understood anything you’ve been saying for the past 5 years.
13. August 2019 at 08:01
Well, that didn’t take long …
https://www.investing.com/news/stock-market-news/stocks–wall-street-jumps-sharply-after-us-delays-some-trade-tariffs-1953753
Maybe the market will learn from this and/or you, not to slump on Trump tariff tweets.