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SEPTEMBER 2020

Trump’s Currency War: National Economy Vs Globalism

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Trump's Currency War: National Economy Vs Globalism

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US President Donald Trump has, for months, attempted to pressure the Federal Reserve Board of Governors into lowering interest rates.

Former Trump economic adviser Stephen Moore said that he was completely right in pressuring the Federal Reserve, and that Chairman Jerome Powell wasn’t doing a proper job.

“Every meeting I have with Donald Trump, he spends railing against Chairman Powell,” Moore told told Yahoo.

“They made two major mistakes in September and December” of last year when the Fed raised rates, Moore said. “It was a catastrophically bad decision,” that led to a big drop in stocks at the end of 2018.

The Federal Reserve Board of Governors reduced interest rates three times in 2019. The target range for the federal funds rate is now 1.5% to 1.75%

Right before Trump nominated Moore to fill one of the vacant seats on the Fed’s Board of Governors, Moore said: “They should all be fired and they should be replaced by good economists.” His opinion was in sync with Trump at the time. “There’s no bigger swamp in Washington than the Federal Reserve Board. It’s filled with hundreds of economists who are worthless, who have the wrong model in their mind,” Moore had said.

Finally, Trump did get lower rates, but what would the cost of that be.

“I am a big believer presidents get the monetary policy that they want.” In Moore’s opinion the performance of the US economy in 2019 was proof that Trump was correct in his monetary policy.

“Now we’ve got the lowest inflation and the lowest unemployment rate in 50 years,” he said. “The Fed is in a lot better place today than it was a year ago.”

In July 2019, Trump accused both Europe and China of manipulating their currencies to gain an unfair advantage over the US.

This tweet caused fears that a “currency war” might be coming. In a July report, Pimco, a large asset manager, warned that a “full-blown currency war with direct intervention by the US and other major governments/central banks to weaken their currencies, while not a near-term probability, can no longer be ruled out.”

The Federal Reserve Board of Governors’ trade-weighted dollar index showed that America’s currency is at its strongest level since 2002, underscoring the competitive pressures faced by US exporters.

Essentially, Trump accused China, Canada, Mexico, as well as Japan, Germany and Italy of manipulating their currencies, namely keeping the exchange rates of their currencies low in order to boost their country’s exports and support their local industry.

Trump, disgruntled by this has long voiced his wish to “forcefully” push the interest rate down in order to begin a “currency war” with these “manipulators.” He wishes for the Federal Reserve Board of Governors to push interest rates as low as possible, by releasing loans with a very low interest rate, which would then boost local industry and production. In turn, because more loans are being given out, more money are being spent.

Initially, instead of a “currency war” Trump began a “trade war.” Starting from March 2018 he put tariffs on all cheap foreign steel and aluminum coming into the US. He argued that the United States needed to keep domestic steel and aluminum production strong to build military equipment.

Canada and Europe withstood the pressure, but Brazil and Argentina didn’t. The two South American nations agreed to the Trump Administration’s demands to restrict how much steel and aluminum they sold the United States, through the use of a formal “quota.”

The tipping point that threatened all US investors, was when Trump in May 2019, threatened to impose tariffs on all imports from Mexico unless the Mexican government took dramatic steps to stem migration across the southern U.S. border.

As a result of the quotas on Brazil and Argentina, Trump on December 2nd, 2019 announced tariffs on the two countries, because according to him they were attempting to manipulate their currencies.

“Brazil and Argentina have been presiding over a massive devaluation of their currencies. which is not good for our farmers,” Trump tweeted. “Therefore, effective immediately, I will restore the Tariffs on all Steel & Aluminum that is shipped into the U.S. from those countries.”

This wasn’t the first time Trump has hit a nation with higher tariffs over currency. Chad Bown, a fellow at the Peterson Institute for International Economics, pointed out that Trump increased tariffs on Turkey in August 2018 because the Turkish lira was sliding against the dollar.

Trump’s actions are the first time ever since a US president has declared anything such as a preparation to begin a currency war since the US became the “global hegemon.”

It is, nevertheless, a logical approach for a leader who wishes to support their national economy and wants it secure and strengthened, growing.

Earlier, however, such actions went contrary to the “globalist” approach. Many economists say that the US dollar’s strength is a reflection of the fact that the economy is in a good place, and they point out that Trump is deviating from the precedent set by prior presidents to verbally support a strong dollar. And a strong dollar provides a sense of security for those keeping a reserve in it.

If the US dollar falls, due to an intentional push from the Trump administration, or due to other reasons, this would make it less attractive for large corporations to invest in US dollars or even keep a reserve in Washington’s currency. This is specifically important for establishments that do not produce – such as banks, broker agencies, investments agencies and similar. At the same time, this will improve the internal production of the US, thus it is a sort of trade off between national economy against the global economy.

The US national debt stands at $22 trillion, it is the highest it has ever been. The Treasury Department data comes as tax revenue has fallen and federal spending continues to rise. The new debt level reflects a rise of more than $2 trillion from the day President Donald Trump took office in 2017. Trump did promise to keep it under control, but it doesn’t appear that anything of the sort has transpired.

The US deficit for fiscal year 2019 went up by 26% to $986 billion. It is the highest it’s been in 7 years. The U.S. government also collected nearly $71 billion in customs duties, or tariffs, a 70% increase compared to the year-ago period.

For Fiscal Year 2020, the interest on the national debt which the US government needs to pay sits at $479 billion. It will consume 10.1% of the budget. Interest on the approximately $22 trillion debt is already the fastest growing federal expense.

The interest on the debt was $253 billion in 2008. It consumed 8.5% of the FY 2008 federal budget.

In Fiscal Year 2020, top mandatory spending goes to:

  • $1.102 trillion for social security;
  • $679 billion for Medicare;
  • $418 billion for Medicaid.

The US will pay more for interest on debt, than on Medical aid. If the debt was a branch of government, it would received the 2nd most funds, following the Department of Defense which received $718 billion for the period.

For 2020, the budget deficit is estimated at $1.101 trillion. That’s the difference between $3.645 trillion in revenue and $4.746 trillion in spending.

And clearly this needs to be contained, so if Trump stays the course, begins a currency war and attempts to further protect the US economy and promote its industry. In the event of success, these actions of the Trump administration will lead to a slow but steady destruction of the current global system based on the US dollar.

The US alone can’t weaken the dollar, since it is as much global, as it is national at this point. But Donald Trump and his aides, with their attempts, can contribute to a long-expected global recession, raise political tensions and upend financial markets as countries try to depreciate their currencies against everyone else’s.

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