The US Federal Reserve must henceforth be considered the personal political agency of Donald Trump. America’s monetary credibility has been utterly trashed.
The world’s superpower central bank will set interest rates at his whim, much like the Turkish central bank under the Erdogan regime.
Markets must now assume that Trump will compel the Fed to soak up America’s exorbitant debt issuance and hold down long-term interests by a form of de facto yield curve control.
They must also assume that Trump will force the Fed to press the pedal to the floor and slash interest rates far below the natural Wicksellian rate until the midterm elections are safely out of the way next year.
Trump has crossed the Rubicon by purging an independent member of the seven-strong Fed board, each appointed for 14 years with Senate confirmation and protected tenure to shield them from pressure.
He has already sacked the protected head of the Federal Trade Commission and got away with it, so the latest abuse should hardly come as a surprise.
If there were any authenticity to the sacking of Lisa Cook, one of the federal governors, under the legal category “for cause” it would have entailed a genuine probe under due process.
Trump’s obvious purpose is to bring the Fed under his full control immediately and, above all, to issue an implicit warning to any member of the Federal Open Market Committee who refuses to toe the line that they too will be disposed of if anything can be found against them – and something can always be found.
“It’s an authoritarian power grab that blatantly violates the Federal Reserve Act, and any court that follows the law will overturn it,” said Elizabeth Warren, the veteran Democrat on the Senate Banking Committee.
Her caveat is noted. It takes some courage for intimidated judges to “follow the law” in Donald Trump’s America.
The dollar was already on borrowed time as the world’s hegemonic reserve currency before the death of the Fed. The process will now accelerate, with potent implications for the dollarised system of global finance.
The Bank for International Settlements estimates that $13tn (£9.6tn) of offshore global debt is denominated in US dollars, or $35tn if you include embedded liabilities in swaps and other derivatives.
Trump can bulldoze his way through resistance within the US – and he can strong-arm foreign allies into concessions, until they cease to be allies – but there is one great immovable power that is beyond his reach.
He cannot force the global bond market to buy US treasuries and fund his debt.
The Achilles’ heel of Trumpism is that the US has a net international investment position of minus $24.6 trillion, or 82pc of GDP. It has a personal savings rate of 4.7pc, a fraction of US post-war levels or of global levels, and is living off a constant supply of foreign credit to cover day to day spending.
Read the rest here.
One additional factor not getting a lot of attention in all of this is that Trump has been investing hundreds of millions of his own money in US bonds since he won re-election. If he can force down interest rates, he stands to make a killing.
No comments:
Post a Comment