<blockquote class=”twitter-tweet” data-lang=”en”><p lang=”en” dir=”ltr”>China, the European Union and others have been manipulating their currencies and interest rates lower, while the U.S. is raising rates while the dollars gets stronger and stronger with each passing day – taking away our big competitive edge. As usual, not a level playing field…</p>— Donald J. Trump (@realDonaldTrump) <a href=”https://twitter.com/realDonaldTrump/status/1020287981020729344?ref_src=twsrc%5Etfw”>July 20, 2018</a></blockquote>
<script async src=”https://platform.twitter.com/widgets.js” charset=”utf-8″></script>And yet, both his tax cuts and trade war are contributing to these dynamics.
- You juice the economy at full employment with a deficit-financed, $2 trillion tax cut, and the Fed’s naturally going to ramp up their concerns about overheating.
- At the same time, the extra fiscal impulse is leading to stronger U.S. growth, relative to that of our trading partners, and that, too, puts pressure on both the dollar and the trade deficit.
- Meanwhile, tariffs tend to reduce the circulation of dollars in foreign exchange markets, yet another pressuring factor of the value of the greenback.
The figure below, an index of the value of the dollar against a basket of foreign currencies, shows the dollar beginning its most recent appreciation around when the first salvos of the trade war hit. Relatedly, as Trump’s tweet mentions, the Chinese yuan is falling sharply against the dollar, down about 7 percent since April, a movement that directly offsets that same amount of Trump’s tariffs.
In other words, the president has a point. But while part of this is what he gets from inheriting a strong economy — something I suspect he wouldn’t trade — part of it is because of his and his party’s actions.
.. The Fed is different, as its independence from politics is so vital. There are many sad examples of countries whose economies did a lot worse than they should have because their central banks became an arm of the government.
.. That said, I’m not reaching for the vapors. I really wouldn’t want to see Trump ratchet up his Fed critiques to a regular feature of his daily rants.
.. So, if you’re listening, Mr. President, no point in whining about a currency appreciation to which you’re contributing. Whine as you might, you can’t have a “great economy” closing in on full employment, an independent Fed, a big tax cut, a trade war — and a falling dollar.