Pump the Money
China will be pumping money into their system and probably reducing interest rates, as always, in order to make up for the business they are, and will be, losing. If the Federal Reserve ever did a “match,” it would be game over, we win! In any event, China wants a deal!
— Donald J. Trump (@realDonaldTrump) May 14, 2019
China will be pumping money into their system and probably reducing interest rates, as always, in order to make up for the business they are, and will be, losing. If the Federal Reserve ever did a “match,” it would be game over, we win! In any event, China wants a deal!
Lead image from Hedgeye with my anecdote in white.
Another Routine Lie
For starters, note the routine lie in Trump’s Tweet. If China wanted a deal we would have one. More accurately, both sides have to want a deal.
But wanting a deal and demanding terms the other side cannot accept is an admission you really don’t want a deal.
Currency War
The important point is not the routine lie which we expect daily from Trump, but rather his proposal for a currency war.
Trump explicitly stated he wants the Fed to pump money and cut rates to “match” China. That’s a direct call for a currency war to debase the US dollar.
Manipulations – Two Means to an End
China pegs the yuan, allegedly keeping it undervalued.
But interest rate cuts are just another means to the same end. The US dollar is strong because the Fed is the only advanced nation that has been hiking. The ECB is still accumulating assets.
Interest rate and QE wars serve the same end as pegs, ceilings, and floors: competitive currency devaluation. Meanwhile, the manipulators (every nation) point the finger at China.
Why Now?
The key to Today’s Tweet stems from today’s import/export price report.
Agricultural Imports and Exports Synopsis
- Agricultural Exports: The price index for agricultural exports decreased 1.5 percent in April following a 1.0-percent advance in March. The April decline was driven by a 17.2-percent decrease in vegetable prices and a 6.8-percent decline in fruit prices. A 2.6-percent drop in corn prices also contributed to the overall decline in April. Prices for agricultural exports fell 2.8 percent over the past year. The 12-month decrease was led by a 14.1-percent drop in soybean prices. Lower prices for fruit, cotton, nuts, meat, and corn also contributed to the over-the-year decline in agricultural export prices.
- Foods, Feeds, and Beverages Imports: The price index for foods, feeds, and beverages rose 2.8 percent in April, the largest monthly advance since the index increased 3.1 percent in July 2016. The April advance was driven by higher prices for fruit, vegetables, and meat.
For details, please see Forecasters Miss Inflation Targets By a Mile: Steep Decline in Ag Export Prices.
Message Not Heard
Things got so serious in April that Iowa Senator Chuck Grassley warned “Trump’s Tariffs End or His Trade Deal Dies“.
Trump did not heed Grassley’s message.
Instead, Trump wants a currency war and a weak dollar to boost exports and reduce imports.
Soybeans at 2008 Lows
Soybean prices have been falling since 2012. Don’t blame Trump for that. But his tariff tactics and China’s retaliatory agriculture tariffs put the screws to the US.
See-Through Bluster
….If we bought 15 Billion Dollars of Agriculture from our Farmers, far more than China buys now, we would have more than 85 Billion Dollars left over for new Infrastructure, Healthcare, or anything else. China would greatly slow down, and we would automatically speed up!
— Donald J. Trump (@realDonaldTrump) May 10, 2019
That Tweet is so preposterous, everyone admits it, even Trump’s own advisers. Note that Kudlow Admits the Obvious: Trump is Wrong.
Much like a playground bully coward, Trump’s preposterous see-though bluster unmasks his fears.
And today’s import export report pinpoints the weakness Trump wants to hide: agricultural states in the upcoming election.
Stop the Lies
On May 10, I asked Dear President Trump: Stop the Damn Trade Lies.
But Trump is doubling and tripling down.
Where Does It stop?
With Trump it hasn’t and perhaps won’t.
Trump’s scorecard is a big zero on: USMCA, TPP, China, and the EU.
Meanwhile we have threats of escalating trade wars with a new threat of currency wars on top of it.
Good luck with that.
Mike “Mish” Shedlock
It is possible that Fed Chairman Powell is trying to navigate a course that doesn’t cause the dollar to strengthen to where it devastates emerging markets creating massive instability. The dollar holds a special place in the world currency market. Following the recent strong job report it is surprising we are not hearing anyone talking about raising interest rates or how this may be inflationary. Instead, the focus has been steered in the direction of how we have obtained a “Goldilocks” situation and if anything Fed Chairman Powell may have room to cut rates even more. The article below explores the Feds stand.
I’ve got a suggestion for the White House, make all economic information secrete that way he can say whatever he wants. he should fire all economist and then make sure that all the data is hidden.
Once tariff reality hits businesses will just move out of China to Cambodia, Vietnam, Philippines, Thailand and many back to USA to more automated production lines. Items like steel will ship to Canada and Mexico first and relabel origin then ship to USA.
I would prefer that every country drops all tariffs and not intervene in Forex, but since China has been doing this for decades (and the Japanese before them), someone has to stand up to them.
Trump is right on one thing. A trade war will hurt China far more than it will hurt us. Their economy is far more dependent on US exports than ours is on Chinese exports.
Really? Only 15% of Chinese exports go to the US. 40% of this is American companies importing parts and raw materials. China can adjust their currency a tiny bit and cancel any effects of US tariffs.
The TWIT-ter-in-chief at it again.
President Trump has deftly disintermediated the liar press.
“You can’t con people, at least not for long,” Trump writes. “You can create excitement, you can do wonderful promotion and get all kinds of press, and you can throw in a little hyperbole. But if you can’t deliver the goods, people will eventually catch on.”
weak dollar will do wonders for oil prices….
This is only started to get interesting. It would be unfortunate if it is not allowed to play out because of false narratives and the upcoming election.
Trump want another Plaza Accord. Trump and everyone else believe in Mercantilism.
Mercantilism was refuted by Adam Smith and David Hume 200 years ago.
Solution is Commodity money like gold and silver
“Solution is Commodity money like gold and silver”
A solution for how long? Gold and silver have been cyclically in and out of favor as money.
“Trump explicitly stated he wants the Fed to pump money and cut rates to “match” China. That’s a direct call for a currency war to debase the US dollar.”
If Trump wants the Fed to debase the currency, they could do it with another round of QE but, instead of purchasing more debt, just print money and buy gold. This would drive up the POG while driving down (debasing) the dollar.
Eventually, as gold reserves accumulate and the POG rises, we might come to a situation where the
POG = total gold reserves divided by money supply
Then we can declare a gold standard with 100% backing.
Actually, I meant to say
POG = money supply divided by total gold reserves
Sounds crazy, but not a bad idea. Print USD and buy gold with it.
President Trump is an accomplished military scholar. He knows well that in war you never play fair. You use every available advantage relentlessly. Never give a sucker an even break. A currency advantage would help.
It’s fun to watch the pathetically mediocre brainpower of Emperor Xi and his bureaucrats match wits with the towering intellect of President Donald Trump. Like a pool shark he lets them think they are still in the game until the last three balls. He could have cleared the table on his first turn.
China is in the midst of a meat shortage. Without soybean imports from USA and pork imports from USA it gets worse. Massive layoffs are coming to China. Flight of capital is in stampede. Banks are failing. Dollar reserves are inadequate to finance imports. This is only the second inning. There is no upper limit to tariffs. Could go to 100%, 200%….
The end game is a Chinese revolution of two hundred million hungry penniless peasants. Likewise in Russia as in Venezuela.
DT will never surrender,Barak surrendered,DT watched 8 years of BO getting humiliated,bitch slapped,made a worldwide joke by the Chicoms and well….everybody,DT is determined to not let that be him.
Yeah, America is such a weak nation, why don’t you move to a strong nation like … oh, yeah, about that.
The best thing for American business is a level playing field, and Obama worked to deliver the TPP which would have promoted U.S. interests and surrounded China with a fast growing market tied in to the U.S.
I’m not only blaming Trump for pulling out of the TPP, Hillary was pathetic on that front as well, but I am blaming Trump for that and all the other stupidity that has made the U.S. dramatically weaker by attacking our natural allies that could have helped build a balance against China.
So off you go to some blustering foolhardy nation that is “strong” in your eyes. What about Turkey, Brazil, or Russia. They have leaders who cater to the “feelies” instead of the economic literate.
Inflation causes depression.
The US minimum wage is absurdly inappropriate for the value of US unskilled labor. USA is not competitive until inflation devalues the USA minimum wage to the $2/hour world standard. President Trump intends to bring USA labor, taxes, incentives, infrastructure, military, productivity, etc. to the premier competitive level.
Next: Pentagon
I think Trump’s reasoning on twitter is just a story for those who will buy it or at least argue about it. He doesn’t actually care about wonky reasons, calculations, or right-versus-wrong, because in his world there is only one rule that matters: the biggest bully wins and everyone else loses. Trump foresees China becoming more powerful than the US, and he is desperate to stop that — so he is trying to scratch their eyes out even if the US gets hurt in the process.
I’ve been to China many times – I was there for the 10/31 “opening of the markets” and spoke at a capital markets event.
The Chinese have achieved amazing things since Deng introduced Communism with Capitalist Overtones in the 1980s. They have pulled more people out of poverty than any nation at any time in history. But their central approach, coupled with political paranoia is simply not be feared by the U.S. Their capital markets are a mess, their debt is incredibly fragile. Their currency is second rate.
I wish them the best of luck and hope their people do well in the long run, but let’s wait for China’s first home grown financial crisis before we worry too much about them dominating the World markets.
Bingo
My crystal ball is murky. The tariff will surely lead to some price increases, which will push up inflation. Yet, it will also lead to a decline in economic activity, which tends to lead to a recession and deflation. Similarly, the trade war is leading to falling ag prices, which also leads to deflation.
“With declining inflation, Trump may get his rate cut. Fed wouldn’t be lying about their inflation targets, right?”
Eventually yes, if my recession call is accurate.
Trump wants 75 basis points now and a currency war.
The Fed was behind the curve so long that that might actually be in front of it. Another bubble bust even is in the cards
Mish: What specifically is your recession call? When will the recession hit, what will be the cause, and how long will it last?