Fed needs to wake up and admit the economy is overheating

US central bank risks having to slam on the brakes if it persists with gradualism

Jason Cummins



In Newton’s First Law, an object in motion stays in motion until a force acts upon it. Under new leadership, the Federal Reserve’s monetary policy strategy appears to be following the same logic. In his June press conference, chairman Jay Powell said the Fed would raise interest rates until “we get a sense that the economy is reacting badly”.

The latest numbers suggest the US economy is doing anything but reacting badly. The unemployment rate declined to 3.75 per cent, a 48-year low and three-quarters of a percentage point below the Fed’s median estimate of its long-run sustainable rate. Consumer prices rose 2.3 per cent in May from a year earlier. Excluding volatile food and energy categories, core personal consumption expenditures inflation moved up to 2 per cent, matching the Fed’s target for the first time in more than six years.

Despite downside risks from trade tension, these trends look set to continue. Monetary policy is still expansionary on top of the sizeable fiscal expansion that will build in the coming years. The labour market is poised to get tighter and put continued upward pressure on inflation.

With its latest increase in the federal funds rate to a range of 1.75 per cent to 2 per cent, the Fed has finally brought real interest rates to approximately zero. With further gradual increases every quarter, interest rates would end the year at the lower end of Fed policymakers’ range of neutral — ie, the rate that neither stimulates nor slows economic activity. Given the gradual pace outlined in the Fed’s Summary of Economic Projections, monetary policy would eventually become modestly restrictive sometime in 2019 or later.

Mission accomplished? Economic theory and history suggest otherwise. With long and variable lags between monetary policy and its effect on economic activity, theory teaches that interest rates need to be restrictive before the economy overheats. The likelihood is the Fed will enable an even hotter economy and then really have to cool it down. With markets discounting an even more gradual path of rate rises, the central bank risks a sharp financial snap back when it has to slam on the brakes.

International financial markets are responding to the prospect of tighter US monetary policy by bidding up the value of the US dollar against other currencies. In the past, this has been a key catalyst for international financial crises.

With the Fed raising rates and the People’s Bank of China cutting reserve requirements in June, the renminbi slid more than 3 per cent against the US dollar, its largest ever monthly drop for the tightly managed currency. Continued depreciation risks a replay of the destabilising capital outflows seen in 2015 when US and Chinese monetary policies also diverged. At that time, a mild financial panic that played out into early 2016 stoked fears of global recession.

Elsewhere in emerging markets, central banks are under pressure to respond to a stronger US dollar by defending their currencies with rate rises. The most vulnerable economies like Argentina and Turkey already demonstrated acute strain with sharp depreciations in their currencies and capital outflows.

It’s not just the most mismanaged economies that are vulnerable. Indonesia surprised the market by raising rates 50 basis points last month. Mexico is raising rates to defend its currency and some observers think the next move in Brazil will have to be a hike as well. In these countries, equity markets are down on the year and the appreciation in the US currency is making it harder for domestic borrowers to pay back more expensive dollar-denominated debt.

Back home, the Fed has largely shrugged off the international consequences of its actions. Gradualism seems to pose manageable risks because inflation only recently hit 2 per cent and probably will remain contained in the near-term given how flat the Phillips curve appears to be.

Unfortunately, history teaches that the Fed has never successfully managed a soft landing with the current set of macroeconomic conditions. In every case when the Fed tightened policy by enough to raise the unemployment rate by more than four-tenths of a percentage point, it caused a recession.

However, Powell said at his last press conference that it’s “very possible” the long-run sustainable unemployment rate is lower than 4.5 per cent. There is surely uncertainty about the unobservable variables that guide policy. But, if there’s uncertainty, why conduct policy as if the true value is 75 basis points or more below your official estimate?

A high-pressure economy feels great during the party. But the recessionary hangover can be brutal. A better strategy would be more forward-looking. Recognise the economy is overheating rather than hoping that it’s not, announce that policy will need to be more restrictive sooner than expected, and get on with it. Policymakers would have to endure some pain in the short run as they realign market expectations to a more hawkish rate path. But that’s better than the gradualism that virtually guarantees a larger, more painful realignment later on.


Jason Cummins is chief US economist at Brevan Howard


Has One Tweet Reversed Gold’s 3-Month Downtrend?



(Kitco News) - While one tweet has helped to reverse gold’s near-term fortunes, some analysts have said that more work needs to be done to end the yellow metal’s three-month downtrend.

Although gold is ending is second week in negative territory, the market is well off its one-year lows as the U.S. dollar bulls reacted to comments from President Donald Trump. Gold’s bounce started Thursday afternoon after Trump said, in an interview with CNBC, that he was “not thrilled” with rising interest rates as they are hurting economic growth.

August gold futures have managed to hold on to its gains heading into the weekend, last trading at $1,229.20 an ounce, down almost 1% from last week.

The President doubled down on his comments Friday morning in a tweet questioning why the U.S. is raising interest rates as debt is growing and coming due. He also called out China and the European Union for manipulating their currencies, taking away the U.S.’s competitive edge.


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…

Donald Trump

....The United States should not be penalized because we are doing so well. Tightening now hurts all that we have done. The U.S. should be allowed to recapture what was lost due to illegal currency manipulation and BAD Trade Deals. Debt coming due & we are raising rates - Really?

Donald Trump
 
 
While gold is testing critical resistance just below $1,236 an ounce, some analysts are questioning whether these comments will reverse gold’s downtrend.
 
 

“I think we could see some short-term short squeeze through next week as investors digest all the geopolitical risk in the marketplace,” said Phillip Streible, senior market analyst at RJO Futures. “But I don’t know if this completely saved the gold market. Trump’s comments are not going to stop the Fed from raising interest rates.”

Streible added technical momentum indicators are still bearish for gold and that the downward trend is still fairly strong.

However, for investors who are interested in testing the gold waters at current levels, he likes the idea of buying October $1,250 calls.

Colin Hamilton, managing director of commodity research at BMO Capital Markets, is not paying attention to Trump’s latest comments. In an email comment to Kitco News, he said that the U.S. central bank “seems pretty committed to two more rate hikes this year.”

For gold, Hamilton said that while physical demand is expected to pick up with prices hovering near a one-year low, the market needs a weaker U.S. dollar to attract major asset managers.

Trump Did Not Reveal Anything New

Neil Mellor, senior currency strategist at BNY Mellon, said that he doesn’t see the President’s tweets shifting the strong bullish U.S. dollar sentiment in the marketplace.

“We already know that he doesn’t like a strong U.S. dollar. Nothing he said was new for the market,” he said.

Mellor said that the price action he currently sees is more an indication of investors taking profits, rather than a reversal of futures.

“Gold has seen some major selling this week. At the same time, the U.S. dollar has made some big gains so investors are taking some profits off the table ahead of the week,” he said. “Next week, I think we will see fresh buying in the U.S. dollar.”

Mellor also said that he doesn’t think that Trump’s tweets will stop the U.S. central bank from raising interest rates. He also said that China has no choice but to continue to devalue its currency to support its economy.

“China is trying to deleverage the biggest credit bubble in history,” he said. “A weaker yuan is the only option for the government right now.”

At the same time, Mellor added that European economic growth would support any hawkish comments from Mario Draghi, president of the European Central Bank, next week.

“I think we are going to see some fresh euro selling and that will continue to support the U.S. dollar and hurt gold,” he said.

Gold Is Still The Best Safe-Haven Asset

But not everyone is negative on gold in the near term. Eugen Weinberg, head of commodity research at Commerzbank said that the market reaction to Trump’s central-bank comments is proof that investors should not completely ignore gold.

“We can see how much market reaction there was to just one tweet,” he said. “Investors will start looking at gold again because they will want to focus on security and stability.”

While investors having been swept up in the euphoria of near-record equity valuations, Weinberg said that cracks are starting to show in the global economy and he expects safe-haven demand to grow in the coming months.

George Milling-Stanley, head of gold investments at State Street Global Advisors, said in a recent interview with Kitco News that he expects recession fears to eventually push gold prices higher through the rest of the year.

“I can’t understand why people’s perception of risk seems to have ratcheted down quite significantly in the last few months,” he said. “Circumstances have not improved to the extent to where I would personally want to be taking on more risks. If anything, the circumstances have deteriorated with the continued rise in equities.”

Levels To Watch

Although gold is seeing a healthy jump off its recent one-year low, Weinberg said that more work needs to be before the metal attracts more buying momentum. He said that gold needs to push above $1,250 an ounce before investors feel confident that the current downtrend has finished.

Streible added that he is also watching $1,250 an ounce in the near term.

Chris Beauchamp, market analyst at IG, said that gold prices have to push above $1,265 an ounce before the trend of lower highs is broken.

The Final Say

The economic calendar next week is fairly sparse with little major data to be released. The markets will receive some important housing sales data and preliminary manufacturing data.

The big economic reports come at the end of the week with the release of U.S. durable-goods numbers published Thursday and then the first reading of second quarter U.S. gross domestic product Friday. Economists are expecting that the U.S. economy grew 4% in the second quarter.

In his testimony before Congress this week, Fed Chair Jerome Powell presented a fairly optimistic view on the U.S. economy.

“The FOMC believes that--for now--the best way forward is to keep gradually raising the Federal funds rate,” he said.

With little economic data on tap next week, commodity analysts will also keep an eye on more rhetoric on global trade. According to reports, Trump has said that he is “ready to go” to launch $500 million in tariffs on imported Chinese goods.

“Increasing trade wars raises the risk of slower economic growth so we could see more movement into gold,” said Weinberg.


Thinking About the Trump-Putin Meeting

 

By and large, high-level summits don’t matter. Agendas are set weeks in advance. A series of agreements – mostly symbolic – are negotiated ahead of time, with documents ready to be signed. Private meetings usually involve several aides to help the leaders and to ensure that they stick to the script.
President Donald Trump approaches summits differently from his predecessors. Rather than months of preparation at lower levels, he enters meetings prepared to improvise. He has been deeply criticized for this approach, particularly by those officials who would normally be called upon to prepare for meetings, but it isn’t clear that the old method worked. It tended to minimize gaffes, but it also homogenized the meetings, tying the hands of the president – who was elected, after all, whereas the minions were appointed. Trump’s desire to be free to interact and deal is not inherently a bad idea, as it would turn summits into authentic meetings, but the complexities of domestic and foreign politics require discipline.
Only a handful of people know exactly what was said during the private meeting on Monday in Helsinki between Trump and Russian President Vladimir Putin, but the world bore witness to the post-summit Q&A with the media. The American president was not restrained by his advisers, nor was he bound by his prepared remarks. He was, however, constrained by domestic politics. World leaders are politicians, and politicians have publics – whether in democracies or dictatorships – that they must answer to.
The weaker the political positions of leaders are – or the weaker they perceive their positions to be – the more they will speak to their public. Their statements will shift away from the matter at hand to try to buttress their political position at home. They can do this in several ways, including by using the occasion as a platform to attack domestic opponents. This is what happened at the Trump-Putin meeting. Putin is politically strong, and for him, simply appearing confident was enough. But Trump is embattled, and he chose to focus on domestic issues. A major one is the investigation into Russian interference in the 2016 U.S. election. Since the summit was with Putin, and Trump’s focus was on domestic politics involving Russia, the confluence led him into difficult places.
Trump’s most interesting comment came as a tweet before the press conference, though he reaffirmed the comment’s sentiments during the conference. He said that U.S.-Russian relations had reached their lowest point ever and that it was the United States’ fault. The first part is suspect given events like the Cuban Missile Crisis, but the startling part was the assertion that the U.S. was to blame. What I think Trump was trying to do was to attack the Obama administration for trying to isolate Russia rather than engage it. There is an argument to be made for that position, but it wasn’t clearly expressed in the tweet.
The decision by Robert Mueller, the special counsel leading the investigation into Russian meddling, to indict 12 Russians the Friday afternoon before the summit clearly threw Trump off balance. It isn’t clear that Mueller had to do this when he did, given that there was no chance whatsoever that the Kremlin would extradite them. Putin hinted that if Mueller wanted to question them, the Russian government would then want to question Americans accused of committing crimes in Russia, citing one case in particular. Since U.S. foreign intelligence must break laws daily in Russia to do its job, an agreement on this would open a can of worms no one wants.
One explanation for the timing of the indictments is that Mueller was oblivious or indifferent to the fact that there was a summit meeting the following week. Another explanation is that in performing his job as special counsel, Mueller saw an opportunity to fluster Trump and he used it, prioritizing his role in the investigation over U.S. foreign policy. In any event, the indictments dominated the press conference, with American reporters hammering on whether Trump endorsed them. Trump could have answered that they were only indictments and not convictions and that he would let the judicial system decide this, but instead, he essentially took Putin’s line, dismissing U.S. intelligence findings. (Trump walked back those remarks on Tuesday.)
This brings us to the subtext of the investigation, which is that Trump is in some way under the control of Russian intelligence. The press conference should put those concerns to rest. If he were, the Russians never would have permitted Trump to reject U.S. intelligence findings or side with Putin. Indeed, it would have been unwise to hold a private meeting between the presidents in the first place. The Russians would be doing everything in their power to enhance Trump’s political standing in the United States and to make him appear anti-Russian. They would never allow anyone to imagine he was working for them. They would use him in different ways. Trump would have attacked Putin directly at the press conference.
The pressures on Trump are mounting, whether he is concerned about something he did or simply under the normal pressure that comes with being under constant investigation. His desire to challenge what he sees as tormentors on all fronts has become powerful, and it broke out around the meeting in Helsinki. Putin undoubtedly was pleased, and the world media declared it a major setback for the United States.
In actuality, at most it hurt the career of a single politician, and more likely it didn’t do even that. The American public is fully aware of Trump’s personality quirks and public statements. His approval rating has ticked up in recent months, reaching as high as 47 percent according to Rasmussen for the month of June. This is one of the higher results, but it’s pretty strong for a president at this point in his presidency. There are voters who will despise him regardless of what he does, and others who will admire him regardless of what he does. Trump’s popularity won’t surge or plummet simply because he behaved like himself.
As to American standing on the world stage, that too is consistent. Most dislike the United States, but none can dismiss it. In my travels, I found many countries that held President Barack Obama in withering contempt. President George W. Bush was regarded as incompetent. Dislike of the president for being unsophisticated, or the U.S. for being naive or ruthless (sometimes both, somehow), is not new, although there is no question that Trump has created vast new opportunities for critics.
But the United States is the world’s largest economy, the engine of global technological innovation and the only global military force in the world. It is also the largest importer, and Germany’s largest customer, for example. German Chancellor Angela Merkel may be offended by Trump, but in the end, her country needs the American market. The objective realities of U.S. power trump the behavior of the president. Similarly, summits must be put into context. They are meetings between people, some of whom have enough political support to do what they say they will, others who do not. But both will pass the scene long before the deep power of either country passes away. The balance of power shifts, but, except in time of war, ever so slowly. A sense of proportion is needed, but that has never been abundant in the world.


China Fights the Trade War at Home

Beijing is preparing the public for the coming storm.

By Phillip Orchard


 
The first round of U.S. tariffs and Chinese counter-tariffs came into effect on Friday.

All told, they will directly affect some $68 billion in goods. On July 15, the U.S. is expected to impose more tariffs targeting $16 billion in Chinese goods, with proportional Chinese retaliatory measures to follow. Things are likely to escalate from there. Whether or not this spat should be defined as a full-blown trade war, both sides are now firing with live ammunition, and neither side will escape unscathed.
In some ways, it’s not an equal fight. China is more dependent on U.S. exports than the U.S. is dependent on Chinese imports, and the Chinese economy is far more fragile than that of the U.S., so it’s reasonable to conclude that the United States is heading to battle from a position of strength. Still, it’s not just about who can punch the hardest on the economic front, but also about who can take the most hits without facing major political blowback at home. And here, China’s ability to direct state support to targeted industries, crack down on dissent and shape public perceptions gives it some advantages, especially against a divided adversary heading into an election season.
Earlier this week, we got an inside look into how China is attempting to use its media controls to steel public resolve for the hits to come. The China Digital Times, a U.S.-based censorship-monitoring site, published what it claims is a leaked circular from Chinese authorities outlining how state media should cover the trade spat. We cannot confirm the document’s authenticity, but its contents jibe with narratives Chinese state media has begun pushing – and hint at intensifying pressures that Beijing is most certainly feeling. Below we provide some excerpts from the allegedly leaked document and outline how these statements can be used to shape public discourse on trade.
 
What Beijing Is Really Saying
“The trade conflict is really a war against China’s rise, to see who has the greater stamina. This is absolutely no time for irresolution or reticence.”
The theme of “us against the world” has been central to sustaining public support on any front where Beijing’s moves have triggered an international backlash, from human rights crackdowns at home to assertiveness in the South China Sea. And it’s a potent one. It reflects a historical effort to perpetuate and harness the power of China’s defining narrative since its defeat in the First Opium War in 1842: that China was bullied, carved up and subjugated by foreign imperialists during the so-called Century of Humiliation, subjecting what was once the world’s pre-eminent civilization to untold suffering. And if the Chinese people fail to unite behind their leaders, according to this narrative, outside powers would readily do it again. Chinese leaders have been adept at nursing collective grievances as part of the never-ending quest for national rejuvenation since even before the Communist Party took power in 1949. But it’s not just propaganda. Rather, it speaks to an enduring anxiety embedded deep in the national psyche that, despite China’s more recent gains and burgeoning national confidence, it could all come undone yet again.
“All media should prepare well for protracted conflict. Don’t follow the American sides’ fluctuating declarations.”
China thinks the trade fight won’t be over quickly. This is, in part, because it’s unclear what the White House would need to claim victory and move on. If the fight were just about the trade deficit, this wouldn’t necessarily be the case. In trade negotiations, China reportedly offered to buy between $25 billion and $70 billion more in U.S. stuff (mostly energy and agricultural goods) annually to bring the deficit down somewhat. And as the Chinese consumer market grows, it’s likely to be buying more and more U.S. goods in the coming years anyway. Already, China is the fourth-largest market for U.S. exports, with China-bound goods growing some 115 percent over the past decade to nearly $130 billion each year.
But the real fight is over China’s quest to become a dominant technological power – and the mercantilist policies it’s using to leapfrog the U.S. and other Western powers in the high-tech realm. Here, it cannot back down without undermining its core national strategy. Its reliance on low-cost manufacturing has left it vulnerable to rising competition from its lower-cost neighbors, productivity declines as its workforce ages, and downturns in Western economies – as was exposed following the global financial crisis beginning in 2008, when Chinese exports contracted sharply. If anything, the U.S. moves to squeeze it on this front will only reinforce the belief in Beijing that it must become less reliant on foreign technology by whatever means necessary. But the U.S. is loath to back down as well. Its comparative advantage over lower-cost manufacturers like China is in high-tech goods and services. And the real Chinese threat to long-term U.S. economic competitiveness and strategic interests is that China eats into this advantage.
“Do not make further use of ‘Made in China 2025,’ or there will be consequences.”
“Made in China 2025” is China’s contentious plan to become a leader in the industries likely to matter most over the coming century (for both commercial and military applications), such as semiconductors, robotics, aerospace, green energy and biotech. It was conceived as a rallying cry at home, a roadmap for how the Communist Party would fulfill its pledge to make China a world-class power. But Beijing now sees the slogan as giving the U.S. a fixed target with which to galvanize support for President Donald Trump’s tariffs and shift focus from the trade deficit to the technological threat.
The trade war is divisive, and Trump doesn’t have much support on either side of the aisle or with allies for tariffs intended to revive U.S. steel and aluminum industries at the expense of U.S. consumers, industries that rely on cheap Chinese imports and industries likely to be harmed by Chinese retaliatory measures. But there’s broad agreement among both parties and abroad that China’s mercantilist tech policies are a threat (even if there are major disagreements in the U.S. over Trump’s plan to address them). To curry support from Trump opponents in the U.S. and abroad, Beijing is trying to portray itself as a champion of free trade fighting back against a president hellbent on dismantling a system that made much of the world rich, however disingenuous this portrayal may be. In other words, Beijing is trying to change the subject. Relentlessly touting a high-profile plan that involves practices like forcing foreign firms to hand over technology in exchange for the right to operate in China – not to mention activities like outright technological theft – wasn’t helping.
 


 



“[China should] strike accurately and carefully, splitting apart different domestic groups in US.”

China’s best hope is that the trade war becomes politically untenable for Trump, particularly with midterm elections just around the corner. And this means directing countermeasures at politically influential interest groups. According to Brookings, for example, Trump won 82 percent of the counties expected to see job losses from Chinese retaliatory measures. American farmers, who’ve routinely exercised considerable sway on U.S. trade policy, are squarely in Beijing’s crosshairs, with key U.S. crops like soybeans, wheat and corn facing 25 percent tariffs.
China has ample options in this regard. According to a study by Oxford Economics, some 2.6 million jobs in the U.S. were created by the combination of U.S. exports of goods and services to China and bilateral foreign investment flows. The same study said cheap Chinese goods such as washing machines and solar panels (both of which were targeted with tariffs in January) have saved the average American household some $850 annually. General Motors sold more than a million more cars in China last year than in the United States. According to the Peterson Institute, some 60 percent of U.S.-bound exports from China were produced by multinational firms, some of them American, rather than Chinese-owned companies.
“Don’t attack Trump’s vulgarity; don’t make this a war of insults.”
Know thy enemy’s strengths. Don’t rally his base. Keep him focused on trade disputes with Canada, Japan and the European Union. Don’t give him reason to put the spotlight on alleged Chinese human rights violations that speak louder than the president’s words.
China’s Chrome-Plated Fragility
Beijing’s ability to control media narratives and shape public perception at home is indeed a strength. But its need to do so points to its underlying weaknesses. China is facing an economic reckoning as it enters a prolonged phase of slowing growth, and Beijing is trying desperately to push through ambitious economic reforms before that day comes. Its need to restructure its economy, whittle down a staggering debt load and wrestle pollution into submission, while also maintaining high employment and broad backing for the regime, has it performing a high-wire act. Already, amid Beijing’s crackdown on shadow lending, we’re seeing a growing wave of defaults among private sector firms that had grown fat on limitless credit. Last winter, anti-pollution measures led to widespread natural gas shortages. In May, the coal-rich city of Leiyang failed to make payroll amid revenue shortfalls stemming from Beijing’s crackdowns on high-polluting industries and overcapacity reforms. Growth in exports, retail sales and fixed-asset investment is slowing.
So the trade war is coming at a precarious time for China. And in recent weeks, we’ve started to see hints of dissent from influential figures and media outlets asking the question if China can really afford to fight a two-front war against the U.S. on trade and against its own internal woes. Beijing doesn’t exactly have a choice in either matter. Dark clouds are gathering either way; perhaps its only option is to prepare the public for the storm.


The Dollar Will Eventually Pay the Price for U.S. Deficits

In the long run, the dollar should be weaker. But when will the long run arrive?

By Richard Barley


DOLLAR POWER
Second-quarter performance of U.S. dollar against selected currencies

Source: FactSet




The U.S. dollar’s startling rally has upended markets around the world. Burgeoning U.S. deficits due to tax cuts and higher spending should mean a weaker dollar in the long run, as investors demand a discount to buy U.S. assets. But when will the long run arrive?

The dollar’s second-quarter rise was as sharp as it was unexpected. It rose 5.5% against the euro and racked up double-digit percentage gains against emerging-market currencies like the Brazilian real and South African rand. The rout reached China late in June, with the yuan falling 4% in just a couple of weeks.

The greenback rose as U.S. growth barreled along while the rest of the world proved less buoyant than hoped. Additional fuel for the move has come from concerns about an escalating trade war—the U.S. and China imposed tariffs on each other’s exports Friday—and political stresses in Europe and some developing countries.


CORPORATE COST
Total return on ICE BofAML U.S. investment-grade corporate bond index

Source: FactSet



For now, the rush of better U.S. growth has proved stronger than the fear of the consequences of wider U.S. budget and current-account deficits that have to be financed. The gain has been taken before the potential pain.

That could persist for a while yet. There have been tentative signs of stabilization in economic data outside the U.S., but the idea of synchronized global growth has taken a hammering.

Trade-war fears are still concentrated outside the U.S. and the Federal Reserve is alone in methodically raising interest rates. 

   An exchange bureau advertisement in Cairo on Wednesday. Photo: mohamed abd el ghany/Reuters 



At the same time, longer-term concerns haven’t gone away. For signs of when then might become a problem for the dollar, investors should pay attention to the U.S. corporate-bond market, thinks Morgan Stanley . Low interest rates globally have led foreign investors to pile in, chasing higher returns. For instance, Japan’s holdings of U.S. corporate debt have risen by more than 50% to nearly $250 billion since the start of 2016, according to U.S. Treasury data.

However, corporate bonds have turned into a losing trade, hit by both higher Treasury yields and wider credit spreads. If foreign investors start to pull back, pushing up borrowing costs further, that could weigh on prospects for U.S. growth—and on the dollar.

With the rest of the world facing challenges, the dollar’s strength can continue for now. But the bill for the higher growth the U.S. is currently enjoying can’t be put off forever. Eventually, the dollar will have to pay the price.


America the Loser

J. Bradford DeLong




BERKELEY – The Washington Post’s Catherine Rampell recently recalled that when US President Donald Trump held a session for Harley-Davidson executives and union representatives at the White House in February 2017, he thanked them “for building things in America.” Trump went on to predict that the iconic American motorcycle company would expand under his watch. “I know your business is now doing very well,” he observed, “and there’s a lot of spirit right now in the country that you weren’t having so much in the last number of months that you have right now.”

What a difference a year makes. Harley-Davidson recently announced that it would move some of its operations to jurisdictions not subject to the European Union’s retaliatory measures adopted in response to Trump’s tariffs on imported steel and aluminum. Trump then took to Twitter to say that he was, “Surprised that Harley-Davidson, of all companies, would be the first to wave the White Flag.” He then made a promise that he cannot keep: “… ultimately they will not pay tariffs selling into the EU.”

Then, in a later tweet, Trump falsely stated that, “Early this year Harley-Davidson said they would move much of their plant operations in Kansas City to Thailand,” and that “they were just using Tariffs/Trade War as an excuse.” In fact, when the company announced the closure of its plant in Kansas City, Missouri, it said that it would move those operations to York, Pennsylvania. At any rate, Trump’s point is nonsensical. If companies are acting in anticipation of his own announcement that he is launching a trade war, then his trade war is not just an excuse.

In yet another tweet, Trump turned to threats, warning that, “Harley must know that they won’t be able to sell back into U.S. without paying a big tax!” But, again, this is nonsensical: the entire point of Harley-Davidson shifting some of its production to countries not subject to EU tariffs is to sell tariff-free motorcycles to Europeans.

In a final tweet, Trump decreed that, “A Harley-Davidson should never be built in another country – never!” He then went on to promise the destruction of the company, and thus the jobs of its workers: “If they move, watch, it will be the beginning of the end – they surrendered, they quit! The Aura will be gone and they will be taxed like never before!”

Needless to say, none of this is normal. Trump’s statements are dripping with contempt for the rule of law. And none of them rises to the level of anything that could be called trade policy, let alone governance. It is as if we have returned to the days of Henry VIII, an impulsive, deranged monarch who was surrounded by a gaggle of plutocrats, lickspittles, and flatterers, all trying to advance their careers while keeping the ship of state afloat.

Trump is clearly incapable of executing the duties of his office in good faith. The US House of Representatives and Senate should have impeached him and removed him from office already – for violations of the US Constitution’s emoluments clause, if nothing else. Barring that, Vice President Mike Pence should have long ago invoked the 25th Amendment, which provides for the removal of a president whom a majority of the cabinet has deemed “unable to discharge the powers and duties of his office.”

And yet, neither Speaker of the House Paul Ryan nor Senate Majority Leader Mitch McConnell nor Pence has dared to do anything about Trump’s assault on American democracy. Republicans are paralyzed by the fear that if they turn on Trump, who is now supported by roughly 90% of their party’s base, they will all suffer at the polls in the midterm congressional election this November.

It is nice to think that the election will fix everything. But, at a minimum, the Democratic Party needs a six-percentage-point edge to retake the House of Representatives, owing to Republican gerrymandering of congressional districts. Democrats also have to overcome a gerrymandering effect in the Senate. Right now, the 49 senators who caucus with the Democrats represent 181 million people, whereas the 51 who caucus with the Republicans represent just 142 million people.1

Moreover, the US is notorious for its low voter turnout during midterm elections, which tends to hurt Democratic candidates’ prospects. And Trump and congressional Republicans have been presiding over a relatively strong economy, which they inherited from former President Barack Obama, but are happy to claim as their own.

Finally, one must not discount the fear factor. Countless Americans routinely fall victim to social- and cable-media advertising campaigns that play to their worst instincts. You can rest assured that in this election cycle, as in the past, elderly white voters will be fed a steady diet of bombast about the threat posed by immigrants, people of color, Muslims, and other Trump-voter bugaboos (that is, when they aren’t being sold fake diabetes cures and overpriced gold funds).

Regardless of what happens this November, it is already clear that the American century ended on November 8, 2016. On that day, the United States ceased to be the world’s leading superpower – the flawed but ultimately well-meaning guarantor of peace, prosperity, and human rights around the world. America’s days of Kindlebergian hegemony are now behind it. The credibility that has been lost to the Trumpists – abetted by Russia and the US Electoral College – can never be regained.


J. Bradford DeLong is Professor of Economics at the University of California at Berkeley and a research associate at the National Bureau of Economic Research. He was Deputy Assistant US Treasury Secretary during the Clinton Administration, where he was heavily involved in budget and trade negotiations. His role in designing the bailout of Mexico during the 1994 peso crisis placed him at the forefront of Latin America’s transformation into a region of open economies, and cemented his stature as a leading voice in economic-policy debates.