US aggression on the dollar will prove costly

By: Guest writer

In this guest post, former veteran Treasury official Mark Sobel and now US Chair of OMFIF, a think-tank, argues that the US administration’s penchant for weaponising currency markets will hurt both itself and the international monetary system.

If “weaponising” trade and financial sanctions did not suffice, the Trump Administration is stepping up its aggression on the dollar and foreign exchange markets. Indeed, it is even seeking to institutionalise this aggression in US foreign exchange policy. The Administration’s mistaken approach will hurt America and weaken the international monetary system.

Casting aside a two decades-long policy of a “strong dollar” and limiting comments on foreign exchange markets, this Administration is now engaged in spurious open-mouth operations about key foreign currencies. Harmful currency practices should absolutely be tackled. But the Administration discounts that currency weakness can legitimately reflect market forces, and instead acts as if major currency weakness constitutes a harmful currency practice.

Take the President’s criticism of ECB President Mario Draghi and his signal for greater euro-area monetary accommodation in June. Draghi’s reasons for doing so were crystal clear — euro-area economic activity is weak and the ECB’s inflation objective is persistently undershot.

More accommodation is fully consistent with the ECB’s mandate, even if a weaker euro results.

At the recent Fukuoka G20 Finance Ministerial, US Treasury secretary Steven Mnuchin reportedly observed that markets were accustomed to Chinese intervention to support its currency, and suggested that a lack of such intervention could signal an intentional desire to weaken the renminbi.

The Administration apparently wants China to prevent any depreciation below Rmb7 per dollar, even if a weaker currency reflects market forces. Higher US tariffs on China weaken Beijing’s competitiveness and hit the renminbi. China would have little reason now to tighten monetary policy to defend its currency given a slowing economy due in part to the US-China trade war.

In the land of the blind, the one-eyed man is king.

The Administration seems to ignore that despite manifold US economic problems, there may be good reasons for dollar firmness. Better US growth performance favours investment stateside relative to an anaemic Europe and Japan. Higher official interest rates, reflecting America’s outperformance, have coupled with an ill-advised procyclical deficit-busting US fiscal policy to support dollar demand. Contrary to longstanding G20 foreign exchange commitments — largely written by the US — the Administration seemingly wants a competitive dollar depreciation, or a non-competitive appreciation of other currencies.

To help achieve this, the Treasury has unsoundly tightened its criteria for assessing possible currency “manipulation” in its latest “Foreign Exchange Report”.

Treasury fairly widened the net of “major trading partners” eligible for examination to spotlight large current account surpluses in many ASEAN countries. But Treasury also cut the current account surplus threshold for triggering closer scrutiny from 3 to 2 per cent of GDP. This is too low a threshold and will now pick up a cacophony of countries.

Such a threshold neglects that there may be valid structural or cyclical reasons why some countries run modest surpluses. The latest Treasury report also doubles down on bilateral balances as a means of training its sights on China, even though China’s current account surplus is small and disappearing. Moreover, the Peoples’ Bank has not been intervening to weaken its currency.

Another tool the Administration is using is to aggressively associate currency provisions with trade deals — a process begun under the Obama Administration.

The US trade deal with Mexico and Canada (USMCA) includes certain currency provisions inside the agreement, marking the first time foreign exchange policy commitments would be legally enforceable under dispute resolution in a trade deal. While this may not be practically meaningful (as the North American currencies float), it sets an important precedent for future deals. Further, the US-China trade deal under discussion months ago included a currency chapter.

Lastly, the Commerce Department just proposed — with the Administration’s blessing — a regulation that would make currency “undervaluation” a countervailable subsidy, meaning the country in question is providing “unfair” financial assistance to the benefit of its export sector.

Almost all trade experts and lawyers argue this would fly in the face of WTO rules. What is more, there is no precise way to measure undervaluation. Monetary policy heavily influences exchange rate movements, and it should be directed at fostering maximum employment and price stability, not a given trade balance, as the G-7 and G-20 have agreed. Monetary policy is in the Fed’s wheelhouse. It has nothing to do with Commerce’s remit.

If the United States is to determine the equilibrium dollar-renminbi exchange rate, that rate will depend on whether the US believes the desired bilateral balance is several hundred billion dollars or zero. Yet the vast bulk of economists dismiss the relevance of bilateral balances. If one currency’s undervaluation is the flip side of dollar strength and overvaluation due to US policy or performance, should the undervalued currency be sanctioned?

The Administration is right to highlight legitimate harmful currency practices. But the Administration is misguided in its penchant to blame foreigners’ currency practices first and simply assume they are the sinners.

Rather, it should first look in the mirror at itself and its own policies. That penchant runs the risk of causing a flare-up in beggar-thy-neighbour protectionist behaviour. This will not benefit America. The international monetary system will be weaker if the US adds unnecessary currency conflicts to its trade wars, unwarranted unilateralism on financial sanctions, and disregard for international institutions.

China cannot easily weaponise its holdings of American government debt

Neither country seems fully to understand the ties that bind them

AN OLD SAYING: if you owe the bank $100 it’s your problem; if you owe $100m it’s the bank’s. The adage is silent on debts like America’s to China, of more than $1.1trn. The IOU looks like a source of leverage for China’s leadership—a reason for President Donald Trump to be cautious in waging trade war, lest his counterpart, Xi Jinping, command the People’s Bank of China (PBOC) to dump its Treasury bonds and plunge America into a fiscal crisis. An editorial on May 29th in the People’s Daily, a Communist Party mouthpiece, suggested that China might restrict exports to America of rare earths, which are used in smartphones, electric vehicles and much more. Seen against fresh threats, the $20bn-worth of long-term bonds China sold in March might seem a shot across the bow. Yet China’s bond pile is more blunderbuss than laser-guided missile. It is as likely to miss or blow up as to strike its target.

China’s bond-buying began innocently enough. Its leaders, eager to follow the time-tested path to export-led development, favoured an undervalued currency. In the early 2000s, as rapid growth in output and exports put upward pressure on the exchange rate, the PBOC sold yuan and bought dollars, most of which it parked in American Treasuries. Cheap funding looked like a boon to America, at the time awash in red ink because of tax cuts and foreign wars. But as so often with China, something too small to notice quickly became too large to ignore. China’s official holdings of American government debt rose from just under $100bn in 2002 to a peak of nearly $1.3trn in 2013. It now manages the yuan against a basket of currencies rather than the dollar alone, and no longer buys very many Treasuries. But the reserve hoard remains. 
Its value as an economic weapon is dubious, however. The point of a bond dump would be to saturate the market for Treasuries. America’s hefty government debt needs continuous rolling over, and its stonking deficits add to the pile at a pace of about $1trn per year. Investors, for now, keep buying. But China, by selling Treasuries, might ply the market with more bonds than it can easily digest. To keep overfilled investors coming back, America’s government might need to offer higher interest rates. A big enough jump in borrowing costs could force it to choose between growth-crushing fiscal austerity and a fiscal crisis.

But Treasuries are not a typical security. In 2011, for example, Standard & Poor’s, a ratings agency, cut America’s sovereign credit rating, citing its soaring debt and dysfunctional politics. Markets promptly gobbled up more Treasuries than ever; the yield on the ten-year bond soon fell by more than a percentage point. This anti-gravity effect derives from America’s hegemonic role in finance. It issues the world’s primary reserve currency and its most prized safe asset. The always-healthy appetite for American debt grows in times of economic uncertainty—even when America itself is the cause of the trouble. If Chinese bond sales rattle global markets, the flight to safety might well sop up the new Treasury supply.

Even if markets remained calm, Chinese sales might prove a mere annoyance. An analysis published by the Federal Reserve in 2015 suggested that $1.5trn in bond purchases would be expected to reduce ten-year Treasury yields by between 40 and 50 basis points. A comparable rise in yields induced by Chinese bond sales would be uncomfortable, but hardly a disaster, especially since the Fed could intervene if rising yields threatened America’s economy. The Fed is currently shedding $15bn-worth of Treasury bonds each month as it unwinds the unconventional stimulus measures used after the financial crisis. Were China to start selling, the Fed could simply resume buying.

Bond yields are only part of the picture. China bought its Treasuries to stop the yuan appreciating too quickly. Were it to sell them and convert the proceeds back into yuan, its currency would rise, hurting its already-beleaguered exporters and delighting Mr Trump. China could instead try to swap its Treasuries for other foreign assets. Alas, no other government-bond market matches America’s for size and safety. German bunds are rock-solid, but in short supply thanks to German fiscal surpluses. France, Italy and Japan offer large markets but more risk. All would fume if China turned its cash their way, causing their currencies to appreciate, hurting their exporters and perhaps inducing deflation, which they already struggle against. Their governments might respond by raising tariffs on China, a disastrous outcome for Beijing.

Buried Treasuries

China could use a bit of depreciation to offset American tariffs. Investors know this, and may be selling yuan now to avoid future losses. China’s recent Treasury sales probably represent an effort to keep the depreciation orderly, using dollars to buy yuan from bearish investors, rather than the start of a belligerent bond dump. If the pace remains slow, then China could offload more of its American bonds without angering other trading partners—but also without causing America much discomfort, if any. Moreover, as market forces push the yuan down, the value to China of dollar assets is obvious. They provide China with a bit more macroeconomic autonomy in a global economy dominated by the dollar.

America’s place at the centre of global finance is unassailable in the short term. Yet neither America nor China appears to understand just why its position is so commanding. China might like to discomfit America by becoming a credible alternative hegemon: if investors could flee American assets in response to bad behaviour, America might behave better. But challenging America would require open markets, transparent financial institutions and the rule of law—all of which is difficult for an authoritarian regime.

America seems just as clueless. A protectionist bully is an unappealing steward of the world economy. In abusing its privilege, it undermines the shared trust that makes Treasuries an asset without equal. This trade war has been built on mistaking strengths for weaknesses—and weaknesses for strengths.

Central Banks Get Less Independent, and Investors Cheer

The choice of Christine Lagarde as head of the ECB confirms that central bankers are taking on a more political role

By Jon Sindreu

Christine Lagarde has lauded ECB chief Mario Draghi in the past, which makes it more likely that she will react to the current economic slowdown in the eurozone with another round of generous stimulus policies. Photo: saul loeb/Agence France-Presse/Getty Images 

Central-bank independence is dying to the thunderous applause of investors—for now.

In a surprising turn of events, the heads of state of the European Union decided late Tuesday to nominate International Monetary Fund chief Christine Lagarde to succeed Mario Draghi at the head of the European Central Bank.

Investors and analysts cheered. Ms. Lagarde, who is French, has lauded Mr. Draghi in the past, which makes it more likely that she will react to the current economic slowdown in the eurozone with another round of generous stimulus policies. Other potential candidates, like Germany’s Jens Weidmann, raised more doubts.

Yields on German 10-year government bonds dropped Wednesday to yet another record low of minus 0.394%.

Yet her nomination also confirms that central banks are moving away from their once-prized status as uber-technocratic, apolitical institutions full of academics. 

Ms. Lagarde is a former lawyer with no formal training in economics—the first of her kind to lead the ECB. Both she and the ECB’s vice president, Luis de Guindos, are essentially high-profile politicians.

Many analysts expect them to play a more active role in Europe’s complex political machinations—pushing for structural reforms in the bloc and perhaps nudging Northern European governments to be looser with fiscal policy—than in the design of monetary operations. ECB chief economist Philip Lane is expected to shoulder responsibility for the latter.

This echoes what has happened in the U.S., where Federal Reserve Chairman Jerome Powell is the first non-economist to hold the job in nearly 40 years.

Fairly or not, investors have regularly expressed doubts about his leadership. Often, he has appeared to bend to either political pressure from President Trump or to market turmoil in order to ease policy. Ultimately, however, financial markets end up celebrating the potential for lower interest rates. This week the S&P 500 hit another all-time high.

A new breed of central bankers may not be a bad thing. Throughout most of their history, these institutions were led by people who were closer to business than universities—Marriner Eccles, the legendary Fed chairman during World War II, didn’t even have a degree.

Independent academic technocrats didn’t anticipate the 2008 financial crisis, and still struggle to explain why growth and inflation remain so low. More coordination between governments and central banks may be a necessity during the next downturn.

Yet central bankers taking more active political roles will likely stoke popular demand for more democratic accountability. Political turmoil may become too much for investors’ tastes if candidates aren’t carefully chosen.

Neither the way that Ms. Lagarde was picked—behind closed doors as a bargaining chip for other top EU jobs—nor her professional trajectory are spotless: Her CV includes a criminal conviction for negligence while at France’s finance ministry and several issues of accountability and transparency while at the IMF. Mr. de Guindos was a European adviser for Lehman Brothers in the run-up to the financial crisis.

Right now, financial markets have reasons to cheer the new status quo in central banking. In time, they may come to regret it.

Central banks should issue digital currencies of their own

They need to protect financial stability, monetary policy and access to public money

Jean-Pierre Landau

Digitalisation has reshaped how we communicate, organise, interact, move and trade. It is now changing money. Mobile-phone based electronic payments are becoming just like cash: contactless, cheap and easy to make on a peer to peer basis, including across borders. Life without a bank account becomes possible, which helps financial inclusion in places with no banks and high mobile penetration.

Many companies are seeking to exploit the synergies between money and platforms in a digital economy. In China, Tencent and Ant Financial aggregate payments with social and commercial activities for millions of users. Facebook and 27 partners have announced plans for a Libra digital coin.

For governments and central banks, the digitalisation of money raises new challenges and the Bank for International Settlements warned this week that they are coming “sooner than we think”.

First, physical cash may be disappearing as a medium of exchange. Trust in banks has depended on the perceived convertibility of deposits to cash. In a cashless society, there would be no direct access by citizens to sovereign money. Deposits would no longer be convertible with possible detrimental effects on financial stability.

Second, the monetary system may become more fragmented. The economic logic of networks and platforms means they have an incentive to maximise user numbers and a tendency to evolve into closed systems. They may create “digital currency areas” where participants are kept together because they share and exchange the same type of digital money.

Third, because digital money is naturally cross-border, it opens the way to new forms of currency competition, from Libra among others. Some governments may try to use digital payment networks to internationalise their currencies, while others will face a risk of “digital dollarisation” through the penetration of foreign currencies in their domestic economy. This has the potential to significantly reshape the international monetary system.

Sovereign governments have the power to protect their currencies. They can decide which money serves as legal tender and in which currency taxes must be paid. They can force private payment systems to be open through technical interoperability. They can require the acceptance of cash. And they can strictly regulate e-money issuers, as China began doing in 2018.

They should do more. The general public is entitled to keep access to central bank money as technology changes. If cash is eliminated, it should be replaced by a digital equivalent, known as Central Bank Digital Currency.

The Swedish Riksbank and others are already considering the merits and dangers of CBDCs for monetary policy and financial stability. On the one hand, CBDCs may strengthen the transmission mechanism of monetary policy by allowing interest (including at negative rates), to be paid on the currency. On the other, they could imperil financial stability by offering an attractive (riskless) substitute to bank deposits and increase the risk of runs.

However, there is a more fundamental argument to be had about the balance between private and public money in our societies. A CBDC would protect the pre-eminence of public money in a digitalised economy. It would maintain effective convertibility of private into public money and provide a defence against digital dollarisation.

For that purpose, a CBDC should be as close as possible to cash. It should be a complement, not a substitute, to bank deposits. It should not carry interest. Whether it should be anonymous, as cash currently is in certain limits, is a fundamental social choice. It must be openly debated as the digitalisation of money forces us to reconsider and rethink the place of privacy in our lives.

The writer, a former deputy governor at the Banque de France, is a senior research fellow at Harvard Kennedy School


Does Apple’s boss have a Plan B in China?

Brace for an iPhoney trade war

LONG BEFORE Tim Cook became Apple’s boss, when his job was to wring costs out of the company’s supply chain, he learned of a problem with a supplier in China. “This is really bad,” he told his staff. “Someone should be in China driving this.” Thirty minutes later he saw one of his executives sitting at a table. “Why are you still here?” he asked quietly. The executive stood up, drove directly to San Francisco’s airport and bought a ticket to China.

This anecdote, recounted in Walter Isaacson’s biography of Steve Jobs, Apple’s founder, is one of only a few tales in print that offer an insight into the management style of Mr Cook, who took over from Jobs shortly before he died of cancer in October 2011. It is telling. While Jobs, the irascible creative genius behind Apple’s bestselling products, stole the show, Mr Cook, who is both courtly and deeply private, plugged away behind the scenes to cement a relationship crucial to Apple’s soaring success: that with China.

In the early days of Apple, Jobs wanted to make his Macintosh computers in America. With his trademark obsessiveness, he built a factory of pure white to produce them (and wore white gloves to check for dust). When Mr Cook joined the company in 1998 he changed all that, deploying his soothing Alabama lilt and a fearsome work ethic (he gets up at 4am) to forge an unrivalled supply chain running through Asia. Today labels on nearly all iDevices read, “Designed by Apple in California. Assembled in China”.

Mr Cook’s bet on China extended beyond its factories to its consumers. Sales to the region have risen from next-to-nothing in 2010 to $52bn last year, or almost a fifth of Apple’s revenues. Since Donald Trump’s election in 2016, “Tim Apple” (as America’s president once called him) has jetted to Washington and Beijing to try to ease rising trade tensions between the two superpowers. Horace Dediu, a technology analyst, says Mr Cook “knows how to navigate the political mind”.

Given his reputation as a logistical mastermind, it is worth asking why he has ignored the first rule of supply-chain management: the risk of keeping too many important eggs in one basket. In Mr Cook’s case, that basket is China. The trade bust-up is getting uglier. If it leads to an anti-American backlash in China, it could spell trouble for Apple—and for Mr Cook personally.

Mr Cook’s lobbying has helped Apple avoid direct hits from Mr Trump’s tariffs, already imposed on $250bn-worth of Chinese imports. But its shares have fallen by almost 12% in the past month. On June 1st, after The Economist went to press, China was expected to retaliate with tariffs on $60bn of American goods, including components for Apple devices. Mr Trump has threatened a levy of 25% on $300bn more of imports if trade talks do not produce a breakthrough. This would cover the iPhone, by far Apple’s biggest source of revenue. Morgan Stanley, a bank, estimates that it could add $160 to the cost of a $999 iPhone XS. Apple could absorb the cost or pass it on to buyers. Either way, profits would suffer.

A more immediate threat may be a Chinese reprisal for the Trump administration’s decision in May, on national-security grounds, to stop American companies from supplying Huawei, China’s tech champion (and the biggest seller of smartphones in China), with chips, software and other technology. A Chinese consumer boycott of Apple products could accelerate their shift towards other, cheaper brands. Because of the trade tensions, Citi, a bank, has halved its forecast for iPhone sales in China in the second half of this year, from almost 14.5m to 7.2m units.

Others reckon that Apple could offset Chinese losses by luring customers away from Huawei in other countries—but only if it could continue to churn them out in Chinese factories. Although Apple has tentatively started production of some iPhones in India for local customers, it appears if anything to have increased its China exposure, even as Mr Trump’s trade bluster has intensified. According to a review of Apple’s top 200 suppliers by the Nikkei Asian Review, a Japanese publication, last year those from China (41) exceeded those from America (37) for the first time—though Apple stresses the importance of its American supply chain. China has recently released draft cyber-security regulations that cover threats to national security and supply chains. Andrew Gilholm of Control Risks, a consultancy, says these could be weaponised against big American firms in China if the situation deteriorates.

That would be the nuclear option. It looks unlikely for the time being. The costs for China would be huge; Mr Dediu estimates that Apple contributes about $24bn a year to China’s economy. Some 1.5m Chinese help assemble Apple products. A further 2.5m Chinese software engineers create apps for the iOS operating system. Appetite for punishment may be weak. On May 26th Ren Zhengfei, Huawei’s boss, told Bloomberg TV that he would be the first to protest if China hits back against Apple. “Apple is my teacher, it’s in the lead,” he said. “As a student why go against my teacher? Never.”

Mr Ren can always change his mind. So can China. Whereas Huawei claims to have a Plan B to survive its blacklisting by America, and Samsung, a rival smartphone-maker from South Korea, is shifting supply chains from China, Apple appears to have no clear alternative to assembly in China. Few other places possess the expertise to produce the high-end components that Apple needs. The existing network would take years to unscramble.

On Apple watch

One fix would be for Apple to develop another indispensable product that no self-respecting affluent Chinese consumer could do without. For all his success, Mr Cook has not yet managed this. Another would be to develop services that do not need production in China. Apple’s much-trailed announcement in March of new video-streaming, payments and other services shows it is trying. They may prove a hit, but would be no substitute for the iPhone. Mr Cook must be hoping that he has not miscalculated the risks to the supply chains he has so intricately engineered.

Trump’s Trade-War Miscalculation

The US seems convinced that it is up against a China with a particularly weak hand, owing to the risk of a hard landing for its economy. But while China imports relatively little from the US, it may have even more weapons than its opponent.

Zhang Jun


SHANGHAI – Just when a trade agreement between the United States and China appeared to be in sight, negotiators found themselves back at square one. The immediate reason for the disruption was China’s insistence on a substantially rewritten draft agreement, which, according to US President Donald Trump’s administration, reneges on previously agreed terms. But the root cause of China’s changes to the draft – the reason behind its reluctance to meet US demands – lies in a fundamental miscalculation by the Trump administration.

Simply put, the US has been overplaying its hand. The agreement that China rewrote would have obliged the Chinese side to legislate some of the changes sought by the US, and it was negotiated amid an aggressive US campaign against the Chinese telecommunications giant Huawei. That campaign has included adding the company to America’s trade blacklist, thereby cutting off its supply of critical technologies, and pushing allies to isolate the company as well.

While such actions will undoubtedly hurt Huawei, the company can eventually offset its losses by forging ties with other fast-growing Chinese tech companies. For the rest of the world, however, the Trump’s administration’s attacks on Huawei – and on China more generally – will have far-reaching consequences.

China is too deeply embedded in global supply chains simply to go away. Alienating the world’s leading manufacturer and industrial producer – with its consumer market of 1.4 billion people – will severely disrupt global value chains and cast a shadow over the entire world economy.

The Trump administration’s miscalculations may have resulted partly from acting in haste, in the hope of notching a “win” ahead of next year’s presidential election. But the US also seems convinced that it is up against a China with a particularly weak hand, owing to the risk of a hard landing for its economy. That is not the case.

While China imports relatively little from the US, it may have more weapons than its opponent to deploy in this trade war. Beyond retaliating directly, through tariffs on agricultural products and commercial aircraft, it could tighten capital controls, dump its unparalleled holdings of US Treasury debt, or allow its currency to depreciate. (The wave of competitive devaluations triggered by the latter option would destabilize the US dollar, as well as the international monetary institutions.)

So far, however, China has shown considerable restraint. For example, despite the renminbi’s recent depreciation against the US dollar, the People’s Bank of China has expressed its intention to maintain exchange-rate stability. Even if deepening tensions with the US over trade and technology force it to take some short-term retaliatory actions, China is likely to maintain this restraint for the foreseeable future.

The reason is simple: this moderate approach serves China’s own long-term interests, both directly (by supporting continued economic growth and development, preserving social stability, and protecting state integrity) and indirectly (by avoiding further costly disruptions to global markets). Ironically, it also will compel China’s commitment to the very structural reforms that the US claims to be seeking.

The trade war has highlighted the risks inherent in maintaining an open economy. But, rather than slam the door shut on the rest of the world, China is attempting to protect the global economy’s stability.

China’s leaders do not believe that the trend of capitalist-led globalization – in which China has been both a leading beneficiary and, increasingly, a major contributor – will be reversed any time soon. Because the US remains, in China’s view, the world’s preeminent defender of the free markets toward which China is moving, its deviations from free-market orthodoxy and abuses of state power could shake America’s own economic foundations and threaten its institutions.

To be sure, China and the US will most likely become increasingly estranged. China will develop its own core technologies, in order to end its dependence on the US, and build up the strategic sectors that will propel its economic development.

But such technological progress on China’s part will, in any case, require the country to implement structural reforms. In particular, it will have to protect intellectual property rights and establish more efficient capital markets, in order to encourage basic scientific research, technological innovation, and entrepreneurship. Recognizing the role of capital markets in promoting technological innovation, China will open a Science and Technology Innovation Board at the Shanghai Stock Exchange later this month.

This is not to say that China will close the door on trade negotiations. On the contrary, the US-China trade relationship does have its structural imbalances, which China is willing to address.

But, rather than allow the Trump administration to push it to increase imports unilaterally – an approach that is both naive and reckless – China is insisting on resolving the problem in stages. The world should support this method, with the US, in particular, relaxing restrictions on exports to China and welcoming Chinese investment in the US.

To many, China and the US appear to be falling into the “Thucydides Trap,” a self-fulfilling prophecy in which a hegemon, fearing a challenger, brings about a war for global dominance. But, even as the economic contest between the two countries continues, this outcome is far from inevitable.

A lack of mutual political trust has not prevented the US and China from engaging in mutually beneficial commercial collaboration over the last 40 years, nor has it hampered the recent surge in cultural, educational, and other exchanges. At a time when the two countries face many common challenges – including climate change, nuclear threats, terrorism, poverty, and financial-market stability – one can only hope that the US administration once again shows the vision and wisdom needed to renew such cooperation with China.

Zhang Jun is Dean of the School of Economics at Fudan University and Director of the China Center for Economic Studies, a Shanghai-based think-tank.

The Fed Dusts Off “Whatever It Takes”

The most consequential words ever spoken by a central banker are, without doubt, ECB chair Mario Draghi’s 2012 promise to “do whatever it takes” to stop the bleeding of the Great Recession and keep the eurozone from spinning apart. Specifically:

“Within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough.”

The global financial markets responded to Draghi’s promise like a dog presented with the mother of all soup bones, leading people who love the modern monetary system to see Draghi as a hero — while those who view fiat currency and fractional reserve banking as abominations see him as the Devil. But everyone sees him as effective.

So it’s not a surprise that the Federal Reserve, in its search for words to keep the debt binge going, has dusted off Draghi’s formulation:

Powell says the Fed will ‘act as appropriate to sustain the expansion’
Federal Reserve Chairman Jerome Powell said the central bank is watching current economic developments and will do what it must to keep the near-record expansion going. 
Financial markets have been nervous lately over an escalating trade war that has spread from China and now could include Mexico. At the same, government bond yields are behaving in a way that in the past has been a reliable recession indicator. 
Powell began a speech Tuesday in Chicago by addressing “recent developments involving trade negotiations and other matters.” 
“We do not know how or when these issues will be resolved,” he said in prepared remarks. “We are closely monitoring the implications of these developments for the U.S. economic outlook and, as always, we will act as appropriate to sustain the expansion, with a strong labor market and inflation near our symmetric 2 percent objective.” 
Powell’s comments came at the “Conference on Monetary Strategy, Tools and Communications Practices,” a kickoff for an examination the Fed is conducting this year about the tools it has to meet its goals as well as the way it is communicating its actions to the public. 
He did not address any other specific issues relating to current conditions. Market are broadly expecting the policymaking Federal Open Market Committee to cut its benchmark rate twice before the end of the year in response to current conditions. 
For his part, Powell has stuck to the position that the Fed remains data dependent.  
The most recent FOMC statement, from its May meeting, indicated that the committee is taking a patient stance toward policy changes at conditions evolve. 
Looking down the road 
In his speech Tuesday, Powell took a longer view, outlining the challenges the Fed faces ahead for when the next crisis hits. The current low rate environment leaves the Fed little room before it hits the zero lower bound, or the point where the Fed’s nominal benchmark rate can’t be lowered much more. 
“In short, the proximity of interest rates to the ELB has become the preeminent monetary policy challenge of our time, tainting all manner of issues with ELB risk and imbuing many old challenges with greater significance,” he said. 
The Fed faces a problem with inflation, which has yet to sustain at the central bank’s 2% goal. Powell said persistently low inflation could lead to “a difficult-to-arrest downward drift” in expectations. 
Powell said the tools used during the crisis — near-zero rates and asset purchases that took the balance sheet to more than $4.5 trillion — are likely to be deployed again. 
“Perhaps it is time to retire the term ‘unconventional’ when referring to tools that were used in the crisis. We know that tools like these are likely to be needed in some form in future ELB spells, which we hope will be rare,” he said.

Powell seems like a regular guy who’s is in a tough spot not of his own making. He recognizes that interest rates are too low to provide much ammo in the next downturn, so he’s desperately hoping that the trade war and political chaos will be resolved shortly, goosing stock prices and extending the expansion. In the meantime he’s saying words he knows the markets like to hear (which they clearly do: the Dow is up 400 points this morning).

But he also seems to know he’s just delaying the inevitable. In the next recession, which history says is imminent, he’ll be forced to cut interest rates the usual five or so percentage points, taking the US and the rest of the world deeply into negative territory, with consequences neither he nor anyone else can predict.