Donald Trump’s war on the Federal Reserve
The president has left himself just one tool to stop a recession — bullying Jay Powell
Edward Luce
Pity Jay Powell. The man who appointed him as chair of the US Federal Reserve wonders whether he is a bigger enemy of the US than China’s president, Xi Jinping. Donald Trump entered new territory by implying his country’s central bank was run by a traitor. Previously, Mr Trump had described Mr Powell as “clueless” and a man with a “horrendous lack of vision” who is like a “golfer who cannot putt”. Also he “maybe” regrets having picked him.
Anyone would think Mr Powell was trying to ruin Mr Trump’s re-election prospects. In fact, most of Mr Trump’s recent epithets came after the Fed had done what he wanted by cutting interest rates in late July. His tweet followed an otherwise anodyne speech in which Mr Powell sounded a mildly dovish tone about the Fed’s likely trajectory. His offence, it appears, was to sound agnostic about how far the Fed should go to counteract the fallout from a trade war that is harming domestic growth. Though the Fed chair was too diplomatic to single out America’s escalating trade war with China, Mr Trump correctly sensed that this was the unforced error to which the Fed chair was referring.
Where does it go from here? At the best of times, US presidents have limited power to stop a recession, or even a growth slowdown. Mr Trump has already ruled out two out of the three most obvious things he can do to to keep the economy buoyant ahead of next year’s election. The first would be to call off his trade war with China. The likelihood that it will get worse has spurred a flight to the dollar, which has more than wiped out any depreciatory effect of last month’s quarter point interest-rate cut.
The US investment outlook is already fraught with uncertainty. On Friday the US president “ordered” US businesses to disinvest from China. Concerns about a US-China decoupling now seem almost quaint. Mr Trump is aiming for a full-blown divorce. This is not a climate that is conducive to higher investment.
The second tool Mr Trump is abjuring is global co-ordination. This weekend he is meeting his G7 counterparts in France. It would be the ideal moment for leaders to issue a clear statement that they will act to stop competitive currency devaluations and trade wars. Such pledges have had a constructive impact on many occasions over the past 50 years.
International co-ordination can steer currency markets, as happened in the 1980s, and can help to rescue the global economy, as happened in the financial crisis. But cross-border co-ordination is foreign to Mr Trump. It goes against his belief that sovereign powers should act alone. That is also out of the question.
The third tool a US president can use is fiscal stimulus. Mr Trump has mused in recent days about passing a payroll tax holiday, which would put more money in American consumer pockets. However, Democrats would probably demand a price that Mr Trump would find hard to swallow, such as a federal $15-an-hour minimum wage, or a big infrastructure package.
Each would boost the economy. But Mr Trump is allergic to striking deals with Democrats (and vice versa). Either way, Mr Trump now says a tax cut is off the table.
That leaves him with just one tool — bullying Mr Powell. The problem is that the Fed has fewer tricks up its sleeve than Mr Trump supposes. The difference between a fed funds rate of up to 2.25 per cent, which is where it is now, and going to 2 per cent or below would be minimal at a time when we are facing fears of what former Treasury secretary Lawrence Summers calls “secular stagnation” — negligible long-term growth. It is like pushing on a piece of string, as the saying goes.
A better metaphor would be that Mr Trump is administering futile beatings to the Fed chair with a golf club. The president can threaten all he likes — and even stretch the law to imply he can fire Mr Powell. That may be what eventually happens. But he cannot turn the Fed into a magic box of economic remedies.
The larger danger is that the Fed is already enabling Mr Trump to indulge his most combative instincts. Every time Mr Trump threatens China, he looks to the Fed to bail him out.
Mr Trump is now pushing for a 100 basis point rate cut. This puts Mr Powell in an unwinnable position. On the one hand, monetary easing gives Mr Trump further room to pursue his growth-dampening trade war. On the other, the Fed would be negligent if it failed to react to the incoming data. Mr Powell’s remit is to aim for the dual target of 2 per cent inflation and full employment. It is not his role to question a president who is making that task far harder.
Over the long term, the Fed as an institution will probably survive Mr Trump’s assaults with its independence intact. The same looks decreasingly likely for the man who heads it. It is quite possible that Mr Powell will be replaced from among the galaxy of unprincipled job seekers who audition daily on Mr Trump’s TV screen. Technically, the president does not have the power to remove the Fed chair before his term ends in 2022. But this president is a unique kind of leader.
Earlier this week, Mr Trump tweeted quotes from an admirer that likened him to “the King of Israel”. Mr Powell should beware. Biblical scholars will recall that the infamous King Herod was fond of having heads served to him on a platter.
DONALD TRUMP´S WAR ON THE FEDERAL RESERVE / THE FINANCIAL TIMES OP EDITORIAL
Brazil and France, at Loggerheads on Trade
How these two powerful economies could sink a trade deal between Mercosur and the EU.
By Allison Fedirka
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GOLD - THE $1,600 PER OUNCE TARGET / SEEKING ALPHA
Gold - The $1,600 Per Ounce Target
by: Andrew Hecht
- A spectacular rise from the April low.
- Markets rarely move in a straight line.
- This time could be different.
- Gold mining stocks outperform on the upside; leverage on dips to turbocharge performance.
"The investment seeks daily investment results, before fees and expenses, of 300% of the daily performance of the NYSE Arca Gold Miners Index. The fund invests at least 80% of its net assets (plus borrowing for investment purposes) in financial instruments, such as swap agreements, and securities of the index, ETFs that track the index and other financial instruments that provide daily leveraged exposure to the index or ETFs that track the index. The index is a comprised of publicly traded companies that operate globally in both developed and emerging markets, and are involved primarily in mining for gold and, in mining for silver. It is non-diversified."
Source: Yahoo Finance
WHY STOP AT PARLIAMENT? LET´S GET RID OF THE WHOLE GOVERNMENT / THE FINANCIAL TIMES OP EDITORIAL
Why stop at parliament? Let’s get rid of the whole government
A timeout will send a clear message to the world: Britain has not gone mad, we’re just drunk
Henry Mance
The Houses of Parliament, London. Imagine there’s no cabinet. It’s easy if you try © Getty
History is one damn thing after another; British politics is lots of damn things all at once. As a BBC journalist helpfully explained in the run-up to the Iraq war: “It’s like a complicated game of bluff, except it’s not a game and they’re not bluffing.”
But I have an idea — a way out of the mayhem. Instead of arguing over whether to suspend parliament, could we not simply suspend the whole government instead? No new laws, no policy announcements, no ministers. Like a toddler timeout, but on a national scale. Or a long walk after a family argument. Meet back here once we’ve all calmed down, OK?
It is the common sense solution. Brexit means restoring faith in our democracy. How can we do this while Priti Patel and Gavin Williamson exercise cabinet responsibility? They’ll get over being sacked for a bit — it won’t be the first time.
To those who say that a government is essential, I say: Belgium. In 2011 Belgium set a world record — 541 days — for a country without an executive, and it survived. I say also: Italy. Its bond yields hit a record low after its government collapsed this month.
Democracy, said Winston Churchill, was the worst form of government except for all the others. But what about no government? He didn’t think of that. The era of big government is over, said Bill Clinton. He too wasn’t thinking laterally enough. Imagine there’s no cabinet. It’s easy if you try.
The suspension need not last long. Drunk people take a cold shower to sober up. Our government could do with a stomach pump and several months in a darkened room. The time will fly. Doesn’t it seem like yesterday that the UK was a normal country? It was three and a half years ago.
Of course the doom-mongers will talk down the opportunities of no government. They’ll say there are risks that simply cannot be managed. I call that Project Fear. Make no mistake — we will be ready.
In fact, Britain has been working tirelessly to prepare for a country of no government. For several years, our departments have been dedicated to not achieving anything. The Iraq war, the deficit plan, David Cameron’s immigration target, Theresa May’s burning injustices. Did we achieve any of our objectives? Absolutely not. We should be confident of a smooth transition to no government.
True, there are lots of useful things a government might do in Britain, but the current generation of politicians seems incapable of any of them. So let’s take a political version of the Hippocratic Oath — first, do no harm.
We won’t call any referendums, prematurely invoke Article 50, negotiate any universally unpopular withdrawal treaties, or organise any more state visits by US President Donald Trump. Our government-less country will be less headless chicken, more hibernating tortoise.
I admit that Brexit is a complicating factor. Downing Street’s insistence on leaving the EU on an arbitrary date — with or without a deal — is a bit like a bloke insisting on getting married next summer — whether or not he has found a partner. Would this strategy focus the minds of his Tinder dates? I’m not convinced. If anyone desperately needs to leave the EU on October 31, they can always take a cheap flight to Norway.
The business of the nation can obviously not cease completely. What will happen to the HS2 railway or Heathrow airport’s third runway? Here, too, we’re actually remarkably prepared for no government. Ministers have approved both projects without definitely committing to either. So if HS2 and Heathrow really want action, their best hope is to make progress while there is no government, in the hope that it will be too late to cancel the work once the executive is back. Genius, really.
You may wonder if all this is very democratic. Please, at least wait until you’ve seen the opinion polling. No government may be the one thing the public can all agree on.
A government timeout will send a clear message to the world. Britain is not irredeemably mad, we’re just rather drunk. And, to paraphrase Churchill, in a few months we’ll be sober again.
WHY AMERICA´S CEO HAVE TURNED AGAINST SHAREHOLDERS / PROJECT SYNDICATE
Why America’s CEOs Have Turned Against Shareholders
The chief executives of America's largest companies made news this month by coming out against a model of corporate governance that has for decades prized shareholder value over all other considerations. But no one should assume that corporate America has finally seen the light.
Katharina Pistor
NEW YORK – The Business Roundtable, an association of the most powerful chief executive officers in the United States, announced this month that the era of shareholder primacy is over. Predictably, this lofty proclamation has met with both elation and skepticism. But the statement is notable not so much for its content as for what it reveals about how US CEOs think. Apparently, America’s corporate leaders believe they can decide freely whom they serve. But as agents, rather than principals, that decision really isn’t theirs to make.
The fact that American CEOs think they can choose their own masters attests not just to their own sense of entitlement, but also to the state of corporate America, where power over globe-spanning business empires is concentrated in the hands of just a few men (and far fewer women). As a matter of corporate law, CEOs are appointed by a company’s directors, who in turn are elected by that company’s shareholders every year. In practical terms, though, most directors remain on the board for years on end, as do the officers they appoint.
For example, Jamie Dimon, the chairman of the Business Roundtable’s own board of directors, has been at the helm of JPMorgan Chase for over 15 years. During most of that time, he has served as both CEO and chairman of the board of directors, in contravention of corporate-governance principles that recommend separating these two positions.
By capturing the process to which they owe their own positions, American CEOs have made a mockery of shareholder control. The Business Roundtable itself has long favored plurality over majority voting, which means that incumbent board members need only receive more votes than anybody else, rather than a majority. At the same time, the organization has fought the Securities and Exchange Commission tooth and nail to block a rule that would allow shareholders to write in their own candidates when votes are solicited. And it continues to try to weaken shareholders’ ability to propose agenda items for shareholder meetings.
In short, for the Business Roundtable and the CEOs it represents, shareholder primacy has never meant shareholder democracy. Instead, the shareholder-value model has given CEOs cover to avoid discussing corporate strategy, especially when it comes to considering alternatives to the share price as a metric for corporate performance. For CEOs, the share price is everything, because it protects the company from takeovers (the greatest threat to incumbent managers), and it increases their own remuneration.
Why, then, would CEOs come out against a status quo that has allowed them to reign almost unchallenged, in favor of a stakeholder-governance model that puts employees and the environment on an equal footing with shareholders? The answer is that revolutions often devour their children. Share-price primacy has not only ceased to protect CEOs in the way it once did; it has become a threat.
After all, it is one thing to champion shareholders when they are too dispersed to organize themselves. It is quite a different matter when shareholders have assembled into blocs with effective veto power and the ability to coordinate in pursuit of common goals. Some 74% of JPMorgan Chase’s shares are held by institutional investors, five of which – including Vanguard, BlackRock, and State Street – control one-third of total shares. And JPMorgan isn’t alone. Recent research in the US shows that the same few global asset managers are top shareholders at almost all of the largest financial intermediaries, Big Tech firms, and airline companies.
For CEOs, the emergence of powerful shareholder blocs has changed the corporate-governance game. With trillions of dollars of savings that need to be invested, institutional investors simply cannot be ignored. Even if asset managers do not actively involve themselves in corporate governance, they can still send a powerful signal to the market simply by dumping shares.
For years, the shareholder-primacy model led CEOs to eke out profits through outsourcing or labor-force downsizing, regulatory and tax arbitrage, and stock buybacks that shower cash on shareholders at the expense of investing in their companies’ future. But now, they have finally realized that these strategies are better for institutional investors than they are for the sustainability of firms.
Confronted with the headwinds they themselves generated, American CEOs seem to have concluded that best defense is a good offense. But if they are serious about abandoning the shareholder-primacy model, public statements will not suffice. They must also support legal reforms, particularly the measures needed to hold corporate directors and officers accountable to the principals they serve. That could mean extending board representation to employees and other stakeholders, or it could take the form of special audits, along the lines of those to which public benefit corporations submit.
Either way, if the new stakeholder model is going to amount to more than the old charade of “shareholder democracy,” the principals themselves must be involved in setting up the new regime. If we leave it for the agents to decide for themselves, we will end up right back where we started.
Katharina Pistor is Professor of Comparative Law at Columbia Law School and the author of The Code of Capital: How the Law Creates Wealth and Inequality (Princeton University Press).
THE GEOPOLITICAL LOGIC OF THE U.S.--CHINA TRADE WAR / GEOPOLITICAL FUTURES
The Geopolitical Logic of the US-China Trade War
The dispute was decades in the making.
By George Friedman
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Since Donald Trump took office in 2017, the United States has introduced a series of measures to try to reduce its trade imbalance with China. But Trump’s decision to impose tariffs on China was preceded by a decade of failed negotiations aimed at establishing a more equitable trade relationship between the two countries. The Obama administration had multiple high-level meetings with Chinese officials over Chinese barriers to U.S. imports and Chinese manipulation of the yuan. Whether fair or unfair, the perception of multiple U.S. administrations was that China enjoyed free access to U.S. markets without reciprocating.
The Chinese made gestures toward accommodation, but they could not grant U.S. demands for greater access to the Chinese market. China’s economy had long been heavily dependent on exporting to foreign markets, since its own domestic market could not absorb the vast quantity of goods that Chinese industry was producing. But with the onset of the 2008 financial crisis, the domestic market took on a whole new significance.
The Japanese Example
There are several similarities between U.S.-China trade relations today and U.S.-Japan trade relations in the 1980s. During the 1970s and 1980s, Japanese industrial production significantly exceeded domestic needs, and Japan had closed off much of its own market to imports from the U.S. The mid-to-late 1980s were a time of extreme tension between the two countries. The U.S. made serious threats of retaliation, but none came to pass for two reasons. First, Japan was a strategic ally of the United States. The need to close off Vladivostok – which required Japanese cooperation – was ultimately more important than the U.S. trade imbalance with Japan. Second, in the late 1980s, the Japanese economy began to crumble. Competition from other manufacturing hubs forced Japan to reduce the price of its exports, which reduced profit margins and weakened the banking system that was underpinning the Japanese export industry. The banks tottered and collapsed, meaning Japanese manufacturers were no longer able to export at the same level they once were.
But before the banks collapsed, there was extreme bitterness and anti-Japanese sentiment in the United States over the loss of jobs to Japanese manufacturers. We’re seeing similar responses today to the Chinese. And China is also now facing intense competition and also lowering prices, while trying to enter other highly competitive markets in technology.
That said, there is a fundamental difference between Japan and China. Japan was a strategic asset to the United States – which, to some extent, helped contain the economic friction. Not only is China not a strategic asset to the U.S., but it’s actually increasingly viewed as a strategic threat. Either way, the Chinese have emphasized their growing military prowess, meaning that the arresters that were present in U.S.-Japan relations are absent from U.S.-China relations. Beijing being both a military and economic threat will force different responses from Washington.
But China had followed the Japanese strategy on dealing with the U.S. It held numerous meetings that ended without a resolution. Since there appeared to be no lever to force the Chinese to shift their policy, multiple U.S. administrations simply continued to hold talks that ultimately seemed to go nowhere. In these negotiations, the Chinese were aided by the large investments in China made by U.S. companies, which pushed Washington to maintain a stable relationship with Beijing. But while these companies profited from the relationship with China, it was always questionable whether the U.S. economy did as well. They were in China to take advantage of cheap Chinese labor, but in doing so, they closed U.S. factories and got rid of their American workers. This helped their bottom line, but the wealth that was created remained in China.
A Shift
In prior administrations, the outsourcing of manufacturing for U.S. businesses made it difficult to take action against the Chinese. But after the 2008 financial crisis, the massive displacement of the formerly powerful industrial working class created a large and angry segment of the population that became as politically powerful as the U.S. businesses that operated in China. The option of simply continuing inconclusive talks that had no impact on Chinese policy slowly evaporated.
And so, the Trump administration has used tariffs to try to force the Chinese to open their markets to U.S. competition. The problem is that the Chinese economy is in no position to accept such competition. The financial crisis severely affected China’s export industry as the global recession reduced the appetite for Chinese goods. This hurt the Chinese economy greatly, throwing it off balance in a crisis that still reverberates in China today. China’s main solution to this problem has been to increase domestic consumption – a task that has proved difficult because of the distribution of wealth in China, the inability of financial markets to massively increase consumer credit, and the positioning of Chinese industry to target foreign, rather than domestic, consumers. Selling iPads to Chinese peasants isn’t easy.
Allowing the U.S. to access the Chinese market would have been painful if not disastrous. The Chinese domestic market was the only landing pad China had, and U.S. demands for greater access to it were impossible to meet. The Chinese retaliated against U.S. tariffs, but it was feeble. China derives 4 percent of its gross domestic product from exports to the U.S. The U.S. derives only 0.5 percent from exports to China. China can do much less harm to the United States than the U.S. can do to harm China. Critics of the Trump administration’s use of tariffs will show that various farms or factories have been hurt by the tariffs, and those criticisms are valid, but they do not capture the full picture.
The Chinese responded by lowering the value of the yuan, thereby making their exports cheaper. This strategy works in the short run, but since it increases the price of commodities like oil, it is not a solution in the long run. It has also strengthened the case of those who say China manipulates its currency to strengthen its position as an exporter. It’s important to remember that this is not a new charge; the Obama administration was aggressive on this point but held off on retaliating. The Trump administration has also repeated the claim and, earlier this month, officially labeled China a currency manipulator.
But Trump has recently threatened to take more severe action: forcing U.S. firms in China to leave and return to the United States. There is some legal precedent for this, but should the U.S. follow through, it will be challenged in the courts for a long time. Such a move would be a major threat to U.S. businesses, possibly more so than to China itself. Politically, the move strengthens Trump’s position among Americans who blame their own economic struggles on the outsourcing of jobs to China. And with an election coming up, the political strategy of Trump’s threat is clear. But so too is the pressure that the U.S. is imposing on China. Foreign high-tech companies operating in China have been a major conduit for Chinese access to new technology.
Geopolitics consists of politics, economics and military matters. In comparing China and Japan, we can see all three at work. In the case of Japan, military considerations took precedence over the other two and limited U.S. actions. In the case of China, politics and economics are both pushing the U.S. to take action, while there are no military considerations to hold the U.S. back. If the Chinese decide to counter militarily, it’s better that they do so now when they remain weak, rather than later when they are stronger. The logic of geopolitics has brought us to this point. And the U.S. is unlikely to back down without concessions that China cannot make.
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TRADE UNCERTAINTY IS AT ITS HIGHEST POINT ON RECORD / THE ECONOMIST
Daily chart
Trade uncertainty is at its highest point on record
The unpredictable outlook appears to be dragging down global growth
UNCERTAINTY IS a sort of poison for the global economy. Without knowing what lies ahead, firms delay making potentially profitable investments and hiring new workers. As President Donald Trump’s trade wars have escalated, economists have attempted to estimate how much uncertainty has risen—and to what extent it may be dragging down economic growth.
The latest such measure comes from Hites Ahir and Davide Furceri of the International Monetary Fund and Nick Bloom of Stanford University. To get a consistent measure of uncertainty over time, they scour country reports from the Economist Intelligence Unit, a sister company of The Economist. The more often a report mentions “uncertain”, “uncertainty” or “uncertainties” near a trade-related word, the higher the index value.
The results show that this measure remained low and stable for decades. Despite the collapse in trade around the time of the global financial crisis, uncertainty did not rise, perhaps because world leaders pledged not to resort to protectionist measures.
In recent years, however, trade uncertainty has surged, particularly in advanced economies.
Although it rose a little after Mr Trump’s election, it was only after he imposed tariffs on China that uncertainty fully blossomed. It rose in the third quarter of 2018 (the first round of tariffs was imposed in July 2018) and then fell in the fourth quarter because of an apparent truce between American and Chinese trade negotiators. This year the measure has climbed to unprecedented heights (see chart).
This has no doubt harmed the global economy. The authors reckon that the rise in trade uncertainty in the first quarter of 2019 may have dragged down global growth by as much as 0.75 percentage points. A separate study by economists at the Federal Reserve comes to a similar conclusion. Of course the world has seen very few episodes of this sort. And so, appropriately enough, the economists note that their estimates are uncertain.
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