Archive for May 2019


The short time horizon president

[As usual, read my Econlog post if you only have time for one today.]

Today offers another example of a theme I’ve been pushing for several years. Trump is president with a short time horizon, eager to take actions that look good today at a cost to future generations. Examples include:

1. Ramping up moral hazard in the financial system.

2. Reckless “tax and spend” fiscal policy.

3. Moving away from the rule of law, toward authoritarianism.

4. Ignoring global warming.

5. Politicizing monetary policy

In each case, Trump has a lot of “capital” to spend, as the US has traditionally been a pretty well run country. As Adam Smith pointed out, there’s a great deal of ruin in a nation. Even with Trump’s reckless actions, we are unlikely to face a fiscal crisis, a banking crisis, a global warming crisis or a serious move toward authoritarianism in the next few years.

Today we see another example. Before explaining this situation, let me remind readers that Trump is one of those guys who frequently accuses others of having the very flaws that he himself has. Thus the recent claim that Biden is a low IQ person. Or that other candidates were “liars”.

Trump recently accused the Chinese of negotiating in bad faith on trade, backing off from promises that they had previously made. Of course there’s no way to know if any of this is true, as nothing said by Trump or his aides can be trusted. In any case, Trump has now done exactly what he accused the Chinese of doing—reneging on a trade deal with Mexico, which he agreed to just a few months ago.

The US has built up a lot of reputational capital in foreign affairs. We often make serious mistakes, such as the Vietnam and Iraq Wars, but there is always a certain logic to our actions. We are one of the “serious” countries, and have been one for most of our history.  Trump has decided to spend some of the reputational capital for short-term political gain.

If we’d been a wild and crazy country for the past 100 years, there is no way the rest of the world would have trusted us to control their money (as we effectively do with our leverage in the global banking system.) Thus Trump has the ability to recklessly use powerful economics sanctions against other countries precisely because all previous American presidents have been so un-Trump like in their policies.

This is just one of the many reasons why Trump is by far the worst President in US history. He’s not just a bad American president, like Nixon or LBJ. He’s not really an American president at all. He’s a completely different animal—a sort of a Venezuelan or Filipino president living in the American White House.

Enjoy it while it lasts; your children will pay the price.

PS.  The sad decline of Lindsey Graham

PPS.  The pathetic abasement of Ronna Romney McDaniel

Monetary policy is becoming too tight

The escalating trade war seems to be sharply depressing the Wicksellian equilibrium interest rate. Here are some recent headlines, from Bloomberg:

The 5-year bond yield is down to 2.10%, a pretty clear indication that significantly lower interest rates lie ahead. Trump may or may not have been right that lower interest rates were called for in 2018 (I doubt it, as NGDP growth has been quite strong), but if the trade war keeps escalating then he will almost certainly be right about the need for lower rates in 2019.

[Yes, a determined President can “force” the Fed to cut rates, if he’s willing to wreck the economy.]

Just a month ago, the main argument for lower rates was that trend inflation was a few tenths of a percent below the Fed’s target; now the justification is much stronger—increasing risks of a global slowdown.

Given that the Fed has been “behind the curve” for most of the past decade, I’d strongly suggest that they try to get ahead of the curve. Cutting interest rates won’t work if they remain behind the curve, i.e., if rates are cut more slowly than the equilibrium rate falls. That was their mistake in 2007-08. Cut them sharply enough so that 30-year yields rise.

Short term interest rates are going to fall either way, but you’d like a “good fall” in rates (expansionary monetary policy) not a “bad fall” in rates (recession.) It’s like someone who is genetically predisposed to get colon cancer. They are definitely going to go to the hospital. But it would be better to go for a colonoscopy than wait until later and go for surgery on a softball-sized tumor.

PS. Off topic, this interesting article relates to my recent post on the Aussie election:

The result has dumbfounded the inner urban elites of government, the bureaucracy, media and industry, many of whom are in denial or seeking therapy. Most important, it has helped draw a new geography of political boundaries based not on long standing ideologies of labour or capital, or of class, but of location and privilege. A more complete reversal of traditional party allegiances would have been impossible to imagine before last weekend. As observed by The Sydney Morning Herald, “The Queensland seat of Capricornia is a perfect illustration. It has many coal-mining workers and was held almost steadily by Labor from the 1960s until 2013, yet as of today it is a much safer Coalition seat than Josh Frydenberg’s well-heeled Kooyong, which was (conservative Prime Minister Robert Menzies’ old electorate.”

Crazy. As if a long time Democratic state like West Virginia were to go Republican.

PPS. Apologizes that I have recently been slow to approve new comments. Travel, bad cold (fever), etc.

PPPS. Conservatives used to say that low rates should not be provided to bail out Obama’s bad economic policies. What do they say today?

There’s something wrong with my car

Last week, I brought my new car back to the dealer. It’s not working properly. Here’s how I explained the problem to the dealer:

When I merge onto the freeway, I have trouble getting the car up to 65mph. I tapped on the brake pedal 9 times, and still no luck. It might’ve been still one of the best cars for drifting back in the day, but today, the car doesn’t accelerate to 65mph. There must be something wrong with my car.

The dealer at gave me a funny look, and made up some phony excuse about how tapping the brake pedal might have prevented the car from reaching the desired speed.

I continue to receive comments telling me that the Fed lacks the ability to get inflation up to 2%. The Fed has raised interest rates 9 times since 2015, each time with the goal of reducing inflation. And now, in 2019, they still haven’t got inflation up to 2%. There must be something wrong with the Fed’s inflation raising mechanism.

What does it mean to “finance government spending by purchasing bonds”?

Here’s the Financial Times:

Torsten Sløk, a Deutsche Bank economist, pointed out the US central bank is not only under pressure from the White House, but also from progressive economists and lawmakers, where there is a growing belief that central banks can help finance extra public spending by purchasing government bonds, without triggering dangerous levels of inflation.

I see this sort of thing quite often.  It’s not exactly wrong, but it’s so misleading as to be the moral equivalent of wrong.

Debt can be monetized in two ways, by using newly printed currency to purchase T-bonds and by creating zero interest reserve accounts at the Fed and exchanging them for Treasury bonds in an environment where market interest rates are positive.  In contrast, creating positive interest bearing reserve accounts does not provide revenue for the government, it merely swaps one debt for another.

As a practical matter, in a world of positive interest rates about 98% of debt monetization is cash for bonds, and 2% is the creation of non-interest bearing reserve accounts at the Fed.  So as a first approximation, when people talk about financing spending by monetizing debt they are talking about buying Treasury debt with currency.

If you are willing to tolerate hyperinflation, then you can use money printing to finance spending up to roughly 3% or 4% of GDP, at most.  If you are not willing to tolerate hyperinflation (and we are not willing to), then the amount of spending that can be financed by printing currency is trivial.

If bonds pay positive interest rates, then banks don’t want to hold large quantities of zero interest reserves.  If the yield on T-bonds is zero then banks are willing to hold large reserve balances, but in that case swapping zero interest base money for zero interest bonds doesn’t finance anything.

So yes, you can finance spending by printing boatloads of currency when interest rates are positive and create high inflation.  That’s a tax on money holders, which is every bit as unpopular as any other tax.

I wish people would stop talking about this option; it’s simply not important in the modern world.

How can the world best gang up on America?

The US has many fine qualities, but in the field of international relations the US is becoming one of the single worst nations on Earth.  Here is just one example:

  • President Donald Trump’s administration announced Monday that buyers of Iranian oil must stop purchases by May 1 or face sanctions. 

  • The move, which took many market participants by surprise, ends six months of waivers which had allowed Iran’s eight biggest buyers of crude to continue to import limited volumes.

It’s bad enough that the US refuses to buy oil from Iran; we insist that every other country in the world follow our lead. And in this case we cannot even cite support from allies such as the UK, France and Germany, all of which oppose this move.

Of course there are numerous other examples I could cite. We punish other countries for being tax havens, while the US is perhaps the world’s biggest tax haven. It’s easy to set up secret shell corporations in the US in order to hide wealth.

We also threaten sanctions against foreign multinational companies that do business with Iran. Because of the size of the US, and the fact that it is difficult to do international business without using US dollars, we are able intimidate foreign companies into avoiding Iran.

Trump frequently praises evil leaders like Orban, Kim Jong-un, MBS, Putin, Duterte, while trashing the more respectable leaders of our allies. We are now a part of the “dark side” of authoritarian nationalism. The axis of evil.

We launch trade wars against one country after another, on the flimsiest of justifications. And one could cite dozens of other examples. Some of this predates Trump, but it’s become far worse over the past two years.

So what is to be done? The purpose of this post is to look for ideas as to how the rest of the world can fight back against American bullying.

Consider that the behavior of Russia and Saudi Arabia is at least as bad as Iran’s behavior, if not worse. So why don’t we ban other countries from buying oil from Russia or Saudi Arabia? The answer is clear; they are too big for us to pick on. We know that a cutoff of oil from either of those two countries would push the global economy into recession. We pick on the weak. This suggests a path forward.

It seems to me that it would be in the interest of the major European nations to join up with China, Japan, Russia, Turkey, India and other major powers in an anti-American alliance. That way the US could not pick them off one country at a time. Yes, the Europeans are not completely happy with the behavior of China, but right now the US is the biggest threat to Europe. (Something Angela Merkel seems to understand.) By joining together in an anti-American alliance, it will make it harder for the US to achieve its goals. We can sanction one country for doing business with Iran, but do we dare sanction the entire world? I doubt it.

Perhaps there could be an international effort to replace the dollar with the euro as the dominant currency in global trade and investment. It would not be easy, but the leverage of US policymakers would be reduced if the US banking system did not occupy such a central role in the global economy. Or perhaps the EU could fine American companies doing business in Europe every time we fined a European firm for doing something that was perfectly legal under European law.

The US is a big country, but it generates only about 20% of global GDP. If the rest of the world worked together they ought to be able to put an end to American bullying. Bullies are usually cowards, and tend to back down when they meet actual resistance.

If you have any good ideas, please add them to the comment section.

PS. The recent US ultimatum given to Iran reminds me of the old days when countries like Germany would deliver a ridiculous set of demands to a weaker country in the hope they would be rejected and offer a pretext for war. (I suspect the actual US goal is regime change, not denuclearization.) My favorite example was the US insistence that Iran not intervene in Yemen. Pot, kettle.

Update: Although this Foreign Affairs piece ends up (sort of) defending Trump, it’s still the best thing I’ve read on the Mueller investigation. Highly recommended.