Dollar's demise could threaten world economy

 

Gordon L. Weil

Everything has a price.

Today that price is set in dollars.  To produce more dollars, you can change their value by simply printing more of them.  Or, to boost borrowing by individuals, businesses or the government, you can cut interest rates, which has the same effect as printing more money.  That’s what President Trump wants to do.

This sounds like a boring economics lecture is coming.  But stay awake, because these basic facts have a direct and major effect on everybody.   Not just banks and billionaires, but everybody.  Even entire countries.

When people stopped bartering, trading one good for another, gold evolved into the standard by which prices are set.   Major currencies could be exchanged for gold, so anyone would accept the paper money.  This was the so-called gold standard.  But the amount of gold could not keep up with the need for money, especially to finance World War I.  The printing presses ran.

The US end up with most of the gold, and the dollar quickly was widely accepted by other countries as being as good as gold.  It was so reliably consistent that little was cashed in for American gold.  The amount of dollars would thus exceed the amount of gold backing it and resting in vaults.

President Franklin D. Roosevelt ended the gold standard for individuals, preventing them from trading their dollars for gold coins.  But other countries could still convert their dollars into gold.   This new system was known as the gold exchange standard.

In 1971, President Richard M. Nixon ended access to gold, even for other countries.  The dollar alone would serve as the international standard of value.  Gold has no fixed relationship with the dollar and has become a commodity.  Its value has soared as people seek to hold it as their ultimate financial protection.

Nixon wanted to promote prosperity by pumping more money into the economy.  He also induced the Federal Reserve, which controls the supply of money, to lower interest rates. 

While the economy benefited in the short term, Nixon’s extreme actions brought record high inflation.  Ultimately, after Nixon was gone, the Federal Reserve had to boost interest rates to halt inflation.   That drastically cooled the economy, but the dollar became reliably stable.

This history reveals how a limited gold supply was replaced by a well-managed U.S. dollar as the world standard, used as a commonly accepted value of goods and services.  Average Americans, dealing with their personal debt, may miss the degree to which the world depends on the dollar and the Federal Reserve to maintain its reliability.

President Trump now seeks to repeat Nixon’s mistake.  He, too, wants to pump more money into the economy, believing it will promote growth and personal incomes, reduce federal interest costs, and enhance his reputation.  He demands that the Federal Reserve sharply cut interest rates, allowing more money to flow into the economy.  He doesn’t worry about inflation.

Not only is a stable dollar, protected from inflation, important to Americans, but other nations rely on the Federal Reserve to protect the value of their own currencies by holding the dollar steady.  If Trump’s policy succeeds, weakening the U.S. dollar will export unwanted inflation to a strongly integrated world economy.

Trump mistakenly claims that the Fed chair determines interest rates.  Change the chair and you change the policy.  But rate decisions are made by a 12-member body, including the seven Fed board members and five presidents of regional Federal Reserve banks.

His plan appears to be to create his own Fed board majority, just as he has done at the Supreme Court.  Three members are sure to be his nominees.  He needs one more.

To gain control, he is trying to fire Lisa Cook, a current member.  Her case is now before the Supreme Court.  He has also begun a spurious investigation of Jerome Powell, the current chair. He may try to influence Fed bank president appointments, though he does not make them.

If his policy succeeds, the dollar will begin to lose its role as the world’s standard.  It might be replaced by the Euro or China’s Yuan or by nothing.  Beyond opening the way for worldwide inflation, his efforts would likely result in the loss of much American economic power.

His appointment of Kevin Warsh as the new Fed chair assumes that the nominee agrees with the president and will cut rates.  But both Warsh and the Court may give higher priority to maintaining the dollar than to supporting Trump.  Meanwhile, Warsh’s Senate confirmation may depend on the Trump administration ending its Powell investigation.

The danger to the American economy, other nations and U.S. power from a purely political interest rate policy set by a Trump-dominated Fed is great.  The damage might be beyond repair.

 

Trumps policies falter; 'The economy, stupid' -- once again

 

Gordon L. Weil

“The economy, stupid.”

That phrase, posted by strategist James Carville in Bill Clinton’s 1992 campaign headquarters, has entered American political mythology as a revelation of dazzling brilliance and simplicity.

It isn’t.  It’s an eternal political truth; campaigns are always about the economy, though that’s not always recognized.

Inflation is the immediate problem.  Reacting to voter unhappiness with prices under the Biden presidency, Trump promised: “Starting on day one, we will end inflation and make America affordable again, to bring down the prices of all goods.”  Apparently, many voters, having lost faith in the Democrats, believed him.

Yet, inflation in September was higher than in the last full month of the Biden administration.  Trump runs the risk of facing the same kind of voter frustration with prices that brought him to office.

He asserts that the economy is sound, and people will soon see that he has kept his campaign promise.  Of course, that’s not quite the same as the “day one” promise.

Trump may claim that all is well and getting better for several reasons.  The stock market is soaring, and he may see it as a good representative of the national economy.  Yet its performance might reflect excess optimism about the rapid deployment of AI, which may not happen.  If that bubble bursts, it could harm both the market and the economy.

He may also be only looking at a slice of the American public.  Surveys suggest that Republicans, the wealthiest people and investors are positive about the economic outlook.  But they are out of step with everybody else.  While they wield great economic power, they are not the mass of voters.

Trump’s tariff policy contributes to inflation, though not as quickly as foreseen in some dire forecasts. His team takes credit for the limited early impact, ignoring the lags inherent in economic change, and that inflation will thus increase as the months roll by.  Importers will absorb less of higher tariffs than at the outset, with more costs being passed on to consumers.

By applying across-the-board tariffs, Trump failed to take account of American dependence on certain products that cannot be replaced by U.S. production.  Big price increases have occurred in coffee, women’s clothing and electronics.  Seeing the trend, he has begun lowering some agricultural tariffs.  There may be more reductions to come.

When President Reagan took office facing high inflation, he left it to the Federal Reserve to take the unpleasant measures needed to lower it.  The policy amounted to saying it will hurt more before it gets better.  Reagan remained blameless, while the Fed raised interest rates.  The Fed tamed inflation, but caused much pain in doing it.

By contrast, Trump has plunged in and tried to get the Fed to cut interest rates, which he argues will promote growth.  His pressure may have influenced the Fed, slowing a reduction in inflation.  To the extent that his policy fails, Trump, unlike Reagan, may get the blame.

Housing is a special problem, with demand exceeding supply.  Inevitably, that scarcity drives up prices.  One underlying factor is that by eliminating immigration, the government has cut labor force growth needed for housing construction.

The tariff policy has also had an unanticipated rebound effect.  The U.S. may cut imports and bring production home, but it may lose exports due to retaliation.   After U.S. auto tariffs forced two American carmakers to close some Canadian production, Canada removed a tariff-free exemption on some of their exports to its market, costing the carmakers solid sales. 

One key to Trump’s approach is his heavy reliance on cheerleading to overcome people’s worries about the economy.  An old song included this line: “Wishing are the dreams we dream when we're awake.”  

Unlike the song’s lyrics, wishing won’t make it so.  Trump offers dreams more than paycheck reality.  People pay the price at the check-out counter, an experience that Trump may have missed.  No amount of telling them that it will soon be better, without evidence for the claim, can change the higher costs that people pay.  Dreams can become nightmares.

Trump’s problem, one he shares with many others who have occupied the White House, is in taking responsibility for the state of the economy.  This overstates presidential influence; the economy is usually influenced by a myriad of factors outside of their control.  

In this case, however, Trump’s trade, immigration and Fed games have put him squarely in the game.  He exudes confidence in these initiatives, while they produce uncertainty and come up short on promised results.

Even if he abruptly alters policies, the inevitable economic lag will mean the effects of his past moves will be felt next year.  In short, he has handed Democrats a major issue to boost their 2026 congressional campaigns.  The economy, stupid.

Trump's economic moves hit real people

 

Gordon L. Weil

Since the day Donald Trump became president for the second time, the U.S. has been flooded with disruptive actions, just as he intended.

In reaction, experts and the media have issued dire warnings about the effects, intended or not, of his moves – inflation, immigration, employment, science, commerce and the future economy. Almost all these reactions have focused on the deep and long-lasting national harm his actions will cause.

While Trump’s policies must be taken seriously and the warnings should be heeded, they may seem to be happening at a far higher level than the everyday lives of most Americans.  The best the critics can muster is the observation that the effects will soon find their way down to average people.

If the effects seemed remote or even not likely to happen before they would be erased by renewed prosperity, then Trump can be reassuring and convince people that short-term pain will bring long-term gain.  His message has been that he is so brilliant that people can count on him producing the promised prosperity.

That message is still pending, but it seems increasingly possible that the pain won’t be short term, so the gain is more remote than had been originally implied. The immediate test is whether that situation will have a big enough impact on the 2026 elections to produce a Congress able to rein in Trump or even offer its own policies.

The impacts of his policies are already becoming evident in the daily lives of average citizens.  I take a look here at some of what’s happening in Maine.

The Maine license plate has for decades proclaimed the state as “Vacationland.” Tourism means a lot to the state’s economy, and a lot of the tourists come from eastern Canada.  Canadians feel at home in a familiar culture with appealing beaches and attractions.  But with Trump’s ridiculous but often repeated claim that Canada should become the 51st state, everything has changed.

This absurdity coupled with an overt effort to destroy the Canadian economy to the point that it will seek refuge in the U.S. has amazingly and quickly turned a natural friendship into hostility.  Many Canadians now dislike the U.S. and have cancelled plans to come to Maine this summer.  Maine did not give him all its electoral votes, so he likely doesn’t care about the hit to tourism.

Then, there’s inflation, a big issue for Mainers.  Under former President Biden, as the economy recovered from abnormally low inflation during Covid, inflation took off.  Though it had greatly diminished by the end of Biden’s term, the memory lingered on, and Trump continually reminded voters of it.  Kamala Harris’ response was laughably weak, so Trump scored his point.

Instead of inflation abating, especially for home prices, it began to increase.  Trump’s tariffs were not absorbed by exporters or American retailers, as he had promised.  The free market, favored by him, worked normally, and prices eventually reached consumers.  Walmart and Target prices in Maine rose sharply, as they did elsewhere.  Grocery prices remain high in a state that’s at the end of the supply line.   People noticed.

Housing is especially sensitive.  It is among the top three concerns in the state, along with inflation and immigration. Higher building costs, resulting partly from expected increased Canadian lumber prices, put homes out of reach for potential buyers. The ability of the private sector and government to push tiny homes to ease homelessness was undermined.

That happened in a special way in Maine.  The University of Maine has the world’s largest 3-D printer, and it produced a complete tiny house.  But it needs federal funding to move ahead. Because Trump dislikes Gov. Mills’ insistence on state control of trans athletic policy and the president’s aversion to academic research, the project has begun laying off workers.

Like tourism, a mainstay of the economy is lobster fishing.  Lobsters are a high-cost food whose sales track the health of the national economy.  Trump has managed to create so much uncertainty throughout the economy that consumers are holding back on many purchases and there’s concern about the impact on fishing in coming months.

Every state, every market has seen its own effects of Trump’s policies.  Just as the U.S. cannot be an economic island, neither can any state.  Broad-brush national policies have local effects that should not be ignored, especially by Congress.  Trump’s vision of American industrial greatness comes at immediate cost to the paycheck-to-paycheck population.

Trump’s popularity, though waning, survives because many people like his immigration policy and take comfort in his economic nationalism.  The ultimate judgment may come when Maine fishermen, supermarket shoppers, tourism operators and home buyers vote for their next U.S. senator just 17 months from now.

Trump's tariffs: both good and bad

Gordon L. Weil

Many years ago, I found myself in the middle of an international war.

As tough as each side was, I was fortunate that the ammunition was not bullets.  It was chickens.

The U.S. was the major supplier of chickens to Europe, but the organization now called the EU or European Union wanted to promote its own production, mainly in Germany.  So, it increased its tariff on imported chickens.  American producers protested, and the government retaliated by raising U.S. tariffs on several products.  The result was the “Chicken War.”

The most important U.S. tariff was placed on trucks with the aim of cutting imports of VW vans.  But trucks from all over the world were affected.  Eventually, tariffs on other items, including chickens, were either dropped or lost importance.  But the tariff on trucks remains, decades later, though some foreign producers learned how to dodge it.

As the sole American on the EU staff, my role was to improve understanding between the U.S. and Europe and help defuse the conflict.  Eventually, EU President Walter Hallstein met with President Lyndon Johnson.  Acting on behalf of the Europeans, I had the unusual opportunity of negotiating with the State Department the joint statement of the two presidents.

The moral of the story is that tariff wars have consequences.  Trucks are probably more expensive in the U.S. today thanks to the surviving tariff and because American producers could raise their prices when faced with less competition from abroad.   The Chicken War was hardly just chicken feed.

President-elect Trump likes tariffs.  He sees them as both a threat and a promise.  He seems reluctant to accept that they drive up prices and are likely to bring retaliation that will reduce U.S. exports.  Because other countries can sometimes sell Americans essential products or have lower costs of production, he claims the U.S. is subsidizing them.

Beyond economics, Trump clearly would use tariffs as an instrument of foreign policy.  If he wants a country to halt the flow of immigrants or drugs or even to increase its own military spending, he uses the tariff threat to force change.  Trump’s surprising style, untethered to tradition, can cause others to take his threats seriously. 

Aside from the impact on exports and imports and on consumer prices, the liberal use of tariffs may bring political and economic change.  Trading partners will look for alternatives and not merely submit.

He threatens both Canada and Mexico with higher tariffs unless they stop illegal immigration.  As a result, they may take action even before he takes office.  But the U.S. depends heavily on Canadian crude oil.  If a 25 percent tariff were added, U.S. refineries and their customers would pay more.  And Canada can redirect some sales to Asia.

Trump may do a lot to boost European unification.  Europe is equal to the U.S. as a market, so it could absorb much of its production that can’t enter the U.S.  Higher world prices created by the Trump tariffs would be an incentive for the Europeans to step up their own production to displace American imports.

The aspect of tariffs that holds promise for Trump is that new federal revenues would be collected at the border.  His assumption must be that imports will not be slowed by higher tariffs, so they could create the income necessary to finance the federal government, which meanwhile would be cutting income taxes.

For the moment, that’s pure theory.  Tariffs drive up prices unless foreign suppliers swallow them.  In practice, imports decline when imported goods cost more. Lower imports may produce lower tariff revenues. The revenue effect is greater when the tariff increase is greater. So, tariffs may not be quite as magical as Trump seems to believe.

Yet good reasons exist for raising some tariffs.  That happens when Americans are willing to pay more for goods through a tax disguised as a tariff to achieve national policy goals. 

If the U.S. is concerned about excessive dependence on imports of essential goods, aiding domestic producers or ensuring worldwide environmental standards, greater tariff protection may make sense.  Labor unions oppose trade deals because jobs may be shipped abroad.  But helping workers comes at a price.

China profits from exploiting its own labor and using its polluting coal to produce low-cost goods for American merchants.  Its gains pay for increased Chinese military spending used to expand its influence, threaten Taiwan and to menace the U.S. and its allies on the seas. 

It makes sense to cut China’s sales to the U.S. to level the playing field and reduce its funds for military expansion.  Customers may willingly be taxed for this effort.

Trump’s tariff threats may sometimes work, but their effect goes well beyond raising consumer prices.  Higher tariffs have both economic and political effects, sometimes long-term and often not obvious.