Fed chair alarms market; Grenada; a GOP moderate

 

Fed chair alarms market; Grenada; a GOP moderate

Brief notes of the week

 

Gordon L. Weil

New Fed chair raises alarm

The new Federal Reserve chair has lost support in financial markets in record time.  The non-financial media and the political world have not caught on, but his moves to recast the Fed’s role is causing reactions approaching alarm.  One leading expert opined that “the bond market puked on him.”

The Fed sets short-term interest rates and buys and sells federal debt to influence long-term rates.   It has huge economic clout, alongside the federal government’s spending and taxing. But Kevin Warsh wants to keep quiet about the Fed’s future thinking on interest rates and to reduce its holdings of federal debt. 

Warsh wants the market to drive the economic policies, uninfluenced by Fed forecasts.  He believes that market participants should “play the game rather than watch the referee.”

That would make the economy a playing field (between what parties?) with the Fed assuring fair play.  Meanwhile, the Fed would say less and, presumably, do less.  The Federal Open Market Committee, composed of Fed Board governors and regional Fed bank presidents, could meet less often.

The market wasted no time in reacting to Warsh’s closed-mouth policy, scolding him for not recognizing that the Fed is a major player not simply a ref.  Left unsure of the Fed’s future thinking, the market lifted interest rates.

FOMC members are independent of the chair, making it likely that his new policy lost him support.  The powerful president of the New York Fed bank quickly sketched his view of the economic future.  Other members split with Warsh on rates.

Ironically, the man Trump sent to lower interest rates finds that the president’s Iran war and his own policy shift increase rates.

Grenada or Greenland

The State Department is reportedly closing several diplomatic offices abroad, including the embassy in Grenada, a small, independent country in the Caribbean, located about 100 miles from Venezuela by sea.

The U.S. invaded it in 1983 when Ronald Reagan was president, because of fears it was coming under the influence of Cuba and Russia.  In more recent years, it has developed a two-party political system with elections resulting in peaceful change.  Grenada’s sovereign is Charles III, the King of Grenada and of the United Kingdom.  Grenada has a population of about 115,000.

Its economy depends on tourism and the export of nutmeg and other spices.  Its major economic problem is the large burden of public debt.  It is avid about the game of cricket, and China has financed a $40 million stadium there.

This year, the U.S. opened a consulate in Nuuk, Greenland, which is an autonomous territory of Denmark.   The U.S. has an embassy in Copenhagen, the Danish capital, to which the consulate is subordinate.  Greenland’s sovereign is King Frederik X of Denmark.

The population of Greenland is about 57,000.  While it has half the population of Granada, President Trump wants to acquire it over the opposition of Greenland, Denmark, the EU and Canada.  Its area is 6,288 times greater than Grenada’s.

Trump worries about China having invested in Greenland, and wants to take overt action.  He is unconcerned about Grenada, where China has also shown interest.  Despite its potentially strategic location, Grenada is not in the running to be the 51st state.

How to be a Republican moderate

A moderate is defined in Congress as a senator or representative who sometimes splits with their party to vote with the other side.  Their vote may be especially telling if they oppose a president of the same party.

In the age of extreme partisanship, acquiring the status of a moderate requires only a handful of votes in opposition to one’s own party.

But there is one step even better, enabling the dissenter to break with the party to justify home-state claims to be a moderate without the vote making any difference.  You can vote against your party when it has enough votes to prevail without your help.

Voters in the home state are supposed to see the independence asserted by the officeholder, which gains them votes.  Party allies in Congress accept the opposing vote, aware of its help to the supposed moderate and the continued loyalty of the senator or representative. You can almost see the nod and wink.

This week, Maine Sen. Susan Collins was the sole Republican to vote with Democrats on an environmental issue.  No matter, the GOP had enough votes to defeat it.  Facing a tough reelection, Collins could add evidence to her claim to being a moderate.

She also announced that she would vote against the confirmation of Todd Blanche as Attorney-General.  By announcing early, she could avoid direct responsibility for being the swing vote.  He would squeak by without her vote.  Maybe her vote would dim memories of her unpopular support for Justice Brett Kavanaugh or Secretary Bobby Kennedy, Jr.

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.