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Jerome Powell, chairman of the U.S. Federal Reserve, right, walks with Mario Draghi, president of the European Central Bank (ECB), during the spring meetings of the International Monetary Fund (IMF) and World Bank in Washington, D.C., U.S., on Friday, April 20, 2018.
Andrew Harrer | Bloomberg | Getty Images
It’s quite ironic that President Donald Trump is criticizing the outgoing head of the European Central Bank for “currency manipulation” when he’s counting on his own central bank head, Jerome Powell, to do the exact same thing.
Mario Draghi indicated the ECB could add fresh stimulus to a struggling eurozone economy, a comment that has pushed German interest rates deeper into negative territory and has driven the euro down to $1.11.
Draghi, as the Federal Reserve does, has every reason and right to contemplate further stimulus, whether it’s some kind of rate cut, more quantitative easing or other measures that would keep the entire continent from sliding into recession.
Despite Trump’s constant calls for the Fed to cut rates, in the absence of any looming inflationary threat, the ECB has a much stronger argument for making a move. Unlike the U.S., the eurozone is tilting toward recession. German manufacturing, the engine of European growth, has stalled. France, Italy and Spain have seen recession-like conditions, while Italy’s heavy debt burden has complicated the outlook across the pond. Also, with the prospects of a so-called No Deal Brexit looming, if the U.K crashes out of the EU, economic troubles could spread from Britain to Berlin.
The biggest reason the euro is weakening is not currency manipulation but the fact that the U.S. is still better off than the rest of the world. Positive interest rates in the U.S., in contrast to $12 trillion in negative yielding sovereign debt around the world, is drawing investors into U.S. Treasury bonds, pushing up the value of the dollar. Rates in Germany and Japan aren’t necessarily negative because of central bank intervention — that would be confusing cause and effect. Real rates are negative around the world because the world is not growing.
Contrast that to the U.S., where there has been an obvious slowing of economic activity, but the outlook has yet to indicate recession on the immediate horizon. True, with interest rates in the U.S. plunging, a good portion of the Treasury yield curve inverting, consumer spending decelerating for three straight quarters and no end to the trade war with China in sight, it may well be advisable for the Fed to “take back” its December rate cut as early as Wednesday.
Trump causing the global slowing
Slower economic growth has now offset the impact of the tax cuts on corporate profits while tariffs have offset, by a factor of two, any benefit individuals may have enjoyed by changes in the tax code.
The president, in bashing the ECB, makes no bones about the fact that he’s also been trashing the Fed at the same time, a nearly unprecedented display of interference with central bank independence at home and abroad.
Even more ironic is that, outside of the tax cuts and deregulatory efforts, it’s Trump’s own policies that are contributing to slower global and domestic growth. The “hot” trade war with China is affecting U.S. industries and consumers.
The weaponization of tariffs has damaged business confidence, so much so that the expected boon in capital spending has failed to materialize in the wake of all these uncertainties, which extend out to geopolitical risk, as well, from Caracas to Tehran.
Add to that the potential chaos here at home that could erupt if the president, as indicated Monday, empowers ICE to launch a sweep of the nation to remove millions of undocumented residents.
Irrespective of one’s view of the immigration debate, the U.S. has a critical shortage of labor, not jobs. There are 7.4 million open jobs in the United States, while 6.3 million Americans are unemployed. Even if every American who wanted a job had a job, there would still be over 1 million jobs that would remain unfilled. Given that the U.S. birth rate has tumbled to a 30-year low, immigration, legal or otherwise, helps to fill that gap among low, semi and highly skilled workers that are currently in short supply.
The economic equation is quite simple: Labor force growth plus productivity growth equals economic growth. The president seems unusually unaware of the impact his immigration policies are having, and will have, on the prospects for economic growth.
Add to that the social consequences of a nationwide purge of suspected undocumented immigrants and one could easily imagine civil unrest, the likes of which the U.S. has not seen for decades.
Central banks, both at home and abroad, have done, and continue to do, everything in their power to keep the global economy afloat.
Stop fighting the central banks
The president rhetorically and in real terms has been fighting them every step of the way.
Before he was elected, candidate Trump said former Fed Chair Janet Yellen was keeping interest rates low to help not only President Barack Obama, but also candidate, Hillary Clinton.
He said the Fed’s efforts to enhance growth would lead to a market meltdown. That didn’t happen.
He now says that had the Fed lowered rates, the Dow would be 5,000 to 10,000 points higher.
That may or may not happen, but the president’s central bank bashing is doing absolutely nothing to help the situation.
The president has also warned that the market will crash if he’s not re-elected.
On that, we won’t know for 17 more months. In the meantime, the president would benefit more by leaving central bankers alone than by doing everything in his power to weaken their impact on the global economy.