The media is ignoring the area of governance in which President Donald J. Trump might have the biggest impact: monetary policy.
Unlike most U.S. Presidents, Trump seems to have a serious interest in economics and monetary policy. This probably stems from Donald’s education at one of America’s elite business schools; the University of Pennsylvania. There is also some indication that the new president has a good knowledge of monetary policy.
Trump Understands Monetary Policy
Trump made at least one important statement on monetary policy that was widely ignored in some quarters. The Donald told The Wall Street Journal that he thinks the U.S. dollar is “too strong.” That statement alone indicates that Trump understands a strong dollar is probably the biggest economic threat to his administration.
“Our companies can’t compete with [Chinese companies] now because our currency is too strong,” Trump said. “And it’s killing us.”
This statement sent the dollar tumbling, and it also exposed Trump’s weakness on monetary policy. Even though he understands the concepts, the present U.S. system of government gives the President little sway over monetary policy.
Can Trump do anything about Monetary Policy?
From this statement we can safely assume that Trump wants a weak dollar, but can he actually get it? Monetary policy in the United States is controlled by Congress; which writes the budget and controls taxation, and the Federal Reserve – which regulates interest rates and the money supply.
The most obvious way the government can affect the money supply is to greatly increase spending and economic activity; which would lead to inflation and a weak dollar. The problem there is that any new spending will have to be approved by both Houses of Congress; a process that would take several months under optimum conditions.
Trump would also have to get a least some Democratic support to pass a massive spending package. That seems unlikely given present American political realities.
Another method would be new taxes; or increased taxes, perhaps in the form of the border adjustment scheme. That too would require Congressional approval and it would put on a collision course with his fellow Republicans many of whom hate all taxes.
Protectionist measures designed to make Chinese goods less competitive in the United States might have some effect. Those too would need Congressional support and they would face opposition from powerful interests including farmers, agribusiness and Big Retail.
Trump could take a page from Indian Prime Minister Naranda Modi’s playbook and attempt some sort of demonetization. He might try to stop or limit the printing of the $100 and $50 bills; or try to declare them worthless as Modi did with the 500 and 1,000 rupee notes.
One way Donald can justify this is to claim he is limiting the financing of terrorists and drug smugglers. Two groups that make wide use of $100 and $50 bills.
The danger for Trump here is nobody knows how Congress; or the American people, would react to such a move. Even though most Americans don’t use those bills, there is strong sentimental support for paper money; and deep suspicion of electronic banking, among some elements of the US electorate.
A more pragmatic solution would be to appoint new leadership at the Federal Reserve, America’s Central Bank. He can appoint some new members to the Fed’s Board of Governors and replace current Chairwoman Janet Yellen when her term ends in 2018. Even then Trump’s influence over would be limited because his opponents would still control the Board of Governors and the Five bank presidencies, Project Syndicate’s Nouriel Roubini pointed out last year.
The One Way Trump can weaken the Dollar
Strangely enough there is one way that Trump can quickly; and perhaps temporarily, weaken the dollar. He can pick up his phone and start Tweeting; traders and Mr. Market do pay attention to Donald’s Twitter feed.
The US Dollar Index fell 1.06% after Trump’s strong dollar statement to The Wall Street Journal, Business Insider reported. The Mexican peso moved 1% higher against the dollar Trump tweeted against that nation on January 27, 2017. A day before the Peso’s price tumbled after Trump cancelled his meeting with Mexican President Enrique Pena Nieto.
Trump can temporarily affect the currency markets but it is too early to tell if the effects are permanent. One likely outcome of such Twitter tantrums will be to send large amounts of cash flowing into hedging mechanisms such as gold and bitcoin. This means Trump might be able to affect gold and cryptocurrency prices.
A danger for Trump is that Mr. Market will start ignoring his tweets. If that happens he will need to find means of influencing monetary policy which will be far more difficult.
Changing U.S. monetary policy might be Donald Trump’s major contribution as president. It might also be his most difficult because of political and market realities.
Investors and traders definitely need to pay attention to Trump’s tweets and his actions on monetary policy. They might present dangers to investments and opportunities for shrewd speculators.