This claim caught my eye:
If U.S. President Donald Trump is unable to bring China to submission with tariffs, it’s possible and “highly likely” his administration would launch a currency war, experts tell Yahoo Finance.
Having already placed tariffs on $34 billion worth of Chinese goods exported to the U.S. and threatening to add tariffs to at least $400 billion more, some currency analysts believe Trump could move to devalue the dollar in a bid to further punish China and help U.S. companies gain an edge.
“As this lingers on and we keep increasing the level of tariffs where we get to a point where it really escalates I think it’s highly likely that the U.S. Treasury would then move to devalue the dollar and use it as a tool in this war,” said Keith Bliss, executive director of DriveWealth in New York. . . .
J.P. Morgan Chief Economist Michael Feroli said that while it’s not his base case, he and his team “cannot rule out a turn toward a more interventionist currency policy, particularly since the current Administration has, at times, hinted at a preference for dollar weakness or objected to perceived Chinese currency manipulation.”
I’m not sure if the administration realizes this, but they would lose any currency war with China. That’s because Xi Jinping can easily reduce the value of the Chinese yuan, while the Treasury has relatively little control over the value of the US dollar. Any attempt to reduce the value of the dollar will be mostly offset by the Fed, in an attempt to keep inflation close to 2%.
I use scare quotes in the title of this post because losing a currency war might actually be good for the US. It’s a currency war victory (such as in the early 1970s with Nixon and Burns) that we should fear.
PS. Off topic, but Turkish leader Erdogan went on an infrastructure building spree with borrowed money and encouraged the central bank to hold interest rates below the Wicksellian equilibrium level. Quiz for my readers: What other major world leader has tried (but thus far failed) to get his government to go down that road?
READER COMMENTS
David S
Aug 11 2018 at 10:19pm
I guess I’m not understanding this – if the administration devalues the currency (which is not actually something I believe the President can even do in the US), surely the only way to accomplish that would be through the Fed? So it seems silly to say the Fed would prevent it, if it would take action by the Fed to accomplish it anyway. Obviously, if you devalue the currency inflation will go crazy by definition, right?
Thaomas
Aug 13 2018 at 10:34am
The treasury can borrow fro,m the fed to sell dollars in the market which would push down the dollar at least in the short run. Why this would “punish” China is another matter and why the Trump administration would want to do this is still another.
Would such a “devaluation” drive inflation crazy? No, not unless there was a change in Fed policy to keep a 2% pa inflation ceiling.
If the Administration wants to decrease the trade deficit (although why that would be desirable is a question) the way to do so would be to reduce the federal deficit by say, reducing military spending, cutting back on ICE deportations, not compensating agricultural interests for the fall in exports resulting from the trade war, and increasing taxes on high income individuals.
Hazel Meade
Aug 14 2018 at 9:54am
You last paragraph appears to confuse the trade deficit with the budget deficit.
Michael Sandifer
Aug 11 2018 at 11:41pm
Scott,
I’m curious as to how you’d feel about Congress and Trump enacting a law that increased the savings rate, hence lowering the trade deficit? I don’t think we should care about the savings rate or trade deficit, unless we have policies distorting the economy at the expense of efficiency, but what’s your take?
Benjamin Cole
Aug 11 2018 at 11:59pm
The Monetary Authority of Singapore pegs the Singapore dollar to a basket of currencies, but that basket is a secret.
Is that is good monetary policy? Seems to work.
The Reaganauts also declared if not “currency war,” then a currency “state police action.” See the “Plaza Accord,” the Reagan plan to devalue to US dollar, after which the value of the US dollar fell by 50% against the yen and by a large amount against the German mark.
Allan Meltzer, citing in part the Plaza Accord, termed the Reagan Administration monetary policy “incoherent,” and that was among the nicer euphemisms.
Oddly, after he left office, Reagan was not all that well-regarded in right-wing intellectual circles, for his many compromises on free-market ideologies. Milton Friedman said Reagan rivaled Hoover in protectionism. Reagan ran large federal deficits and appointed enough money-printers to the FOMC to outvote Volcker. Reagan also proposed placing the Fed into the Treasury Department (!).
https://www.nytimes.com/1982/09/18/us/reagan-suggests-tighter-control-of-central-bank.html
On the intervening decades, a powerful set of hagiographers stepped in, and burnished the Reagan image. I suspect this is because Nixon was not burnishable, Eisenhower (my favorite) was too far in the past, Bush Sr. was a total bore, and Bush jr’s presidency ended in two unwinnable wars and economic collapse.
Reagan is left standing, and as an accomplished actor, gave great speeches.
Trump’s speeches are perfectly dreadful, proving Trump cannot learn even useful skills, like acting.
Kurt Schuler
Aug 12 2018 at 10:58am
Scott, do you think a devaluation by China in the circumstances you discuss would take it closer to or farther away from monetary equilibrium, or is it too hard to tell?
Benjamin Cole, I don’t know how old you are, so perhaps you have no adult memory of the Reagan administration. For those of us who do, there was the matter of winning the Cold War, which was a big deal, possibly the biggest political event of the century. Reagan didn’t do it alone and doesn’t deserve all the credit, but he does deserve a lot. Hagiography is almost not enough of a reward, though I will remember Reagan warts and all.
Meets
Aug 13 2018 at 12:45pm
Is the answer Venezuela?
P Burgos
Aug 29 2018 at 10:12am
My other guess would be China (right now). They have been on an infrastructure building spree, but I think that Xi is trying to get the country to build even more infrastructure, both at home and abroad, and having somewhat more of a difficult time than expected.
Hazel Meade
Aug 14 2018 at 9:52am
I think I’ve commented here before that a currency devaluation would be preferable to a trade war, because it might have a silver lining effect of allowing the US to get some of our public debt off the balance sheet. it also would be more likely to “work” in the sense of reducing trade deficits, which we know is irrelevant but it would let the Trump administration declare victory and stop messing around with the economy.
LK Beland
Aug 15 2018 at 3:44pm
Since Yellen left the Fed, the Fed has shown less willingness to counteract fiscal policy in order to stabilize ngdp growth–i.e. the growth rate increased from 4% to almost 5%.
If Mnuchin was ordered to mint Trillion Dollar coins and trade them for foreign currency, I’m not certain that the Fed would completely offset the Treasury’s actions. Trump could very well “win” a trade war, in part because he had enough “vision” to let Yellen go.
LK Beland
Aug 15 2018 at 3:45pm
Trump could very well “win” a **currency** war, in part because he had enough “vision” to let Yellen go.
Gordon
Aug 15 2018 at 9:46pm
BTW Scott, I was wondering if you had noticed that China had 4 consecutive months of decline in inflation from March to June. I’m assuming this is the reason why the Chinese central bank has sought to devalue the yuan. And as we’ve seen in the past, Peter Navarro has no understanding of currency devaluation nor the difference between the nominal and real exchange rates. I strongly suspect that Trump’s ranting about the change in the nominal exchange rate is driven by Navarro but Trump has no clue that Navarro is completely incompetent.
Scott Sumner
Aug 15 2018 at 10:14pm
Michael, The government currently strongly discourages saving. They should stop doing so.
Kurt, I haven’t followed China closely, but they currently seem to be doing a good job of keeping NGDP growth fairly stable.
Hazel, Currency devaluation would not reduce the trade deficit.
LK, Too soon to say, as NGDP jumps around a lot. I do believe they will offset fiscal policy.
Gordon, Good point.
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