Trump's Monetary Policy Desires: An Economic Examination

 President Trump's monetary policy analysis is characterized by three broad policy desires which, according to the sources, are not as unconventional as conventional wisdom often suggests. The analysis accompanying these desires delves into the complexity of monetary theory, the role of the Federal Reserve, and the economic impact of reserve currency status.

The three broad desires are:

1. Lower Interest Rates

Trump desires lower interest rates, partly with the objective of reducing interest costs on the national debt.

Analysis of Low Interest Rates and Inflation:

The standard counter-argument is that lower interest rates inevitably lead to immediate inflation. However, the sources present a mixed and complex analysis regarding this link:

• Empirical Estimates: The best empirical estimates suggest that lower interest rates result in either no or slightly lower inflation for about a year, followed by slightly higher inflation after two or three years. Crucially, this response is described as "barely significant statistically". Since the unexpected rate hikes studied in these estimates typically fade within a year, they offer limited insight into the effect of persistently lower interest rates.
• Theoretical Models: Mainstream, or "new Keynesian," economic theory suggests that a permanently lower interest rate will eventually lower inflation, provided that fiscal policy remains constant, although inflation may rise temporarily. The source notes that this is an unsettling implication for the theory's generally center-left practitioners.
• Historical Record: The historical record is mixed. Inflation remained absent during a decade of near-zero interest rates in the U.S., and for three decades in Japan, which seems to confirm the theoretical stability of inflation with a fixed interest rate. However, low interest rates that financed large government deficits have contributed to inflation in many countries. Low interest rates that occurred in response to "supply" shocks (such as in the 1970s and 2020s) coincided with inflation, but the exact effect remains murky.
• The source concludes that economists do not know with certainty just if, how, under what circumstances, or how quickly low interest rates lead to inflation.

2. Reduced Federal Reserve Independence and Increased Accountability

The second desire is for the Federal Reserve to be less independent and subject to greater democratic accountability.

Context and Analysis of Independence:

The argument for reducing independence stems from the observation that the Fed has vastly expanded its scope of operations. The Fed's actions are described as political, crossing over into fiscal policy and credit allocation, including propping up asset prices, monetizing debt, channeling credit, directing banks, and straying into areas like climate and inequality. Furthermore, the Fed has not had a reckoning with its institutional failures, such as 10% inflation and repeated bailouts.

The source argues that independence is not an absolute virtue. Since the U.S. constitutional order does not include completely independent officials who can print money and regulate banks as they wish, discussion of reform is reasonable. Two pathways are presented:

1. Making the Fed more "democratically accountable" (which is seen as "politically influenced" when the opposing party is in power).
2. Reforming the Fed to have a narrow, enforced, and accountable mandate, allowing it to remain independent (favored by small-government advocates).

Commentary on Accountability:

The discussion section notes that the demand for political accountability, when coming from the Trump administration, is viewed by some as a 'ruse de guerre'. Successive legislative acts since the Truman administration have repeatedly restated and even increased the degree of the Fed's independence. Some commentary suggests that the main problem with reducing the Fed's independence currently is Trump himself, citing his changing opinions, aversion to the truth, and self-dealing.

3. Critique of "Exorbitant Privilege"

The third desire focuses on challenging the premise of "exorbitant privilege" or "reserve currency status," arguing that the fact that the world wants to hold U.S. money and debt—thereby sending us goods in return—is damaging to the U.S..

Analysis of Reserve Currency Status:

While the consensus view suggests that receiving this bounty merits a "nice thank-you note," the source argues this strategy carries significant downsides.

• The Resource Curse Analogy: The situation is compared to the "resource curse" that affects producers of vital commodities. Historically, Spain and Portugal received a similar bounty when they acquired gold and silver from the Americas, using it to buy consumer goods, which ultimately caused their domestic industries to languish and resulted in poverty. The implication is that Switzerland, by contrast, has remained productive by refusing the world's financial offer.
• Consumption vs. Investment: The basic point that saving and investing is preferable to borrowing and consuming applies to both a family and an economy. In the U.S. case, the core issue is that the bounty derived from the reserve currency status was consumed rather than invested. This choice is driven by government deficits financing consumption, combined with legal, tax, and regulatory barriers that limit the profitability of private investment.
• The source notes that while "neomercantilists have a little point buried in a heap of fallacies," there is some merit to the basic idea worthy of examination. However, the sources suggest that policies like tariffs, capital controls, securities taxes, and industrial policy would ultimately worsen matters.

In sum, the sources analyze these three policy desires—for lower rates, political accountability, and a shift away from consumption financed by reserve currency status—by presenting evidence and theories suggesting that the traditional consensus view opposing these desires may be overly simplified or uncertain.

The discussion regarding lower interest rates and inflation is central to President Trump's monetary policy analysis, which is one of his three broad policy desires. The stated goal for desiring lower interest rates is partly to reduce interest costs on the national debt.

The sources argue that Trump's desires for monetary affairs aren’t as crazy as conventional wisdom portrays, particularly concerning the complex relationship between interest rates and inflation.

The Standard Response vs. Economic Uncertainty

The conventional or "standard response" to the desire for lower interest rates is that they will quickly lead to more inflation. However, the sources emphasize that the economic consensus regarding this relationship is uncertain, stating that economists do not know with certainty just if, how, under what circumstances or how quickly low interest rates lead to inflation.

The analysis provided to challenge the standard response draws on empirical estimates, theoretical models, and the historical record:

1. Empirical Estimates

The best empirical estimates concerning interest rate changes and inflation show a complex, staggered, and statistically weak response:

• Lower interest rates are found to lead to no or slightly lower inflation for about a year or so.
• This is followed by slightly higher inflation after two or three years.
• Crucially, this measured response is described as "barely significant statistically".
• Since the unexpected interest rate hikes studied in these estimates typically fade within a year or so, the findings say little about persistently lower interest rates.

2. Theoretical Models

Mainstream, or "new Keynesian," economic theory surprisingly suggests that a permanently lower interest rate will eventually lower inflation, provided that fiscal policy (government spending and taxation) is held constant.

• Although inflation may temporarily rise, the permanent result is lower inflation according to the models.
• The source notes that this is an "unsettling implication" for the theory's largely center-left practitioners.
• The proposition, despite potentially contradicting decades of consensus theory, bears consideration if it is reflected in the equations of the models themselves.

3. Historical Record

The historical record concerning low rates and inflation is described as mixed:

• The fact that inflation went nowhere over a decade of near-zero interest rates in the U.S. and for three decades in Japan seems to confirm the theoretical view that inflation is stable with a fixed interest rate.
• However, low interest rates that financed large deficits contributed to inflation in many countries. The record is less clear if a government does not expand fiscal policy.
• Low interest rates that occurred in response to “supply” shocks (such as during the 1970s and 2020s) coincided with inflation, but the exact effect of the low rates and other responses is murky.

Context within Trump’s Broader Desires

The desire for lower interest rates is the first of the three policy desires identified in the sources. The overall assessment is that there is some merit to the basic point regarding low rates that is worthy of examination and not immediate disdain.

The other two broad desires that frame this discussion include:

1. The Federal Reserve should be less independent and subject to more democratic accountability.
2. The "exorbitant privilege" or "reserve currency status" damages the U.S. by incentivizing consumption over investment.

The sources present the analysis of low rates and inflation as part of a broader critique suggesting that conventional views on monetary policy and central bank independence may be oversimplified or scientifically unsupported.

The issue of Federal Reserve Independence and Accountability is the second of President Trump's three broad policy desires regarding monetary affairs. While many in the policy world are "aghast," the sources suggest that these desires for monetary affairs aren’t as crazy as conventional wisdom portrays.

Trump's desire is for the Federal Reserve to be less independent and subject to more democratic accountability.

The Rationale for Challenging Independence

The fundamental argument supporting this desire stems from the perceived expansion of the Federal Reserve’s role and its institutional failures:

1. Expanded Scope and Political Actions: The Fed is described as having vastly expanded its scope of operations. These actions are inherently political and cross over into fiscal policy and credit allocation. Examples include:

   • Propping up asset prices.
   • Monetizing debt.
   • Channeling credit and directing banks on how to invest.
   • Straying into areas such as climate and inequality.
   • Denying whole business models, such as narrow banks and segregated accounts.

2. Institutional Failures: The Fed has had no reckoning with its great institutional failures, including the instance of 10% inflation and repeated bailouts.

The Debate on Reform and Accountability

The sources affirm that independence isn’t an absolute virtue. Since the U.S. constitutional order does not include completely independent officials who can print money and regulate banks as they wish, it is reasonable to discuss reform.

The discussion outlines two potential pathways for reforming the Fed in light of its expanded power:

1. Democratic Accountability: Making the Fed more “democratically accountable,” though the sources note that this is the same thing as being “politically influenced” when the opposing party is in power.
2. Narrow Mandate: Reforming the Fed to have a narrow, enforced, and accountable mandate so that it can remain independent. A small-government advocate favors this latter option.

The sources conclude that simply ignoring the demands for change by "pulling up the drawbridge, hoisting the 'independence' flag, and pouring boiling scorn on the barbarians at the gate" isn’t a viable response.

Counterarguments and Commentary

Commentary within the sources provides historical context and critiques the motivation behind the demand for greater accountability:

• Historical Legislation: Contrary to the perception that the Fed expanded its powers unilaterally, some observers note that the regulatory expansion (accretions) post-WWII resulted from Congressional acts passed due to earlier financial crises. Furthermore, successive acts of legislation since the Truman administration have without variation restated the independence of the FRB and increased the degree of its independence. This suggests that political accountability is traditionally addressed through Congress.
• Critique of Motives: The demand for political accountability, specifically coming from the Trump administration, is viewed by some as merely a 'ruse de guerre'.
• Critique of Character: A key problem with reducing the Fed's independence at this point in time is Trump himself, citing his tendency for opinions that change on a daily basis, his aversion to the truth, and his self-dealing. The Fed Board of Governors, by contrast, is described as having honest debate, making informed decisions, and being patriotic.

In the larger context of Trump's monetary desires, the call for reduced independence serves to scrutinize the Fed's role alongside the desire for lower interest rates and the critical perspective on the "exorbitant privilege" of reserve currency status.

President Trump's critique of the "Exorbitant Privilege" or "reserve currency status" represents the third of his three broad policy desires concerning monetary affairs. This desire argues that the fact that the world wants to hold U.S. money and buy U.S. debt, thereby sending the U.S. goods in return, is actually damaging to the country. The sources suggest that this desire, like his others, isn’t as crazy as conventional wisdom portrays.

The Core Critique and Historical Analogy

In the consensus view, if the world offers the U.S. money and debt in exchange for consumer goods (the "bounty"), the appropriate response is simply a "nice thank-you note". However, the critique asserts that this strategy carries significant downsides.

The sources draw a powerful historical analogy, comparing the reserve currency status to the "resource curse" that affects producers of oil and other vital commodities.

• Spain and Portugal: These nations received a similar financial bounty when they found gold and silver in the Americas. They used this wealth to buy consumer goods, which caused their domestic industries to languish and eventually end up poor.
• Switzerland: In contrast, the sources point to Switzerland, which refuses the world’s offer and remains productive.

The Central Problem: Consumption vs. Investment

The basic economic premise supporting the critique is that saving and investing is preferable to borrowing and consuming for both an economy and a family.

The core issue regarding the U.S. reserve currency status is that the resulting bounty was consumed rather than invested. This choice is not necessarily inherent to the reserve currency status itself but is driven by internal policy flaws:

• Government deficits that are used to finance consumption.
• Legal, tax, and regulatory barriers that make private investment less profitable.

While the sources acknowledge that "neomercantilists have a little point buried in a heap of fallacies," there is some merit to the basic idea that warrants examination and not immediate disdain.

Policy Implications

The sources warn against common policy interventions often associated with neomercantilist or protectionist views, arguing that policies such as tariffs, capital controls, securities taxes, and industrial policy will all make matters worse. Instead, the solution should be to "Get out of the way" and remove the barriers hindering productive investment.

Context within Trump’s Broader Monetary Analysis

The critique of exorbitant privilege is intertwined with Trump's other policy desires:

1. Lower Interest Rates: Desired partly to lower interest costs on the national debt.
2. Reduced Federal Reserve Independence: Seeking greater democratic accountability for the Fed's expanded scope of operations.

In all three cases, the sources conclude that the basic points raised are worthy of examination and should not be met with immediate disdain.