Trump would plunge the US into crisis if he carried out his latest bizarre threat
Last Friday Donald Trump threatened to stop all trade with countries that have trade surpluses with the US … unless the US Federal Reserve Board cuts interest rates.
It is doubtful whether Trump has the power to carry out that threat or whether the Fed would take any notice of it. He also doesn’t appear to appreciate that, if he were able to do what he is threatened to do, the US would almost certainly be plunged into recession, if not depression.
Trump posted the bizarre threat on Truth Social (naturally) after payroll numbers showed a better than expected number of jobs were added in August.
“Lower the interest rates because the U.S.A. is a much stronger credit than it was just a short time ago! A STRONG COUNTRY MEANS A LOWER INTEREST RATE – IT’S A BETTER CREDIT…VERY SIMPLE!,” he wrote.
“We should have the LOWEST RATE of any country in the World, like the ‘old days’,” he said.
The US, with $US40 trillion ($55.5 trillion) of government debt, a fiscal deficit of about 6 per cent of GDP and an inflation rate of 3.7 per cent isn’t a strong credit – it is a rapidly deteriorating one – which is why investors in US Treasury securities have been pushing US bond yields up to near six-year highs.
The Trump administration’s profligacy – he’s added more than $US3.8 trillion to the debt in less than 18 months – his inflation generating trade war on the rest of the world and his real war in the Middle East have added risk premiums to the yields on US government securities.
“LOWER THE RATE OR I’LL STOP TRADING WITH COUNTRIES WITH WHICH WE HAVE A DEFICIT, which the U.S. Supreme Court, in its ridiculous and very costly Tariff decision, strongly acknowledged “the President” has an absolute right to do. IT’S BETTER THAN TARIFFS! The Fed board, with its great new leader, must get smart — – be PATRIOTS for a change. High interest rates put the U.S.A. at a very unfair disadvantage, and I won’t allow that to happen,” he wrote.
It’s not at all clear that Trump has the power to do what he is threatening.
The US Supreme Court decision in February that he cites and which ruled his “Liberation Day” tariffs were illegal dealt with a particular piece of legislation – the International Emergency Economic Powers Act – and taxing powers, rather than deciding any questions about the authority the president might have under it or other legislation to simply ban trade with another nation.
The legal status of the replacement tariffs Trump has subsequently announced (based on the questionable grounds of countries not doing enough to combat slave labour) is being challenged in the courts and has yet to be decided.
The presidential authority over trade is one delegated, and limited, by Congress and the power to ban trade with another country is reserved for declared national emergencies. The Trump administration might be accelerating the US economy towards a financial and economic crisis and national emergency, but it’s not there yet.
It would face a national emergency if Trump were to cut trade with the more than 90 countries with which it has a goods and services trade deficit or the more than 130 countries with which it has a goods trade deficit.
Last year the US goods trade deficit (Trump never includes America’s $US340 billion services surplus) was $US1.2 trillion.
Given that those countries that have a trade surplus with the US would probably also import products from the US, – the value of their exports would be greater than their trade surpluses – the value of all the trade affected by a ban would be considerably higher.
What would happen if he stopped all trading with those surplus countries?
The US dollar’s role as the world’s reserve currency and the centrality of its financial markets, particularly its bond market, to the world financial system promotes imports of both goods and capital and effectively lowers their cost for US consumers and businesses while making its exports less competitive.
The US consumes more than its poor savings rate can finance. It borrows from the rest of the world to complement its savings and help finance investment and consumption, with the dollar’s singular role lowering the cost of those borrowings.
The US imports products that it either doesn’t have or can’t make at sufficient scale itself or where the imported products are cheaper or are of greater quality or consumer appeal than those it can produce domestically.
Some of its imports are components in the global supply chains for products or equipment that are largely manufactured or assembled in the US.
If the US were to shut off imports with those countries that have trade surpluses with it, it wouldn’t have the ability to quickly replace them with domestic production.
It wouldn’t, for instance, be able to replace its imports of coffee, bananas, cocoa, tomatoes and other foods immediately, if ever, and it doesn’t have the domestic deposits of rare earths, or copper, or even semiconductors to meet its domestic demand.
So there would be severe shortages of some products and massive increases in the prices of those products, and others.
Manufacturing plants would close, and jobs would disappear because companies would lose access to global supply chains for the raw resources and intermediate products they rely on.
Almost inevitably, there’d be an exodus of capital from US financial markets.
There would be a severe spike in the inflation rate – and interest rates – and a cost-of-living crisis that would dwarf the one Americans are now experiencing. Recession, or something far worse, would be inevitable.
The impact could be exacerbated if other countries (which would also be adversely affected, but at least would be able to trade with each other) were to retaliate and block US exports. Regardless, a global recession would be likely.
In the longer term, it is conceivable that Trump’s bans on trade might generate more US home-shoring of production, but that wouldn’t moderate the near term shock and, in any event, wouldn’t fill in the vacuum left by the ban on goods that the US doesn’t have the resources to produce.
It is improbable that the Fed which, unlike the administration, is staffed by a raft of people with economic expertise, will pay any heed to Trump’s “threat.”
Trade is beyond the Fed’s dual mandate of controlling inflation and maximising jobs and, in any case, the central bankers would recognise the level of destruction and self-harm that execution of Trump’s threat would generate. Patriotism, for the Fed’s governors, involves trying to blunt the impact of Trump’s inflation-inducing policies.
The US would face a national emergency if Trump were to cut trade with the more than 90 countries with which it has a goods and services trade deficit or the more than 130 countries with which it has a goods trade deficit.
They’d also be acutely aware that while they might be able to provide the anchor point for the US yield curve – the federal funds rate – the rates that businesses and consumers actually pay are set by the market and, with the bond vigilantes re-emerging and bond yields spiking, their focus has to be on lowering the inflation rate.
Trump’s unhinged Truth Social post is a sign of the increased anxiety within the White House as the midterm elections loom.
He might be right to see those higher bond yields as a threat to Republicans and his presidential authority, but threatening a trade ban unless the Fed does as it’s told will only strengthen the Fed’s resolve to protect its independence and make bond investors even more conscious of the erratic character and economic illiteracy of the president and his policies and the risk, albeit remote, that he might actually try to do what he threatens.
