Trump Asks the Fed Start a Currency War With China

-edited

To win his trade war, Trump seeks a currency war.

Pump the Money

China will be pumping money into their system and probably reducing interest rates, as always, in order to make up for the business they are, and will be, losing. If the Federal Reserve ever did a “match,” it would be game over, we win! In any event, China wants a deal!

Lead image from Hedgeye with my anecdote in white.

Another Routine Lie

For starters, note the routine lie in Trump's Tweet. If China wanted a deal we would have one. More accurately, both sides have to want a deal.

But wanting a deal and demanding terms the other side cannot accept is an admission you really don't want a deal.

Currency War

The important point is not the routine lie which we expect daily from Trump, but rather his proposal for a currency war.

Trump explicitly stated he wants the Fed to pump money and cut rates to "match" China. That's a direct call for a currency war to debase the US dollar.

Manipulations - Two Means to an End

China pegs the yuan, allegedly keeping it undervalued.

But interest rate cuts are just another means to the same end. The US dollar is strong because the Fed is the only advanced nation that has been hiking. The ECB is still accumulating assets.

Interest rate and QE wars serve the same end as pegs, ceilings, and floors: competitive currency devaluation. Meanwhile, the manipulators (every nation) point the finger at China.

Why Now?

The key to Today's Tweet stems from today's import/export price report.

Agricultural Imports and Exports Synopsis

  • Agricultural Exports: The price index for agricultural exports decreased 1.5 percent in April following a 1.0-percent advance in March. The April decline was driven by a 17.2-percent decrease in vegetable prices and a 6.8-percent decline in fruit prices. A 2.6-percent drop in corn prices also contributed to the overall decline in April. Prices for agricultural exports fell 2.8 percent over the past year. The 12-month decrease was led by a 14.1-percent drop in soybean prices. Lower prices for fruit, cotton, nuts, meat, and corn also contributed to the over-the-year decline in agricultural export prices.
  • Foods, Feeds, and Beverages Imports: The price index for foods, feeds, and beverages rose 2.8 percent in April, the largest monthly advance since the index increased 3.1 percent in July 2016. The April advance was driven by higher prices for fruit, vegetables, and meat.

For details, please see Forecasters Miss Inflation Targets By a Mile: Steep Decline in Ag Export Prices.

Message Not Heard

Things got so serious in April that Iowa Senator Chuck Grassley warned "Trump’s Tariffs End or His Trade Deal Dies".

Trump did not heed Grassley's message.

Instead, Trump wants a currency war and a weak dollar to boost exports and reduce imports.

Soybeans at 2008 Lows

Soybean prices have been falling since 2012. Don't blame Trump for that. But his tariff tactics and China's retaliatory agriculture tariffs put the screws to the US.

See-Through Bluster

That Tweet is so preposterous, everyone admits it, even Trump's own advisers. Note that Kudlow Admits the Obvious: Trump is Wrong.

Much like a playground bully coward, Trump's preposterous see-though bluster unmasks his fears.

And today's import export report pinpoints the weakness Trump wants to hide: agricultural states in the upcoming election.

Stop the Lies

On May 10, I asked Dear President Trump: Stop the Damn Trade Lies.

But Trump is doubling and tripling down.

Where Does It stop?

With Trump it hasn't and perhaps won't.

Trump's scorecard is a big zero on: USMCA, TPP, China, and the EU.

Meanwhile we have threats of escalating trade wars with a new threat of currency wars on top of it.

Good luck with that.

Mike "Mish" Shedlock

Comments
No. 1-22
Latkes
Latkes

With declining inflation, Trump may get his rate cut. Fed wouldn't be lying about their inflation targets, right?

Mish
Mish

Editor

"With declining inflation, Trump may get his rate cut. Fed wouldn't be lying about their inflation targets, right?"

Eventually yes, if my recession call is accurate. Trump wants 75 basis points now and a currency war.

The Fed was behind the curve so long that that might actually be in front of it. Another bubble bust even is in the cards

Realist
Realist

Desperation time for Trump. When does he threaten China with nukes in order to get a good deal? Pathetic.

Carl_R
Carl_R

My crystal ball is murky. The tariff will surely lead to some price increases, which will push up inflation. Yet, it will also lead to a decline in economic activity, which tends to lead to a recession and deflation. Similarly, the trade war is leading to falling ag prices, which also leads to deflation.

bradw2k
bradw2k

I think Trump's reasoning on twitter is just a story for those who will buy it or at least argue about it. He doesn't actually care about wonky reasons, calculations, or right-versus-wrong, because in his world there is only one rule that matters: the biggest bully wins and everyone else loses. Trump foresees China becoming more powerful than the US, and he is desperate to stop that -- so he is trying to scratch their eyes out even if the US gets hurt in the process.