Trump Should Envy Germany’s Fiscal Discipline, Not Europe’s Monetary Freak Show

Trump Should Envy Germany’s Fiscal Discipline, Not Europe’s Monetary Freak Show

Lost in the cacophony of absurd self-aggrandizing on Wednesday was Donald Trump’s dismay upon learning about Germany’s historic zero coupon 30-year bond auction.

“So Germany is paying Zero interest and is actually being paid to borrow money”, an incredulous Trump tweeted of the sale.

At this point, it’s safe to say the president feels righteously aggrieved each and every time he stumbles on a statistic from the European fixed income market, where the list of mind-boggling factoids grows by the week.

Read more: Germany Makes History With ‘Failed’ Zero Coupon 30-Year Sale

Technically speaking, the German sale was a failure. It was uncovered, with Germany selling just €824 million of the €2 billion it was aiming at. Germany doesn’t see it as some kind of debacle, though, and neither did the market – bund yields moved a couple of basis points higher, but there was no hint on Wednesday that the sale marked a tipping point on the way to a tantrum. Germany’s debt agency wasn’t fazed, saying it “doesn’t view the sale as a failure [and] it doesn’t cause a problem as we can take the remainder on our own books”.

In any case, the nuance hardly matters to the US president. “The US, a far stronger and more important credit, is paying interest”, he lamented, using the news out of Germany as an excuse to lambast the Powell Fed anew. “[We] just stopped Quantitative Tightening”, he said, before bemoaning the “strongest Dollar in history” and asking, in all-caps, “WHERE IS THE FEDERAL RESERVE?”

To answer that latter question, the July Fed minutes suggest the Fed is trying to reconcile a desire to stick with the “mid-cycle adjustment” characterization of the first US rate cut in a decade with a bond market that simply isn’t inclined to let them get away with anything less than a full-on easing cycle.

Trump should be careful what he wishes for. There’s a reason why the entire German curve is negative. Inflation expectations have collapsed across the pond and growth is anemic. Whether he realizes it or not, Trump’s entire push for a weaker dollar is predicated on a desire to avoid importing the kind of disinflation that would risk pushing the US down the “Japanification” road.

‘There’s A Problem Here That Smacks Of Inevitability’: Recession Or No, The Fed Has To Cut Rates Aggressively

Of course, that’s part and parcel of why the president is demanding rate cuts and maligning the ECB’s arm’s-length targeting of the euro, but it’s worth remembering that if everyone chases down the same monetary rabbit hole, that simultaneous plunge is likely to cancel out in terms of the FX channel.

“When all central banks are easing, they are just offsetting each other in a zero-sum game”, BofA wrote last month. “They are in a bad equilibrium, making each other ineffective [and] they all end up with looser monetary policies, but without any change in their currencies”.

The result is inflated asset prices with no impact on the real economy.

It’s something of a catch-22 for Trump. If you cut rates in a bid to “match” other central banks, you might be able to avoid importing disinflation, but the very act of easing aggressively will probably prompt other central banks to ease even further. That’s the “race to the bottom” dynamic. If, on the other hand, you accept the futility of the whole thing from the outset and stick to your guns until the domestic economy shows concrete signs of rolling over, you risk unwanted currency strength in the meantime, which entails importing disinflation which will ultimately force you to ease policy later, at which point you’ll be hopelessly behind.

Perhaps the most amusing part of this is watching Trump slowly put the pieces together. As the picture becomes clearer to him, he’s beginning to understand that it’s all somewhat circular and that his adversarial trade policies are both forcing other countries to ease policy and preventing the dollar from weakening. Unable to accept his own culpability in the creation of what, at this point, is a kind of personal economic hell, Trump simply doubles down on demands for rate cuts, despite the very real possibility that those calls are beginning to undermine voter confidence in the economy.

Germany’s zero coupon debt sale was just another slap in the face for the president in the context of all these dynamics.

In an irony of ironies, the landmark German auction came on the same day that the CBO issued its latest budget forecasts for the US. The projections show that contrary to Trump’s tweet, America is not, in fact, “a far stronger credit” than Germany. Indeed, one of the biggest stories in markets this month is the rumor that Germany may finally be willing to relent on its “black zero” fiscal policy, which stands in stark contrast to the US, which is hemorrhaging red ink.

Meanwhile, in a testament to the fact that negative yields are, in the long-run, more trouble than they’re worth, German Finance Minister Olaf Scholz said the country is pondering a ban on negative interest rates for retail savers, assuming it’s consistent with the constitution. That’s according to FAZ.

How German lenders are supposed to make any money when the entire German curve is negative and passing along negative rates to depositors is illegal is anyone’s guess.


6 thoughts on “Trump Should Envy Germany’s Fiscal Discipline, Not Europe’s Monetary Freak Show

  1. H, have you listened to any of Peter Schiff’s recent podcasts? What do you think of the progression of events that he is predicting will happen…from what I’ve been hearing..this is what I think he is predicting 1) fed is going to cut rates to 0% 2) having 0% rates won’t be enough so they are going to do QE 4 which will be the latest QE yet… 3) This time inflation is going to show up causing bond yields to drop because with higher inflation binder holders will not want negative real yields. 4) Increase in yields will cause anyone loaded up on debt (including the government) to start to feel the pain. 5). Not know what else to do, Fed will do QE 5…which will just make the problem worse.. 6) Dollar will crash resulting in hyper inflation
    The way to protect yourself is to invest in precious metals and foreign assets

    1. I think i’ve mentioned this before, but I don’t listen to Peter Schiff. Peter may well be a nice enough guy, but he’s notorious for being a broken record. I’m not at all trying to dissuade you from listening to him (seriously, i’m not – he has a large following and there’s some value there), but he’s not somebody that I, personally, take very seriously.

      Also, the dollar is not going to crash resulting in hyperinflation. That is 100% ridiculous and even if it wasn’t, that should never be an excuse for buying gold. Gold is a portfolio hedge and an inverse real yields play (until it’s not, which is usually when real yields rise far enough, fast enough to spook risk assets, triggering a flight to safety, in which case gold can actually rally as real yields rise). That’s all gold is. It isn’t an “inflation hedge” — that’s a happy historical coincidence based solely on mankind’s affinity for it. There are a lot of things we have a finite supply of. Why aren’t they safe haven assets too? What about gold makes it any more intrinsically valuable than something else there’s not an infinite amount of?

      Getting back to the dollar “crash” thing, this is one subject I’ve been over a lot here… it’s not clear what a dollar “crash” would even mean, right? what would it “crash” against? the dollar can weaken, but the dollar cannot “crash”, really. it would have to “crash” against something else, and there is exactly nothing other than food, bullets and fuel (and not necessarily in that order) that people would want in a scenario where the dollar becomes worthless.

      that is, if the dollar ever really “crashes”, nobody is going to be worried about the price of a shiny, inert metal that can’t be eaten or burned for fuel (i.e., gold). and people are going to forget about crypto currencies literally overnight because if the dollar crashes, it means the entire world is probably on fire (figuratively or literally) and nobody is going to want to hear about your thumb drive with digital tokens on it.

      and i’m only half joking. if the dollar were to truly “crash”, then it’s all over. it’s time to clean out the local Gas-N-Go and fight your neighbors for what’s left on the shelves at Walmart and Sam’s. the only thing gold bars will be useful for is as a blunt object to beat somebody over the head with on the way to stealing their food and fuel.

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