Donald Trump on Wednesday called on Jerome Powell and the other “boneheads” at the Fed to “get our interest rates down to ZERO, or less” so that America can “then start to refinance our debt”.
Although the president’s consternation with lower rates abroad dates back quite a while, he’s become obsessed with Germany of late. After getting wind of Berlin’s 30-year, zero coupon sale last month, an incredulous Trump opened his Twitter app to lament the injustice of it all.
“So Germany is paying Zero interest and is actually being paid to borrow money”, he tweeted, to 64 million people, the vast majority of whom likely hadn’t the faintest idea what he was talking about.
Read more: Trump Should Envy Germany’s Fiscal Discipline, Not Europe’s Monetary Freak Show
Trump’s Wednesday call for negative rates came just a week ahead of the Fed’s September meeting, which is widely expected to produce a second consecutive 25bp rate cut and a day ahead of the ECB’s decision to unveil a new stimulus package comprised of a variety of easing measures, much to the US president’s chagrin.
The irony is always the same – Trump is demanding negative rates while insisting the economy is booming, and the explicit call for the Fed to drop rates to zero so that Mnuchin can refinance the debt is exactly what you’d expect from a real estate developer-turned would-be banana republic autocrat.
“This is hardly surprising given his background in real estate”, Bloomberg’s Brian Chappatta wrote Friday, on the way to delivering a bit of a reality check as follows:
But the truth is, while the Fed has raised short-term interest rates, overall borrowing costs for the US are barely different now from what they were at this time during Barack Obama’s first term as president… In fact, the interest rate on marketable Treasuries has averaged 2.26% so far during Trump’s presidency, less than the 2.42% average during Obama’s first term and comparable to the 2.21% rate throughout his eight years in office.
Suffice to say Trump isn’t interested in that because it involves math and facts, both of which the president considers to be exceptionally inconvenient.
One person who doesn’t agree that negative rates are a good idea is Larry Kudlow.
“The Europe story, all this super easy money, zero and negative rates. You know, if it was going to work it would have worked”, he told reporters in Baltimore on Friday. “And it’s not worked”.
Larry didn’t say what he meant by “work”, but if he means boost inflation and generate robust growth, his assessment is correct. Europe looks to be succumbing to “Japanification”.
Kudlow went further. “Easy money, you can print as much money as you want”, he mused. “It never works and it won’t work this time either”.
Thanks, Larry! Have you told your boss? Because judging by his Twitter activity, he hasn’t gotten the message.
Incidentally, another person who has spoken out about the deleterious effects of negative rates is Trump Fed pick Judy Shelton.
“What we’ve seen is central banks trying too hard [and they’ve] engineered us right into a negative rate scenario which completely undermines the idea of having faith in the future which is the very virtue of capitalism”, Judy told Rick Santelli in July.
Again, one wonders if all of these very “reasonable”, “sensible” people have mentioned this to the man in the Oval Office. Somehow, we doubt it.
Trump is a hedgehog. He knows only one thing: borrow as much money as you can, at the lowest possible rate, and service the debt until you can’t. Then declare bankruptcy. Wash, rinse, and repeat.
A world of Catch-22 conundrums, caught between real yields and nominal, mixed with the chaos of trump tweets:
Neo-Fisherian denial will tend to produce inflation lower than central banks’ inflation targets and nominal interest rates that are at central banks’ effective lower bounds–the low-inflation policy trap. But what of it? There are no good reasons to think that, for example, 0 percent inflation is worse than 2 percent inflation, as long as inflation remains predictable. But “permazero” damages the hard-won credibility of central banks if they claim to be able to produce 2 percent inflation consistently, yet fail to do so. As well, a central bank stuck in a low-inflation policy trap with a zero nominal interest rate has no tools to use, other than unconventional ones, if a recession unfolds. In such circumstances, a central bank that is concerned with stabilization–in the case of the Fed, concerned with fulfilling its “maximum employment” mandate–cannot cut interest rates. And we know that a central bank stuck in a low-inflation trap and wedded to conventional wisdom resorts to unconventional monetary policies, which are potentially ineffective and still poorly understood.
https://www.stlouisfed.org/publications/regional-economist/july-2016/neo-fisherism-a-radical-idea-or-the-most-obvious-solution-to-the-low-inflation-problem
What Larry meant to say is that his boss is a bonehead.