[!@#$%!]

this one is for the non-illiterates

https://www.washingtonpost.com/opini...ideas-collide/

Trump’s two worst economic ideas collide
Catherine Rampell

At 12:01 a.m. Friday, President Trump’s two worst economic ideas finally collided — and made each other even worse.

To be sure, there are a lot of terrible economic theories espoused by this president (tax cuts pay for themselves, government shutdowns are fun, scam artists should roam free, etc.). But the specific bad ideas I’m referring to are:

1. Trade wars are good and easy to win; and
2. It’s smart for the president to publicly bash the Federal Reserve.

Last fall, Trump began loudly complaining about the Fed’s interest rate hikes, in defiance of a multidecade-long policy for the White House to never comment on Fed decisions. The reason for this norm is clear: Central banks must be politically independent in both practice and perception in order to credibly commit to stable prices. If the public believes that politicians rather than independent technocrats control the printing press, inflation can easily spiral out of control. Lots of other countries throughout history (Venezuela, Argentina, pre-euro Italy) have served as cautionary tales.

But none of that mattered to Trump. He has been throwing tantrums about the Fed’s modest interest rate increases, claiming that they threaten both the U.S. economy and his presidency. At one point, there were even reports that Trump was considering taking the unprecedented and cataclysmic step of firing the Fed chair whom he appointed, Jerome H. Powell.

Markets paid attention. As it turns out, China did, too.

According to the Wall Street Journal, Beijing noticed Trump’s latest Fed-related outbursts and interpreted them as evidence that the president was freaked out about the underlying health of the U.S. economy. They suggested that he might be secretly desperate to make a deal, any deal, with China:

Originally Posted by wsj

Mr. Trump’s hectoring of Federal Reserve Chairman Jerome Powell to cut interest rates was seen in Beijing as evidence that the president thought the U.S. economy was more fragile than he claimed ...

An April 30 tweet, in which Mr. Trump coupled criticism of Mr. Powell with praise of Chinese economic policy, especially caught the eye of senior officials. “China is adding great stimulus to its economy while at the same time keeping interest rates low,” Mr. Trump tweeted. “Our Federal Reserve has incessantly lifted interest rates.”

“Why would you be constantly asking the Fed to lower rates if your economy is not turning weak,” said Mei Xinyu, an analyst at a think tank affiliated with China’s Commerce Ministry. If the U.S.’s resolve was weakening, the thinking in Beijing went, the U.S. would be more willing to cut a deal, even if Beijing hardened its positions.

In other words, our dealmaker in chief failed to realize that berating the Fed not only harms the long-run credibility of the central bank; it also hurt his near-term negotiating position with China.

After previously expressing a willingness to make serious concessions, China started playing hardball. Negotiations broke down, and then Trump responded by more than doubling existing tariffs on $200 billion of Chinese imports, from 10 percent to 25 percent, on Friday. He has also threatened to add tariffs to an additional $325 billion in Chinese goods that aren’t currently taxed.

Trump seems to believe that these tariffs are an end unto themselves because they are bringing “wealth” into the country by forcing China to pay “billions” into the U.S. Treasury:

Originally Posted by trump tweet

 

Talks with China continue in a very congenial manner - there is absolutely no need to rush - as Tariffs are NOW being paid to the United States by China of 25% on 250 Billion Dollars worth of goods & products. These massive payments go directly to the Treasury of the U.S....

This is, to be clear, incorrect.

Two separate studies by separate teams of all-star economists have found that 100 percent of the tariffs Trump has imposed so far are being passed along to, and paid by, U.S. consumers. One of those studies also found that workers in heavily Republican counties were being hurt the most by Trump’s trade wars, thanks to both the tariffs the president has imposed on our imports and the tit-for-tat retaliation other countries have slapped on our exports.

In other words, Trump’s Fed war has worsened his trade war. And in a particularly painful, the trade war might also soon heighten his Fed war.

After all, worsening trade tensions could put the Fed in a bind. An escalation in tariffs is likely to increase uncertainty, slow down business investment and hiring, and ultimately drag on growth. But it might also raise prices, since as those studies I cited note, the cost of the tariffs so far has been passed through to U.S. consumers.

That first effect — slowing growth — would nudge the Fed toward looser monetary policy. The second effect — higher inflation — could instead nudge the Fed toward tighter monetary policy. If a spike in inflation is clearly from a transitory shock (such as a one-time increase in tariffs), Fed officials should ignore it; but even so, it might be hard to tell in the moment what’s behind any given change in the pace of price growth.

Powell acknowledged these challenges when asked by Marketplace’s Kai Ryssdal last year about the tools available if trade wars slow the economy:

Originally Posted by marketplace

Powell: ... We essentially have our our interest rate tool, so if the economy weakens, we can lower interest rates. We can slow the pace at which we’re increasing them. There could be an effect on inflation. I wouldn’t want to, you know, dive into a bunch of hypotheticals here, but I would say, you can imagine situations which would be very challenging, where inflation is going up and the economy is weakening.

Ryssdal: And you’re lowering rates all the same, just waiting for stuff to get better.

Powell: Again, it’s not at all clear how it would evolve. Inflation could move up, just sort of a step up in the price level, which wouldn’t affect future inflation, and that would be something you tend to look through what we call a supply shock. But this will, it it’ll have to be a question that we think about. But again I don’t want to get into a lot of hypotheticals. I just think at this point we’re watching carefully and hoping for a good result.

Basically, escalating trade tensions could make the central bank’s already very difficult job even more difficult — and thereby provide even more fodder for Trump to complain about Fed policies.

The moral of the story: Neither trade wars nor Fed wars are good and easy to win. But especially not when fought simultaneously.