Trump Doesn’t Understand Economics, Part 1847

It became painfully obvious during the 2016 campaign that Donald Trump, despite going to a good business school, doesn’t have the first clue about economics. Now he’s criticizing the Federal Reserve Board for raising interest rates and complaining about the strength of the dollar after taking steps that made that inevitable. Jared Bernstein, former chief economist for Joe Biden, explains why:

He’s annoyed that the Fed is raising rates and that the stronger dollar is making our exports less competitive.

And yet, both his tax cuts and trade war are contributing to these dynamics. You juice the economy at full employment with a deficit-financed, $2 trillion tax cut, and the Fed’s naturally going to ramp up their concerns about overheating. At the same time, the extra fiscal impulse is leading to stronger U.S. growth, relative to that of our trading partners, and that, too, puts pressure on both the dollar and the trade deficit. Meanwhile, tariffs tend to reduce the circulation of dollars in foreign exchange markets, yet another pressuring factor of the value of the greenback.

Trump complained in a tweet about how it’s not a “level playing field,” but currency markets never are. They never can be, because the value of a nation’s currency is measured relative to other currencies. But the reality is that both a strong dollar and a weak dollar have advantages and disadvantages. A strong dollar does make the trade deficit look worse, but the trade deficit, despite Trump’s ignorant blather on the subject, is not really a bad thing. And at the same time that he complains about the trade deficit, he brags every time a big company makes an investment in the United States. Hey Donald, guess what attracts that investment? A strong dollar.

He doesn’t understand how either deficits or debt (treasury securities) work. He doesn’t understand that a bond used to finance a private development project, or even a joint public/private municipal development, is entirely different from a bond sold to finance the federal budget. He thinks you can just renegotiate what you owe to the bondholders and settle for less than the face value of the bonds, and you can in private business. If you do that with T bills, you get much higher interest rates, which reduces investment and weakens the dollar by making it less safe as a reserve currency (and probably plunge the world economy into a recession). It’s like we elected your ignorant, drunk uncle who thinks he knows everything and doesn’t know anything at all.

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