Trump’s Assault On The Fed Is China’s Problem
“You’re fired!” Asians once liked watching Donald Trump yell these words at reality-show contestants as much as anyone. That, of course, was back in Trump’s pre-presidency days hosting “The Apprentice.”
This region will be far less entertained if Trump yells his signature phrase at Federal Reserve leader Jerome Powell, making Asians a bit poorer in the process. Even if Trump doesn’t sack Powell, he’s now set on wrecking one of the world’s most respected institutions, one that has a starring role in Asia.
From Seoul to Jakarta, investors often care more about Fed decisions in Washington than by their own central banks. Blame it on Asia’s long and sordid history of pegging currencies to the dollar, a strategy that blew up in 1997 amid a regional financial crisis.
Since then, the dollar, for better or worse, has remained the financial system’s sun, around which all economies revolve. The Fed is often the force that keeps everyone in orbit–and the laws of economic gravity in check.
In today’s Washington, the Fed’s fierce independence makes it something of an immovable object to Trump’s unstoppable force. Since January 2017, Trump has done a number on U.S. institutions. First, the judiciary. Then, Congress and the media. Now, it’s the Powell Fed in the crosshairs. Last year, Trump veered into uncharted territory by publicly criticizing Powell’s rate hikes. The Fed, Trump said, has “gone crazy.”
More recently, Trump directed top economic advisor Lawrence Kudlow to demand a half-point rate cut–an unprecedented assault of the Fed’s autonomy. Worse, arguably, Trump nominated an unqualified crony to an open Fed board seat with a 14-year term. More political operative than credible economist, Stephen Moore has no business making monetary-policy calls than one of the “Apprentice” contestants Trump fired on-air.
“Moore,” says Nobel laureate Paul Krugman, “is manifestly, flamboyantly unqualified for the position.” It would be easy to dismiss this nomination as just part of Trump’s and his Republican Party’s “preference for hucksters over experts, even partisan experts.” But Asia’s trajectory is at risk if Moore and other Trump sycophants undermine the dollar and U.S. debt.
Founded in 1913, the Fed has 12 districts throughout the U.S. The last 22 years, though, have seen an extreme globalization of America’s central bank. During Asia’s crisis, then Fed Chairman Alan Greenspan wasn’t exaggerating when he called the U.S. an “oasis of prosperity.” Officials in Bangkok, Jakarta, Kuala Lumpur and Seoul would soon agree. America’s voracious demand for Asian goods helped the region recover.
Since then, Asia became the Fed’s de facto 13th district, Latin America the 14th, Russia the 15th, and so on. China, of course, could be a ward all its own. But what the Fed giveth with rate cuts like those under Greenspan two decades ago, its tightening moves taketh away.
Just the mere risk of Fed rate hikes in 2013 kicked off a “taper tantrum” that slammed Indonesia, India, Turkey and other emerging nations. Nine tightening steps since December 2015 caused plenty of turmoil for China and Southeast Asia. They’ve also triggered Trump’s White House.
In December, Trump reportedly discussed firing Powell. Such a step would devastate confidence in the U.S. financial system. It also would slam the dollar and raise yields on U.S. Treasuries.
That’s a three-fold threat to Asia. One is how the resulting turmoil hits global gross domestic product. Two, a sharply weaker dollar would toss sand into Asia’s all-important export engine. Three, it would put at risk $3 trillion-plus of U.S. Treasury securities sitting on Asian central bank balance sheets.
The earlier-mentioned Moore nomination raises the stakes for Asia’s foreign-exchange reserves. It’s not just that he’s unqualified. “The real reason,” argues Washington Post economic columnist Robert Samuelson, “is that, if confirmed by the Senate, Moore could become the Fed chairman–and that is a scary possibility. It could spawn a global financial calamity.”
The 2008 “Lehman shock,” remember, had its roots in the easy-money, all-regulations-are-bad ethos espoused by Moore and his ilk. The same with the magical-thinking argument that Trump’s giant $1.5 trillion tax cut would pay for itself. Hardly.
American snafus go global in an instant, particularly in district No. 13. Asia’s real vulnerability is China, who’s stability owes more to the Fed than President Xi Jinping’s government admits. The Fed’s post-Lehman liquidity surge helped keep China afloat, stabilizing global demand with zero interest rates.
In the summer of 2015, as Shanghai stocks crashed, then-Fed Chair Janet Yellen’s team delayed a rate hike. That gave Xi’s team breathing room to get a handle on the chaos.
As the trade war shoulder-checks China, Xi’s team might feel better if the Fed’s independence weren’t under Trumpian attack. It’s not like the U.S. Treasury is the adult in the room here. Not when it’s run by Trump’s Steven Mnuchin, a former Hollywood producer with credits like Suicide Squad and The LEGO Batman Movie to his name. Mnuchin said Trump’s budget-busting tax cut would trickle down to the middle class. Hardly.
From the first days of the Trump era, Krugman warned a “Trumpified” Fed would be disastrous for the developing world. As he wrote in October 2017 in his New York Times column, “one of American policy’s last remaining havens of competence and expertise will soon share in the general degradation. And won’t that be fun when the next crisis hits?”
Not for an Asian region hitched to a dollar that’s about to get trumped in frightening ways.