The news is becoming increasing surreal. This morning I saw the following story in the Financial Times:
The euro sank by about 0.5 per cent against the dollar, reaching a low of just under $1.12, while European equities rose – Germany’s Dax index was up by 2 per cent on the day.
In response, Mr Trump suggested that Europe was engaging in currency manipulation.
“Mario Draghi just announced more stimulus could come, which immediately dropped the euro against the dollar, making it unfairly easier for them to compete against the USA,” the US president wrote on Twitter. “They have been getting away with this for years, along with China and others.”
He also commented on the rise in European share prices, by Tweeting: “German DAX way up due to stimulus remarks from Mario Draghi. Very unfair to the United States!”
Where to begin?
1. There are serious academic studies that consider currency manipulation, such as Fred Bergsten and Joe Gagnon’s recent book. But they make it very clear that domestic monetary policy aimed at achieving a country’s macroeconomic targets are certainly not the sort of currency manipulation that should concern other countries. In the Eurozone, the need for monetary stimulus is far greater than in the US, on both the inflation and the employment front. So there is no basis for criticizing Europe on those grounds. The Eurozone needs monetary stimulus.
2. President Trump has been asking for monetary stimulus in the US, despite the fact that we are far closer to hitting our targets.
3. Monetary stimulus in Europe actually helps the US economy. Trump doesn’t seem to realize that economics is not a zero sum game. Faster growth in Europe is good for America firms, Chinese firms, Japanese firms, and Brazilian firms. If you don’t believe me, ask the Canadians how their economy did in 2009 (when their banking system was perfectly fine.) Canada had a recession in 2009, likely triggered by slow growth in the US and Eurozone.
I am actually surprised that Trump doesn’t see this point, because (to his credit) he often looks at the stock market reaction to policy announcements. US stocks are up sharply today, a pattern I’ve seen over and over again.
Trump seems to want a tighter money policy in Europe. Here’s a headline from 2015, showing how global markets reacted to the sort of policy that Trump seems to favor:
Global stocks slammed by ECB; euro jumps most since 2009
Global stocks “slammed” by a contractionary ECB policy announcement. When I first read Trump’s comments on the ECB, I was reminded of this old joke from the Soviet Union:
A genie says to a peasant, “I will grant you any wish, but remember that I will give your neighbor twice what I give you.” The peasant thinks for a while and responds, “Poke out one of my eyes.”
READER COMMENTS
Brian Donohue
Jun 18 2019 at 3:54pm
Excellent post. Trump’s a crude mercantilist. Anyone with a brain can see that the EU and Japan should loosen monetary policy. US too, but as you say, our case is less compelling.
Brian Donohue
Jun 18 2019 at 3:54pm
Excellent post. Trump’s a crude mercantilist. Anyone with a brain can see that the EU and Japan should loosen monetary policy. US too, but as you say, our case is less compelling.
Benjamin Cole
Jun 18 2019 at 7:31pm
I love the one-eyed peasant story, which I’m told is also a Russian folktale.
It may be that Donald Trump does not have a PhD level understanding of central banks and macroeconomics. I am beginning to suspect this.
But then, central banks do odd things.
Both the Russian Central Bank and the People’s Bank of China have been heavy buyers of gold in recent years.
The Monetary Authority of Singapore pegs its currency to a secret basket of other currencies.
For reasons that are mysterious to me, the Bank of Thailand has run a monetary policy so tight that the baht is appreciating against the US dollar, despite the fact there is no inflation in Thailand.
The Swiss National Bank has engaged in a years-long campaign to hold down the value of the Swiss franc by buying lots of bonds on the international market.
The Hong Kong Monetary Authority pegs the HK Dollar against the US dollar ( by the way, both Hong Kong and Singapore, often defined as successful economies, have central banks that peg their currencies to the US dollar or other currencies).
So a genie asks me what favor I want, but cautions me that central bankers get double….
George Selgin
Jun 21 2019 at 8:35am
“by the way, both Hong Kong and Singapore, often defined as successful economies, have central banks that peg their currencies to the US dollar or other currencies.”
Hong Kong has no central bank. The Hong Kong Monetary Authority is a currency board: “The structure of the monetary system is characterised by Currency Board arrangements, requiring the Hong Kong dollar Monetary Base to be at least 100 per cent backed by, and changes in it to be 100 per cent matched by corresponding changes in, US dollar reserves held in the Exchange Fund at the fixed exchange rate of HK$7.80 to US$1.” (https://www.hkma.gov.hk/eng/key-functions/monetary-stability.shtml)
Phil H
Jun 18 2019 at 9:01pm
You suggested in the comments under another post that Trump was at least consistent about his desire that the USA have a positive trade balance. I think this indicates that he is not really consistent, or at least hasn’t thought through what he means and how the different parts of the system work together. As you say, a strong European economy would be good for the USA, and good for the USA in precisely the way that Trump claims to want: Europeans would import more from the US. But that’s not what Trump wants. He wants to be a tough guy.
I don’t know if any coherent policy has emerged from the White House’s actions, but I still don’t believe that Trump’s own words represent any kind of coherent thoughts, let alone policy, on economic issues.
Thaomas
Jun 19 2019 at 9:24am
But he is inconsistent in favoring the increase in the deficit from the “Tax Cuts for the Rich and Deficits Acto of 2017” which reduces saving and, for any given monetary target, increases the trade deficit.
Mark Z
Jun 19 2019 at 5:08pm
Mario Draghi ought to reply that he is only retaliating for the US having manipulated its currency at the expense of the Euro for the entirety of 2017, a devaluation which was significantly greater in magnitude than the relative decline of the Euro since early 2018. Does Trump consider the US guilty of currency manipulation during that era?
Perhaps what is right and proper is that the dollar perpetually decline in value relative to all other currencies for all time. And the US would certainly not be engaged in currency manipulation then.
Scott Sumner
Jun 19 2019 at 8:50pm
Mark, Trump actually advocates publicly that the US should manipulate its currency.
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