We issued this YouTube short at lunchtime today:
This is the transcript:
Donald Trump is opposing Jerome Powell, who is the chair of the US Federal Reserve.
That matters.
The US Federal Reserve is responsible for the issue of the dollar, and the dollar is the world's reserve currency.
All oil is traded in the dollar.
The US's power is dependent upon the existence of the dollar and its ability to spend dollars into existence that the rest of the world will accept.
If Jerome Powell is thrown out from the Fed, if Trump takes it over, if Trump uses the Fed as another vehicle for enhancing his own power and wealth, then we're all at risk because the instability that will follow will spread.
It will spread to here in the UK.
It will impact our interest rates.
It will impact our economy.
It will probably create a worldwide recession.
Donald Trump's megalomania is a threat to your well-being.
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This does raise an interesting question. Is it better for central banks to be run by the governments of which they are a subsidiary – recognising that politicians will always place popularity with the electorate above economic considerations – or by arms-length officials who in principle are appointed for their expertise?
Does one prefer Trump with his democratic mandate to the appointed Powell? Or Reeves and Starmer to Bailey? Your analysis of the risks of Trump ejecting Powell suggests there is some benefit to the arrangements currently in force.
(I recognise the question put like this is a bit simplistic, but it is what it comes down to. Ultimately Powell and Bailey do have some sort of democratic accountability through their appointment and reporting arrangements, and there is a secondary question of whether those processes are adequate within our democratic systems).
I don’t agree that politicians will always place popularity with the electorate above economic considerations.
That is a trope promoted by those who oppose democracy.
Why do you buy into it?
I’d love to be able to move all my pension assets out of the US.
Why can’t you?
Your post seeks to point out a plain fact.
It is not to promote a debate about who should be in charge of a country’s central bank. For me, there is no argument about that anyway, and if you don’t think so, just imagine your country being ran with a crypto currency, and the people who run those? Do you think that would be an improvement.
What your post is a timely reminder of is the consequences of voting for someone like Donald Trump.
You post is an appeal against ‘sucker-rism’ and other pain induced stupidity and ignorance that empowers the Trumps of this world.
Thanks
“Donald Trump’s megalomania is a threat to your well-being.” True on many levels – but to focus on the dollar and its “reserve currency” status…
It owes it status to the aftermath of two world wars when the US was “last man standing” owning about 3/4 of all official gold reserves… leaving the dollar as the only “paper” money that was usable in cross-border transactions and a reliable store of wealth. In today’s fiat currency world and multi-polar economy nobody is forced to use the dollar or hold dollars but up until now, there has been insufficient incentive to change. But it could change.
First, modern technology makes it pretty simple to transact anything in (virtually) any currency the counterparties desire. If global transactions happen in other currencies then the desire to hold dollar balances will diminish…. but there is no evidence of a decline in dollar usage.
Second, and this is where things could fall apart quite quickly, is the willingness of people to hold dollars. New dollars are created at the rate of $1.7 trn a year and a trade deficit of $1.2 trn means that most of these dollars are being accumulated by foreigners at a very fast pace. They did feel happy to build those balances because the US was a huge economy with rule of law etc.. Is that is now changing? We see those concerns manifested in the gold price and, to a lesser extent, weakness against other fiat currencies. There is no stampede out of the dollar but it is a risk – to paraphrase Hemmingway “Q: How did the dollar depreciate? A: slowly then quickly”.
If it happens then the resulting turmoil will hurt us – “If America sneezes, the world catches a cold” – and there is nothing we can do to stop it.
I agree with a lot of that – and most especially your conclusion.
“I don’t agree that politicians will always place popularity with the electorate above economic considerations”.
I am an idealist, and would really like to think that politicians were motivated by what they thought was right – as I would want to if I were in their position. But I struggle to think of a member of the current UK government (or its immediate predecessors) or the current American administration for whom I am confident that is the case. You may have suggestions.
I don’t oppose democracy, but I fear that a combination of circumstances has meant that elected politicians are currently unduly influenced by what can be summarised as extreme wealth and populism. If that means that there needs to be the right governance allowing certain functions to be carried out by non-political “experts”, I accept that. Whatever Powell’s faults your blog above recognises that he is better placed than Trump to make important decisions for the Federal Reserve. Closer to home there is very little to be said in favour of Bailey except that Reeves is even less convincing. And while central bankers are “non-political” in a partisan sense they all seem to stack their advisory committees in a pro-wealth way, I would prefer the governance ensured advice includes the full breadth of serious economic thought.
So, we have seen politics corrupted by antisocial neoliberalism. I agree with that.
What I cannot agree with as a consequence is that it would be impossible to do better. I see no reason why we can’t.
I remember reading about Keynes’s idea for the Bancor. What do people here think of the Bancor idea? Would something like that be appropriate now? Might the US be more open to the idea now that they face some risk to the dollar?
We will be making a video on this today – out probably on Friday
What is a “trade deficit”? We think of the value of a currency being affected by an imbalance in trade of goods and services, but is this way of thinking obsolete? is there a “subordinate currency cycle”? The US buys goods and services from another country and pays for them in the other country’s currency, weakening the dollar and strengthening the other currency. But if US companies own the companies that provide those goods and services what happens? The companies repatriate their profits by selling the subordinate currency and buying dollars, weakening the other currency and strengthening the dollar. Perhaps Richard and regular commentators are ahead of me on this and have long realised that the value of a currency is no longer related to trade.
It is not, entirely.
The sectoral balances make that clear.
As do financial flows, including those of hot money.
So long as states have dollar debts then they will want dollars. This is part of the imperial shackles of the IMF, etc. However, you can also see the World moving official reserves into gold and other currencies. The US can’t be trusted any longer. It will be an interesting decade!
@ Jonathon B
Clive Parry suggests a good solution to this problem in the Trump and the Fed thread:
‘So, I favour the current BoE set up – an operationally independent Central Bank – where government sets the parameters but rate setters are one step removed from naked, party political opportunism. That said, this “independent” body that sets interest rates must be representative of the nation at large and not merely do the bidding of rentiers. So, broaden the rate setting committee to include Trade Unionist, Pensioner reps, Small business reps….. and yes, bankers and politicians in the right doses.’
I like the sound of that as I am a bit of a ‘hope for the best, plan for the worst’ person. Structure in the balanced perspectives then you don’t need to rely as much on the morality of individual actors. And let’s also expect individual morality as well… most good behaviour strikes me as motivated by a mixture of consensual good morality and fear of negative consequences and that’s nothing to be ashamed of… we are just apes after all, muddling through complexity as best we can. With a little help from our friends….. 🙂
I think such an advisory committee would be good.
I think we elect politcians for a reason – to govern, which means they decide.
And decide they must – including by saying why they would, or would not, accept the advice given by such a group. That is the right compromise. Anything else undermines democracy.
Is current vulnerability of the Dollar a good opportunity to re-float the idea of a Bancor?
Let me think about that?
It may well be a video
Also, and apologies if you have already written about this elsewhere….
Should the European Union have created a Euro Bancor instead of creating the Euro?
Might that have solved their problems better than the ERM or the Euro?
I have never discussed that.
It would not have met the EU’s objectives, but they were misguided.