That giant sucking sound in markets is Trump flushing US power down the toilet
(Originally published March 7 in “What in the World“) They say Trump only cares about one performance rating—the market. If so, both Trump and the markets are in big trouble.
The market is giving U.S. President Donald Trump’s schizophrenic policies the proverbial Bronx cheer. On Thursday, the benchmark S&P500 fell nearly 1.8%, bringing it to a 5% loss since Trump took office. The tech-heavy Nasdaq fell 2.6%; it’s down more than 8% and is officially in a “correction.” The U.S. dollar index has dropped more than 3.5% since his inauguration. Yields on 10-year U.S. government bonds—which Trump has wanted to drop—have complied, easing to roughly 4.3% from 4.6% on Inauguration Day, not because Trump has quelled inflation, but because investors now fear the Federal Reserve will have to cut interest rates to offset the growing carnage Trump is inflicting on the economy.
Trump was spot-on when he told Congress Tuesday his trade policies would likely cause “a little disturbance.” But it’s difficult to see how the turmoil he has wrought augurs what he said was the beginning of “the golden age of America.” Whatever age he may be ushering in, though, he was right that “it will be like nothing that has ever been seen before.”
A lot of the money fleeing the stock market is heading for the relative safety of cash: investors plowed $51 billion into money market funds in the past week. But some investors believe that what Trump has kicked off is a wholesale reversal in capital flows—out of the U.S. to China and Europe, both of which have responded to Trump’s policies this week by pledging to reverse their own fiscal conservatism to unleash ambitious spending programs. China’s Premier Li Qiang announced to the National People’s Congress Wednesday that Beijing planned to unlock fiscal stimulus to stimulate domestic consumption and cushion China’s economy from “changes unseen in a century.” And Germany’s incoming government on Tuesday moved to lift limits on borrowing to create a €500 billion infrastructure fund and support Europe’s plans to boost military spending, by as much as €800 billion, funded in part by €150 billion in debt.
Trump can perversely claim both developments as a victory: he has long lambasted Europeans for not paying their fair share for their own defense. And if China follows through on fiscal stimulus and reduces its reliance on investment and exports, Trump may take his place in history as the greatest reform leader China has ever had. In Japan, they call this sort of foreign-imposed reform “gaiatsu.” Only back when Japan was No.1, U.S. presidents didn’t ordinarily try to force America’s then-nemesis into reforming by committing economic harakiri.
The market’s histrionics may have convinced Trump to pause his latest tariff tantrum, postponing yet again his 25% tariffs on imports from Canada and Mexico. He may also be leashing his Doge, Elon Musk.
But as the world witnessed on Jan. 6, 2021, Trump’s solution to losing isn’t to admit defeat. It’s to rig the game.
Trump has famously clashed with his own appointee as Fed chair Jerome Powell over Trump’s desire for lower rates, challenging the Fed’s independence. Last month, he issued an executive order demanding that independent federal agencies submit any regulatory changes to the White House for review. His order exempted the Fed’s monetary policy decisions, but some experts voiced concern that it might only be a matter of time before he used the precedent to extend his authority to monetary policy, too.
He fired another shot across the Fed’s bow Thursday by establishing a strategic bitcoin reserve. Trump’s executive order will set aside up to $17 billion worth of Bitcoin and other digital currencies (he has so far named Ether, XRP, Solana, and Cardano) seized in criminal investigations. But the order also directs government agencies to buy Bitcoin and other crypto-crap, suggesting that taxpayer funds will eventually be used to purchase more.
Never mind the efficacy of these cryptocurrencies as stores of value (negligible), or their primary function as a means of exchange between criminals, or as a Ponzi scheme perpetrated by their founders—including Trump with his own digital coin, TRUMP. One of the original arguments for creating Bitcoin and other digital currencies was to provide an inflation-proof alternative to fiat currencies whose supply is controlled by central banks like the Federal Reserve.
The Fed controls the U.S. money supply using interest rates and open-market operations, trading bonds and repurchase agreements and whatnot. People can obviously use other country’s currencies if they don’t like U.S. interest rates or Fed policies, or don’t believe in the fundamental safety of the dollar as a store of value. So far, though, no other currency has managed to rival the U.S. dollar as a stable and secure medium of exchange, though Beijing has long been plugging for its renminbi.
Of course, like all central banks, the Fed also holds other nations’ currencies in its reserves, which it accumulates in the course of international trade. And to some extent, central banks can buy or sell other nations’ currencies to control the rate of exchange between those currencies and their own. China, which is perhaps the best example, has followed Japan’s footsteps by amassing vast reserves of U.S dollars collected when exporters bring them home. By storing them up instead of trading them back in, China can keep the renminbi’s value artificially low and its exports cheap. What does it do with all those greenbacks? Like Japan and other nations with big trade surpluses with the U.S., it uses a lot of them to buy U.S. Treasuries, earning interest by lending money to the U.S. government and, in so doing, provides a reasonably steady source of demand that helps keep U.S. borrowing costs lower than they might be given Washington’s perennial profligacy. (NB: In the past year, both China and Japan have been scaling back their U.S. Treasury holdings.)
It isn’t clear yet, however, whether the Fed will also control Trump’s new crypto-reserve. So far, though, Trump appears to be positioning it as a strategic investment: as crypto prices rise, the U.S. will profit and use its gains to pay bills and pay down its debt. In that sense, the crypto-reserve would function largely like the U.S. strategic oil reserve: one the president can use to dampen the price of oil and gasoline in the U.S.
The problem is that the crypto-reserve wouldn’t be a way to control the price of cryptocurrencies. It would be a way to influence the cost of dollars. If the Fed doesn’t control this sack of digital coprolite, it would potentially give the White House a powerful tool to confound the Fed’s control of the money supply and interest rates. If the President feels rates are too high, he can simply direct his crypto-czar to use taxpayer funds to buy more crypto, thereby releasing dollars into the economy. It’s difficult to imagine a scenario in which a politician would favor higher borrowing costs, but the opposite is also true: if the president felt rates were too low, he can disgorge the nation’s crypto, thereby sucking up dollars, reducing the money supply, and pushing up real interest rates. In other words, the Fed would lose its independent control over the money supply, interest rates, and its ability to influence the value of the U.S. dollar.
To be sure, the crypto-reserve’s starting size of $17 billion is chump change next to the dollars in circulation. When the Fed wanted to push interest rates below zero after the global financial crisis, it ended up buying $4.5 trillion in bonds and other assets with dollars it created out of thin air. Trump can’t create more Bitcoin or Ether and so devalue them. But he can use his still-unchallenged violation of Congressional power over government spending to buy them.
Oh, but Trump’s wrecking ball is still not even in full swing. Even as he gave a one-month reprieve to Canadian and Mexican imports, he was reportedly preparing an order to abolish the Education Dept., ostensibly adding its 4,500 federal employees to the tens of thousands he’s putting on the street. The “Dept. of Government Efficiency’s” combined job cuts of federal workers pushed U.S. monthly layoffs in February to their highest since July 2020—near the height of the pandemic.
As damaging as mass layoffs at the nation’s largest employer might be to the economy in the near term, some also worry that they will cause long-lasting damage to the U.S. government. Most of the layoffs have been of new or probationary employees, and slightly over a third of those are people under 30 just starting their careers in civil service.
Trump may also have achieved in a little over a month what both China and Russia have been hoping fruitlessly to do for decades: shatter U.S. global economic and financial hegemony. As Cornell assistant history professor Nicholas Mulder suggests in a new piece for Foreign Affairs, Trump’s short-term bullying is designed to achieve short-term wins against America’s allies. They’re easy targets, of course, because having been foolish enough to trust the U.S., their defenses are down, and they allowed themselves to rely on the U.S. That left them vulnerable. One wonders whether they’ll ever make that mistake again.