Authored by Mike Shedlock via MishTalk.com,
Trump wants the Fed to cut interest rates to weaken the dollar and boost exports. But that’s not what helped him get elected.
US Dollar Index courtesy of Stockcharts.Com, annotations by Mish
Conflicting Dollar Goals
It’s impossible to get what you want when you have conflicting goals.
Inflation was a key reason Trump won the election. In isolation, a weak dollar would help exports, but at the expense of rising inflation.
Tariffs are a tax on consumers and will slow the economy. Trump wants a strong economy.
Also, countries retaliate against tariffs which does not help exports. Nor does rising anti-US sentiment, especially in Canada.
Conflicting Interest Rate Policy
Trump wants the Fed to cut interest rates. That would weaken the dollar, but tend to cause yields on the long end of the interest rate curve to rise.
Mortgage rates would rise. Housing is already in the gutter. Factor in tariffs on lumber, and steel framing.
Slow Economy or a Strong Economy
The Census Department reports two new records trade deficits in January.
Balance of trade data from the Census department, chart by Mish.
A slowing economy would reduce imports, but Trump does not want a recession. And improvements in trade balances during recession are fleeting anyway.
What About BRICS and the Reserve Currency?
On February 13, Reuters reported Trump warns BRICS Nations Could Face 100% Tariffs.
U.S. President Donald Trump said on Thursday that BRICS nations could face 100% tariffs from the United States “if they want to play games with the dollar.”
“If any trading gets through, it’ll be 100% tariff, at least,” he said in response to a question about the BRICS nations – Brazil, Russia, India and China – setting up their own currency.
Ridiculous for Four Reasons
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Reserve currency status strengthens the currency of the reserve nation, but Trump wants a weak currency.
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No nation other than the US really wants to have reserve currency status because it is both an advantage and a curse, and no one wants the curse.
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No nation is in position to challenge the US dollar because no nation other than the US qualifies for reserve currency.
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Trump fails to understand that trade is between individual, not nations.
The Reserve Currency Curse
Points one and two are related. A Q& A will explain.
Q: Why do foreign central banks hold US dollar reserves?
A: The US runs a trade deficit. The foreign exporters receive US dollars, but those exporters need local dollars for purchases. In China, the Chinese exporters trade the dollars for yuan, and the central banks accumulate dollars as a result.
For all its moaning, China does not really want to have reserve currency status because it would mean the end of its export mercantilism. Germany is in the same position.
What Would it Take for a BRIC-Based Currency to Succeed?
Regarding point three above, please consider What Would it Take for a BRIC-Based Currency to Succeed?
Lost in the hype over nations clamoring to join the BRICS block is a question I have not seen anyone address.
What Would it Take for the “Brick” to Succeed?
- The Brick would need to float freely. The yuan doesn’t.
- The Brick have to be a genuine reserve currency to achieve widespread use.
- A functioning Brick-based bond market. This requirement is also for widespread use.
- A significant desire by individuals to trade in Bricks and accept Bricks rather than local currencies or the dollar.
- Willingness of China to stop export mercantilism.
- No capital controls.
Note that the Euro fails because there is no central asset, no Eurobonds. There are German bonds, Italian bonds, French bonds. etc, all with different interest rates and liquidity.
Trade is Between Individuals, Not Nations
Fundamentally, trade is not between nations.
Aggregate reporting of trade deficits such as the persistent US deficit with China, makes it appear otherwise. But the deficit is really a result of a sum of individual transactions.
For example, you or I go to a store and buy a tool at Home Depot. More likely than not, it’s made in China. A Toyota may be assembled in the US or Mexico with parts from Japan, China, or Mexico.
Taking a step back, the intermediate buyer, say Home Depot, makes big orders with various Chinese manufacturers.
The same applies to a Brazilian Store Owner (BSO) dealing with China.
To place its order with a Chinese merchant, the BSO would need to convert Brazilian currency to Bricks, place an order with a Chinese Manufacture willing to accept Bricks, then the Bank of China would swap Yuan for the Bricks and then what?
What precisely does the Bank of China do with all the Bricks it is accumulating given that Bricks are a trading currency, not a reserve currency?
Are there any Brick bonds? No, because the Brick only a trading currency.
There is no Brick-based bond market and thus no way to collect interest holding Bricks. There is an increasing lack of trust in dollars, but no reason to have any faith at all in the Brick.
Also see BRICS+ Is Forecast to Dominate the World’s GDP, But What Does That Mean?
Here’s a major irony. If and when the “Brick” succeeded as a reserve currency, US deficits would shrink. But there is no chance of that for reasons stated.
Trump and Secretary of Treasury Bessent Discuss the “Detox Recession”
On March 10, I noted Trump and Secretary of Treasury Bessent Discuss the “Detox Recession”
Don’t worry, it’s just a little more pain and inflation disturbance before tariff greatness begins.
Economy Could Be ‘Starting to Roll a Little Bit’
On Squawk Box, Treasury Secretary Bessent said the Economy Could Be ‘Starting to Roll a Little Bit’
And Trump Declines to Rule Out Recession.
Lutnick vs Trump
“There’s going to be no recession in America,” Commerce Secretary Howard Lutnick said on Meet the Press on NBC News.
Somehow Trump and Bessent did not get the message from Lutnick.
Hoot of the Day: House Republicans Suddenly Like Clean Energy Tax Breaks
On March 14, I commented Hoot of the Day: House Republicans Suddenly Like Clean Energy Tax Breaks
21 House Republicans now like Biden’s Inflation Reduction Act incentives.
One way to get a weaker dollar is for the US to run huge budget deficits and for the Fed to not follow through with interest rate hikes.
But that conflicts with Trump’s promise to balance the budget. And balancing the budget would strengthen the dollar.
Lutnick Says Tariffs Can Eliminate the IRS and Balance the Budget
On March 12, I commented Lutnick Says Tariffs Can Eliminate the IRS and Balance the Budget
Lutnick: “We’re going to make the External Revenue Service replace the Internal Revenue Service.”
I ran the math on that ludicrous idea. Team Trump only needs to bring in $7 trillion in tariffs on $3.3 trillion in total imports.
Then we need to faithfully collect 200 percent tariffs on everything with of no trade frictions, no retaliations, and full compliance.
See above link for detailed analysis.
Trumperland Miracles
Trump simultaneously promotes a strong and weak dollar, and proposes we collect huge tariffs while reducing imports.
We will allegedly balance the budget by running huge deficits while having a Detox recession and not having recession.
In Trumperland, contradictions have no meaning, so this is entirely possible.
Tyler Durden
Mon, 03/17/2025 – 13:20
