Facing a Derelict Fed, Trump Can Use the IEEPA to Boost Growth

Last Friday, our financial markets gyrated wildly as President Donald Trump made clear he would not back down in the current trade conflict whereas Federal Reserve Chairman Jay Powell suggested in his speech that while the Fed will react to economic developments it will not proactively coordinate its policy with the Administration. Amazingly, former NY Fed President Bill Dudley today wrote the Fed should not help boost growth amid the trade war and should actually consider setting monetary policy to make it harder for Trump to win re-election. This bastardization of so-called central bank “independence” to hurt an American President is deeply opposed to our democratic values and a blatant interference in our elections. So on the Fed, the view apparently ranges from not coordinating with Trump to actively undermining him.

This puts Trump, and by extension America, at a self-imposed disadvantage in trade talks with China as President Xi Jingping can have all layers of his dictatorial government coordinate policy. Trump must do everything in his power to boost American economic growth to ensure we maintain maximum leverage in this generational battle against long-running Chinese economic aggression.

As such rather than helplessly bemoaning Powell’s stubborn refusal to aggressively cut rates, Trump needs to use the powers of the Presidency to take unilateral action to boost US growth. In and of itself, the fed funds rates of 2.125% is not particularly high, certainly not in a historical context. However, relative to the rest of the world, US rates are exceptionally high. Japan, Europe, and Switzerland have negative rates; Australia, the UK, and Canada are each below ours. The fact the US offers the highest interest rates in a world awash in $16 trillion of negative-yielding debt has made us a magnet for foreign capital, which has flooded onto our shores.

Our relatively high interest rates have pushed the dollar substantially higher; indeed, the trade-weighted dollar is essentially sitting at an all-time high. The Fed’s relatively tight interest rate policy, despite below-target inflation, is pushing the dollar up, which is a major headwind for American exporters and the manufacturing sector, unnecessarily slowing economic growth and weakening our hand against China. The ECB and BOJ among others have used super-low interest rates to artificially weaken their currencies against the dollar. In other words, these governments have manipulated the dollar to unfair heights; US policy aimed at weakening the dollar would help return it to its fair, fundamental value. Fortunately, while the President cannot force the Fed to reduce interest rates, he can act to stop the dollar’s rise and strengthen our manufacturing sector, which would provide the same relief as further Fed rate cuts.

President Trump should immediately declare our trading relationship with China, one defined by chronic trade deficits and stolen technology, a national emergency, invoking the powers of the International Emergency Economic Powers Act (IEEPA). This statute gives the President broad power to regulate international commerce. Namely, section 203 empowers the President to “investigate, regulate or prohibit any transactions in foreign exchange.”

Using this power, President Trump must immediately impose a charge on all foreign capital purchases of US dollars. This could be enacted in one of two ways. Either Trump could impose a 5-10% tax on all foreign financial purchases of US dollars or impose a 100% marginal tax on purchases of US dollar above a certain exchange rate (ie 7 yuan to USD), which would eliminate the ability of other governments to keep weakening their currencies against the dollar. Either of these actions would make it costly for foreign investors to push up the value of the US dollar and enjoy excessive interest rates offered by the Federal Reserve. If foreigners want exposure to our deep, liquid, high-yielding financial markets, they will have to pay an entrance fee. By curtailing this financial flow, the US dollar would immediately reset lower by several percent, giving a shot of stimulus to our export sector, which would help reduce the US trade deficit. A lower dollar also makes it easier for domestic producers to compete against foreign producers within the US consumer market, a benefit to our manufacturing sector.

While Chairman Powell still controls the Fed funds rate, by taking firm control of US dollar policy, President Trump would be able to nullify the impact of higher interest rates that has caused him to criticize Fed policy so vocally, by functionally eliminating the relative rate differential between the Fed and other central banks. This action would also make it clear to President Xi that America will no longer fight this trade war with one arm tied behind our backs. Just like China, we also have the capacity, even if by unconventional means, to coordinate policy across government to maximize growth and enhance our leverage in trade talks.

And let there be no mistake, the current situation with China is a national emergency. For two decades, America’s policy of economic appeasement has let China amass over $3 trillion in foreign currency reserves, build new cities, and amass major military might all while destroying America’s manufacturing base, stealing our technology, hacking into our systems at OPM and elsewhere, and letting fentanyl poison our citizens. Combatting the aggression of the oppressive regime that seeks global superpower status is the defining issue for my generation, just as defeating the Soviets was the existential fight of the latter half of the 20th century. If this isn’t a national emergency, what is?

In the past, the Fed has responded to such national emergencies. One of the Fed’s finest hours was during World War II when it coordinated policy with the rest of the Federal government, keeping rates low (0.375%) to help finance the war effort. Beating the Nazis trumped central bank “independence.” Critical national moments require policy coordination to ensure America’s national interest are best served. Sadly while World War II showcased the Fed’s patriotic purpose, today’s Fed sits stubbornly on the sidelines, which only helps China. This is why Trump must act.

Rather than merely expressing his displeasure with Powell’s anti-exporter Fed policy, Trump needs to effectively leverage the powers of the Presidency. It is time to se the IEEPA to negate Fed policy’s impact on the US dollar, accelerating manufacturing activity and economic growth, which will help America prevail in a prolonged trade conflict against Communist China.

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Taking on China in this Cold War: An 11 Step Plan

With President Trump recognizing the 75th anniversary of D-Day in Europe this week, I found myself wondering how the historic giant of that era, Winston Churchill, would view the present day, particularly the West’s relationship with China. Churchill not once, but twice, was early to see the threats oppressive, domination-seeking regimes posed to freedom loving people everywhere. While the political intelligentsia called for appeasement toward Hitler’s Nazi Germany, Churchill called for strength and resolve, nearly destroying his political career. Similarly, as World War II was nearing its conclusion, he saw the threat posed by Stalin’s Soviet Union, minimized by President Roosevelt and others. Indeed, the Soviets wouldn’t cede any of the Eastern European territory they had taken back from the Nazis, descending an “Iron Curtain” across Europe. Churchill was right both times; the establishment wrong.

As we engage with an increasingly powerful, emboldened, and repressive China, we should remember the painful lessons of history. I suspect Churchill would applaud Trump’s trade actions, lock arms with him, and call for more aggressive global action until China agrees to follow international law and join the ranks of civilized nations. Let’s make no mistake: China is an extraordinarily repressive regime. Political dissent is not tolerated, the government uses technology to track its citizenry’s every move, Taiwan lives under the threat of invasion if not for American support, Chinese Christians face constant persecution, and at least one million Muslims have been locked away in literal concentration camps for “re-education.”

Rather than confront China for these horrendous abuses, the Western elites have gone the route of appeasement, this time economically, to disastrous results. The Clinton and Bush Administrations bet that economic prosperity would lead to political liberalization. As such, they let China into the WTO, let it keep preferential developing nation status, let it depress its currency and subsidize its manufacturers, thereby stealing our industrial base, functionally raping and pillaging the Rust Belt, and costing at least one million manufacturing jobs. To this day, China continues to take Western technology and steal IP, and if a Western company complains, it loses any access to their market. When China hacked into Anthem or OPM, amassing data on millions of Americans, there wasn’t any outcry from our elites who instead remain obsessed with Russia.

This strategy of economic appeasement has instead been one of economic surrender with disastrous consequences. We have succeeded in making China incredibly wealthy, rebuilding its country and military, while giving them over $3 trillion in foreign currency reserves. Yet, the Chinese Communist Party has used this track record of economic success to further entrench itself, growing ever more oppressive and totalitarian. Economic appeasement toward China has only succeeded in making a dangerous, totalitarian regime more powerful with greater economic resources with which to challenge the West. Abject failure.

Fortunately, this soft on China approach, an unmitigated disaster, has come to an end with President Trump working to defend America’s industrial base. This is a generational opportunity to fix the US-China relationship. Postponing the inevitable battle only helps China, which has grown stronger every year. Often, it is only clear you’ve entered a “Cold War” well after it has begun. Well, it has begun; China’s been waging economic war on America for years, but our leaders are only now waking up to it. China is hell-bent on supplanting America as the world’s most powerful nation, leveraging its export-driven economy to move further up the value chain, entangle itself permanently in world supply chains, and build out its military might. Its imperial island building in the South China Sea leaves no doubt as to its ultimate intentions. After all, it is only natural for authoritarian leaders who oppress people inside their borders to seek to oppress those outside their borders as well.

Just ask yourself: how would the Cuban Missile Crisis have gone if the Soviet Union supplied America with most of its consumer goods, or rare earth metals, or medical ingredients, or worse all of the above? I suspect it would not have gone as well as quickly. We must be clear-eyed; relying on China economically poses a clear national security threat. We must disentangle our supply chain today so that China cannot use economics to leverage better military or geopolitical outcomes. Ultimately, economic security is national security.

Thus far, Trump has levied 25% tariffs on $250 billion of Chinese imports. Unsurprisingly in trade deal negotiations, China has backtracked, in keeping with their history of never living up to promises. Fortunately, rather than accept a bad deal, Trump had his team say “no,” raise the tariff rate to 25%, and contemplate further tariffs. However, this is not enough. Until and unless China faces real economic pain, they will never agree to follow the international rules and make real concessions. Recognizing that this trade conflict is but one front in an ongoing economic Cold War, we must enhance the pressure. The President must publicly and forcefully, perhaps with a detailed address to the nation prior to the G-20 summit, explain the threat China poses and call for a national, coordinated response.

Currently, China is coordinating policy, imposing tariffs, but also cutting taxes, and easing monetary policy to support growth. Ultimately, America has far more leverage and tools if our government’s institutions can unite and coordinate behind a central mission: to grow the economy, repair our industrial base, and enhance domestic economic security and sufficiency. Wars are when a nation is united and policy is coordinated. Now is the time for such a national effort. To do so, I would humbly suggest the President announce the following action plan as he prepares for the G-20.

 

  1. Trump should announce we will not re-open negotiations with China. Ultimately, these talks have increased business uncertainty, and consequently, some businesses have been slow to readjust supply chains or launch new investments domestically in case talks lead to a deal. Make it clear to executives they should assume the tariffs are the permanent “new-normal,” and uncertainty will diminish, and growth will pick-up as they invest in boosting domestic capacity.
  2. For America to re-engage with China on trade talks, China will have to, as the only pre-condition, actually stop the flow of fentanyl into America. While recently they have increased regulations on fentanyl, they must enforce these laws. Chinese fentanyl, which President Xi lets come to America, has poisoned our streets and killed at least 45,000 Americans. Xi and the Chinese government is at the least complicit in this mass murder of our citizens. They should be held to account for this. They must commit to paying the US government $45 billion ($1 million per American dead due to China) as a show of good faith to merit a reopening of the trade dialogue. Until they publicly commit to the $45 billion, which we can use to end the opioid epidemic, there will be no trade discussions. I suspect this means no trade talks for some time.
  3. Trump should announce tariffs on the remaining $300 billion of Chinese imports by July 1. As these are more consumer facing (ie iPhones), the tariff rate should begin at 10% on September 1, rising to 25% on January 1, 2020. By staggering the tariffs as such, corporations will have ample time to begin moving supply chains and reshoring jobs to minimize product disruptions and price changes. An orderly implementation of tariffs will calm consumers and markets, ultimately making them more productive
  4. Trump should, effective no later than year end, ban and embargo Huawei, ZTE, and any other Chinese-linked entity from core technology infrastructure susceptible to espionage. Any foreign network using Chinese equipment would also be banned from having secure communications with the US.
  5. As seen by China’s threats on rare earth metals, they cannot be relied on as a stable supplier, yet we rely on them for most of our medical ingredients, which is unacceptable. Any product where China accounts for more than 33% of the supply would be protected by additional national security tariffs to take effect January 1 to promote more domestic production and self-sufficiency.
  6. Chinese state-owned entities would be barred from issuing either stock or borrowing money in US dollars to limit China’s ability to finance its economic war upon us.
  7. No Chinese individuals planning to return to China can receive student visas. We will no longer educate the global competition. Our schools will educate Americans first and foremost.
  8. America works best when it works together, so recognizing this, and to ensure calm in financial markets, the Federal Reserve should announce it will coordinate monetary policy with fiscal policy. It’s time for the Fed to stand with Trump and not with China, which needs to see our economy slow. Namely, in conjunction with these actions on trade, the Fed should announce an immediate 1% interest rate cut to 1.38% and end to balance sheet normalization. Moreover, the Fed should pledge to increase the supply of dollars with an unlimited QE program whenever the trade-weighted dollar passes $125 (it is nearing a record of $130) to defend against foreign currency manipulations and protect American exporters. These policies will boost growth and minimize any disruptions to markets.
  9. Until and unless Democrats agree to immediately use the tariff revenue (at least $90 billion in year 1) to fund new infrastructure projects via a new “China Rebuilds America Fund,” which would make the tariff policy clearly pro-growth, Trump should order the Treasury to dividend all China tariff revenue to each state government on a per capita basis (ie a state with twice the population gets twice the revenue), ensuring fair and equitable distribution. With the influx of cash, each state government can recycle the tariff revenue into their economy as they see fit (lower taxes, infrastructure, or more school spending) with no strings attached.
  10. Trump should direct every regulatory body to streamline permitting and regulatory processes and hasten coordination with private sector bodies and companies to increase apprenticeships and job training to increase US domestic manufacturing capacity as quickly as safely possible.
  11. Finally, the Administration should begin “break-glass” preparations to freeze and seize China’s US Treasury holdings in the event the Chinese government tries to sell to disrupt financial markets. The treasuries could be placed in the Medicare and Social Security trust funds to improve their financial health. Such a move would cripple China financially but should only be taken if China retaliates in a particularly destructive fashion.

 

This policy playbook, combined with already announced policy actions, would show that the Administration is taking the China threat seriously. Increased tariffs and sanctions would put tremendous pressure on the Chinese economy while coordinated policy-making from the executive branch, Federal Reserve, and congress or state governments can ensure the domestic economy continues to run hot. Policy coordination is absolutely critical.

As we stare down China, history will remember this moment as a generational opportunity to protect our industrial base and a free world. It is a time for choosing; will we be a nation of Churchills or Chamberlains?

Trump Should Propose the “China Rebuilds America” Fund Now!

Following a midterm election in which Republicans gained seats in the Senate but lost their House Majority to Nancy Pelosi and the Democrats, President Trump needs to manage a divided Washington to continue delivering on campaign promises and advance America’s interests, which in turn will boost his own re-election chances. As the consummate negotiator, Trump must strike fast to put Democrats on their back foot and immediately offer a deal that will aid America’s workers and economy: a Chinese funded infrastructure bill.

Right now, the American economy is rocking, maintaining 3% growth, which has pushed unemployment below 4% and wage growth to around 3%. The manufacturing sector, which has been enjoying its strongest stretch of job creation in over 20 years, is resurgent. It’s no wonder then that the GOP was able to take Senate or Governor races in manufacturing-heavy states like Indiana, Tennessee, Missouri, and Ohio. Trump needs to ensure economic growth continues to broaden out to further tighten labor markets and push wage growth higher so that all workers see their paychecks rising.

Investing in infrastructure, which enjoys broad political support, will create jobs now, and importantly by modernizing and expanding our infrastructure capacity in everything from rail to broadband, we enhance the long-term potential of our economy. Strategic infrastructure investments will boost near-term growth and employment, forcing wages higher, while also increasing wages over the long-run for all Americans. In so doing, he lays the groundwork for his own re-election. However, we can’t borrow more money to have a multi-billion-dollar boondoggle while deficits are running around $1 trillion.

And this is where China enters the picture. Trump has rightly singled out China as our top long-term geopolitical foe, and they have used unfair trading practices and intellectual property theft to amass a cumulative $4.5 trillion trade surplus with America since George W. Bush foolishly let them in the World Trade Organization (WTO). With this wealth transferred from Americans, China has rebuilt its economy and military. We have literally funded China’s rise as our top rival.

In an effort to right these historic wrongs and restore our industrial base, Trump has correctly levied tariffs on about $250 billion of Chinese imports to level the playing field and eventually force China to negotiate in good faith. From January 1 onward, these tariffs will generate about $62 billion in revenue, which currently goes into the Federal Government’s general budget and reduces the deficit. If, as threatened, 10% tariffs are placed on China’s remaining imports, the annual tariff run-rate will approach $90 billion.

Trump should immediately and publicly offer House Democrats a deal: all Chinese tariff revenue is put in a segregated trust fund (named the China Rebuilds America Fund) to invest in new infrastructure projects in partnerships with state and local governments. By making states and localities together put up 50% of the funding, you can increase accountability and double the effective size of the infrastructure program. We can cap annual federal spending from the China Rebuilds America Fund at $50 billion ($100 billion with state matches) as over time China tariff revenue will fall as companies move production back into the US, which in turn will create new jobs. By capping the fund, infrastructure spending can then continue for some time even as the tariffs are removed. Importantly, by recycling tariff revenue into productivity-enhancing projects, Trump will be offsetting any near-term dislocations caused by the China trade situation and actually accelerate economic growth.

By getting Democrats on board with this plan, Trump would show a unified front to China, which only further enhances our bargaining power to strike a new trade agreement. This is compounded by the fact that Trump’s tariffs will be funding growth-accretive infrastructure. By strengthening the economy further, there is less need for us to strike a quick deal, ensuring we get a better one. There will now be a clear benchmark for China: until they are willing to offer enough concessions to outweigh tariff revenue funding major infrastructure improvements, we have no reason to say “yes” and remove the tariffs.

By proposing the China Rebuilds America Fund, Trump can retake control of Washington, show voters he is a deal-maker, get implicit backing for his tough on China trade stance, provide tangible change to voters via better infrastructure, and boost economic growth. Additionally, he achieves two critical strategic priorities: rebalancing trade with China and modernizing American infrastructure. If Democrats don’t accept this win-win deal, it’d be a proof point to voters they are uninterested in governing and are simply the party of obstruction. Trump wins if they accept this offer because it will help America, and he wins if they say no because it will show Democrats to be hypocrites on their promises for bipartisanship.

It’s time we rebuild America’s roads, bridges, airports, and rail, and with Trump’s tough trade stance, we can have China pay for them.