President Trump and The Fed Want to See Inflation
$USD, $SPY, $GLD, $SLV
The value of USD is determined by a number of variables.
For example, this year’s trade wars with China have resulted in a stronger Buck and a weakened RMB Yuan.
There are a few internal mechanisms that can be used to raise or lower the value of USD. The primary mechanism is the Fed Funds Rate, which is controlled by the Fed.
In the current cycle, the Fed has been raising interest rates, which has strengthened the Greenback.
According to gold-bug Jim Rickards: “The combination of rate hikes and QT aka Quantitative Tightening, has caused a significant increase in US interest rates in all maturities and, in turn, a stronger USD as capital flows to the US in search of higher yields. The result is a persistent strong do USD.”
Since mid-April, USD’s value has been on the rise. A stronger USD typically makes imports less expensive, and can have a deflationary effect on the US economy, among other impacts.
The Big Q:If both internal and external factors are causing USD to become stronger, what could trigger a reversal and a rise in inflation?
The Big A’s:
- It is no secret that Secretary Mnuchin is actually in favor of a weaker USD, not a stronger one. He says that a weaker USD “would benefit the country.”
- And the Fed and President Trump would both like to see inflationary effects.
To achieve this common goal, a possible alternative is that US Treasury intervention using their Exchange Stabilization Fund (ESF).
The US Congress created the ESF in Y 1934 in response to British attempts to influence the exchange rate. Operations are controlled solely by the Secretary of the Treasury, aside from the President.
Outright currency intervention has not been tried since the 1990’s. But since the ESF operates outside of Congressional oversight, it can act like a “slush fund” that the US Treasury could quickly use to intervene in the exchange markets.
President Trump and and Secretary Mnuchin could hypothetically utilize an intervention like this in response to China’s successful devaluation of its currency by 10% over 6 months, a move that aided October’s US stock market pullback.
Or, the Fed could cooperate with Treasury by delaying or reversing rate hikes going forward, we have heard President Trump’s position on the matter loud and clear.
Either way, Shayne and I see a weaker US on the horizon.
The Big Q2: Why?
The Big As: After a 3.25% growth per year trend was established in the US, the nation endured a long depression from Y 2007 until today with annual growth of about 2.3%. Europe and China got a boost, but the US did not pull away from them.
Since then, it has been a matter of taking turns.
The Euro is allowed to depreciate to help growth and the banking system as USD gets stronger based on a slightly stronger US economy. But no major economy has solved the problem of achieving self-sustaining trend growth.
In a conversion at lunch Saturday with some very savvy colleagues we discussed that the “Powers That Be” could start weakening USD again to stimulate the US economy while price inflation keeps rising. Food, energy, and other Key commodities would get more expensive. Good for bankers and politicians, but it could have many unintended negative consequences for American consumers
If and when USD weakens, precious metal (silver, platinum, palladium) prices could be positioned to “break out.”
Then there is Gold, which will do well as a hedge against a USD in crisis.
None of us knows what US Treasury will do, but in case we see much higher rates of inflation, people should be prepared.
Have a terrific weekend.