Friday , August 23 2019

Scapegoat?

Summary:
Here’s Bloomberg: The markets have spoken. If they are to be believed, the potential for a U.S. recession has never been greater in the post-crisis era than it is right now.That’s a problem for President Donald Trump because after the events of the past few days, it should be clear that he has effectively forfeited the ability to use the Federal Reserve as a scapegoat for any economic slowdown, an angle he was clearly prepared to play. Think back to previous administrations that had to run for re-election during periods of high unemployment, such as Hoover, Carter, or the first Bush administration. How well do you think they would have done by pointing to the Fed? I’m trying to imagine a bunch of unemployed steel workers in Ohio, sitting in a bar and commiserating

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Here’s Bloomberg:

The markets have spoken. If they are to be believed, the potential for a U.S. recession has never been greater in the post-crisis era than it is right now.

That’s a problem for President Donald Trump because after the events of the past few days, it should be clear that he has effectively forfeited the ability to use the Federal Reserve as a scapegoat for any economic slowdown, an angle he was clearly prepared to play.

Think back to previous administrations that had to run for re-election during periods of high unemployment, such as Hoover, Carter, or the first Bush administration. How well do you think they would have done by pointing to the Fed?

I’m trying to imagine a bunch of unemployed steel workers in Ohio, sitting in a bar and commiserating over their plight. “You know, I’d like to blame the President, but it was not really his fault. Rather it was a tight money policy by the Federal Reserve that reduced aggregate demand and increased unemployment.”

Pretty funny, eh?

But it gets worse. Under Hoover and Carter, the onset of recession was actually associated with a high interest rate policy. If we have a recession in 2020 it will be trigger by a 2.4% interest rate policy. How many voters are going to blame the Fed?

I haven’t even gotten to the funny part yet:

“You know, I’d like to blame President Trump, but it was not really his fault. Rather it was a tight money policy instituted by key Federal Reserve officials such as Powell, Quarles and Clarida, people that Trump appointed to the Fed. So Trump himself is blameless for the insanely high 2.4% interest rates that clearly caused the recession.”

Yeah, that’ll work.

The article is correct that as of today Trump has no ability to scapegoat the Fed. The truth is that he never did.

PS. Three months ago I argued that pundits were underestimating the strength of China’s negotiating position in the trade war. Today, I see lots of other pundits jumping on board. If you want to read what the zeitgeist will be in three months, read the MoneyIllusion and Econlog today.

Here’s today’s FT:

Larry Kudlow, the top White House economic adviser, told CNBC on Tuesday that the Trump administration wanted to continue talks with China and suggested that the president could adopt a flexible approach on tariffs. Mr Trump on Friday said he would impose tariffs on another $300bn in Chinese products from September 1.

“The reality is we would like to negotiate,” Mr Kudlow told CNBC. “We’re planning for the Chinese team to come here in September. Things could change with respect to the tariffs.”

Hmmm, “things could change”.


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Scott Sumner
Scott B. Sumner is Research Fellow at the Independent Institute, the Director of the Program on Monetary Policy at the Mercatus Center at George Mason University and an economist who teaches at Bentley University in Waltham, Massachusetts. His economics blog, The Money Illusion, popularized the idea of nominal GDP targeting, which says that the Fed should target nominal GDP—i.e., real GDP growth plus the rate of inflation—to better "induce the correct level of business investment".

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