Higher interest rates, stronger dollar, and exploding budget deficits? What's gonna give?

Since going down on his knees to please his pal Vlad isn't going over well back in the States, President Trump tried to distract and talk about something else yesterday. So he chose... to complain about the dollar and higher interest rates from the Federal Reserve?

In an earlier tweet sent Friday morning, Trump complained about what he believes is currency manipulation from both China and the EU.

“China, the European Union and others have been manipulating their currencies and interest rates lower, while the U.S. is raising rates while the dollars gets stronger and stronger with each passing day – taking away our big competitive edge,” Trump said….

Friday’s tweets from Trump comes after a clip of his interview with CNBC that aired Friday morning was released Thursday afternoon in which the president says he isn’t thrilled with the Fed’s current policy stance.

“I’m not thrilled,” Trump said in his interview with CNBC. “Because we go up and every time you go up they want to raise rates again. I don’t really — I am not happy about it. But at the same time I’m letting them do what they feel is best.”

It’s almost like Trump doesn’t understand that if rates aren’t raised in a time of full employment and a continued economic expansion, we'll get high inflation. Well, unless the majority of us aren’t getting wage increases and the rich are taking all of those gains for themselves (hey, wait a minute…..)

As “Budget Guy” Stan Collender points out, higher interest rate needs are the result of Trump’s and the GOP’s own fiscal illiteracy, which have increased budget deficits, requiring encouragements to get people lend money to Uncle Sam.

So first Trump pursues a fiscal policy that all-but-requires the Fed to raise interest rates, and then he criticizes the Fed for doing it. https://t.co/u4nlFuELc0

— Stan Collender (@TheBudgetGuy) July 19, 2018

As for Trump’s complaints about currency manipulation and the overly-strong dollar, he’s actually got a point here. A stronger dollar makes imports cheaper and our exports more expensive for other countries to buy. Combine that with the Trump trade wars, and it could really put a halt to job growth among American manufacturers (they've been averaging 20,000 new jobs a month since Trump took office).

It’s also odd that our dollar has risen over the last year, given that our rising budget deficits should make dollars more plentiful, especially given that it's due to tax cuts and increased federal spending. That printing of money should lower the dollar's value, or if it doesn't it should mean that US interest rates should be rising even more, because foreign investors have to spend more to buy our debt, so they’ll need a better rate of return.

But as you can see, the benchmark 10-year note has retreated from its late-May highs of 3.1% (it did jump yesterday after Trump's blustering).



It reiterates a general “what’s going on here?” feeling that I’ve had in recent months, as the US economy keeps moving ahead despite a lot of fundamentals that seem contradictory. This includes full employment with no real wage growth, a strengthening dollar despite higher budget deficits, and lower savings rates and increasing household debt in a time of rising interest rates.

I just wonder when we these fundamentals start to be more sensible. And when they do, Trump might be hoping that higher inflation is all we end up with, as the alternatives seem to be recession and/or a popping of our stock market and real estate Bubbles. We’ve seen that movie before, and I don’t care to see it again.