Bomb the fed

Softening monetary policy, the fed moved the beginning of the crisis, and thus almost guaranteed the failure of trump in the next presidential election

Economic cycles are well known since the nineteenth century. Debate about their nature does not stop until now, but that does not prevent the practical use of knowledge in making many investment decisions. The most noticeable impact on businesses and citizens have a medium-term economic cycles — the cycles of Juglar who have between 7-12 years.

From 1940-ies, since the “Keynesian revolution”, the monetary authorities of developed countries tend to use monetary policy (DCT) to mitigate the economic downturn in the descending phase (the phase of recession or depression) of the economic cycle. The classical approach implies that the period of rapid economic growth when there is a threat of overheating, the OST becomes tougher (increase rate and reserve ratio), and with the threat of decline — on the contrary, softened. Politicians and economic actors are used to it and implicitly expect from Central banks for this behavior.

These expectations sometimes play with the Central banks of a cruel joke: the country’s leaders turn to Central Bank with a request to “help the economy” and to lower interest rates or to save the company, which is “too big to fail”. From the precedents of recent years clearly showed themselves by the presidents of Turkey and the United States. They both strongly demanded from the Central banks to reduce interest rates to stimulate the economy. From the point of view of scale economy from the risks of pressure on the fed, of course, incomparably higher than in the case of the Central Bank of Turkey.

However, any change in the OST requires great care: improving some economic indicators (reducing the rate and increasing the money supply), it is very easy to degrade others (to accelerate inflation and drop of the national currency). The timing of monetary easing as the form of this mitigation is very difficult. Guided only by short-term considerations in this matter — very rash. That is why the laws of most countries guarantee a high degree of independence of the Central Bank. Otherwise, Executive power is inevitably abused would be easing monetary policy, which also would inevitably lead to hyperinflation.

In fact, all significant inflation over the last hundred years was caused by excessive monetary easing — up to print Fiat money (called equity financing). To prevent this, and the Central Bank and its head have relatively high independence. In USA there are cases when the term of office of the head of the fed is considerably more presidential. This suggests that, from the point of view of legislators, the stability of the DKP is much more important to the stability of the political course of the country.

But in addition to inflation risk (inflation in the US rose, and to ignore them is impossible) there is another, specific Executive risk. It is especially important for presidential (and parliamentary-presidential) Republic. And above all — for the United States. This risk is associated with the phases of the electoral cycle.

In U.S. politics is dominated by two major parties, and the outcome of elections is strongly influenced by the situation in the economy. So, if during the election campaign, the economy is growing, the incumbent usually retains his post. And on the contrary — the election campaign in a recession leads to a change of the President (together with it usually is changing and the majority party in Congress).

At the last meeting, the fed as expected left rates unchanged but surprised the market with his comments — they were too dovish — the regulator has promised to dramatically slow down the tightening of monetary policy. The dollar immediately fell (hard currencies, not the ruble!), the stock market rose. Markets a wave of optimism.

Theoretically trump, who called the head of the fed Jerome Powell to stop the rate hike, might be satisfied with this outcome. However, this decision, the fed put an end to a possible re-election trump in 2020.

If the fed tightened the OST at the pace that it has done previously, it is very likely that by the end of 2019 there would be another cyclical crisis. And closer to the active phase of the race would have started economic growth. If not active, then at least the recovery after the recession caused by the crisis. This would make the victory trump virtually preordained “winner” of the crisis would probably have won the election.

But the unexpected failure of the fed from further tightening of the OST pushed the next crisis in a year or two. And it is very likely that his active stage now appear on the pre-election period 2020. And it’s practically guaranteed to Trump lose, for all the troubles of the crisis will be associated with the incumbent President.

Sergey Hestanov, Forbes
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