Trump’s Latest Tweet on Fed, US Debt Called ‘Recipe for Disaster’

President Donald Trump triggered a swift and skeptical reaction with his demand Wednesday for the Federal Reserve to lower interest rates ‘to zero, or less,’ as part of a plan to reduce the financing costs of U.S. government debt.

“This is a recipe for disaster,” said Roberto Perli, a former Fed economist and partner at Cornerstone Macro in Washington. “If a central bank starts financing debt spending without constraints, interest rates will end up being anything but moderate. Just look at Zimbabwe.”

Independent central banks like the Fed don’t set rates motivated by an urge to manage their national budget’s debt financing costs. They adjust the cost of borrowing based on what they judge will be best for the overall economy. In the U.S., the Fed has to pursue that through specific goals set by Congress: maximizing employment and containing inflation.

To be sure, interest costs represent a meaningful portion of the U.S. federal budget and are projected to rise at a worrying pace. Lower rates would ease that burden. It’s also a fair question to ask why the U.S., the safest haven for investors worldwide, should be paying higher rates than countries like Japan and even Greece.

“The Federal Reserve should get our interest rates down to ZERO, or less, and we should then start to refinance our debt,” Trump tweeted. “Interest cost could be brought way down, while at the same time substantially lengthening the term.”

The president is calling for the Fed to suddenly lower its benchmark rate by 2 full percentage points to zero at a time when unemployment is near a 50-year low and growth, while slowing, is still doing OK.

“If the Fed were to actually do that, markets would have to wonder if the world was much worse than we thought,” said Diane Swonk, chief economist at Grant Thornton in Chicago. “That could precipitate a recession.”

It might be great for a while to lower government financing costs. But if that means setting rates too low for too long, the results can be disastrous, producing financial bubbles and high inflation.

Trump’s proposal, though, is not unprecedented.

During World War II the Fed agreed, at the request of the Treasury, to hold rates artificially low to help the government take on massive amounts of debt in the war effort. But it was accompanied by an equally prodigious expansion of government-financed industrial output.

When output fell after the war, low rates led to wild swings in prices. CPI inflation from 1946 through 1951, when the Fed regained its independence, averaged 6.5%, with a peak of almost 20% in 1947.

U.S. Already Refinancing

A government, especially the U.S. government, can’t refinance its debt the way a household or company can by simply taking out a new loan to pay off all its old borrowing. The U.S. Treasury owes more than $16 trillion in outstanding debt, and is refinancing a portion of that all the time as Treasury bills, notes and bonds mature. It holds weekly auctions of short-term bills and replaces large portions of longer-term debt each quarter.

Even if rates were to fall precipitously, it would be difficult and probably unduly expensive for the Treasury to accelerate that process by going out and purchasing older but yet-to-mature government debt in the secondary market in order to replace it with new issues. Some of those older issues are trading at prices as high as $1.40 for every $1 of face value.

Recently, with rates falling again, the Treasury has begun exploring the idea of issuing very long-term debt — 50 and 100-year bonds — to lock in today’s low rates for long periods. But forcing more debt into ever-longer maturities might press the government to pay more to investors who otherwise lack the appetite for those securities.

Careful What You Wish For

On one level, it is head scratching why the U.S. should be paying more to borrow money than smaller, weaker and riskier countries. If all else were equal, investors should receive a premium for lending to those countries instead of handing their money over to Uncle Sam. But not all else is equal.

Longer-term sovereign bonds yields incorporate investor expectations for longer-term growth and inflation. So, the negative yields found in the Europe and Japan are a reflection of a very poor economic outlook.

From that perspective, the fact that the U.S. Treasury isn’t able to borrow money for nothing signals America’s relative economic strength.

via newsmaxfinance

2 comments

  1. It looks like Trump is an oil company stooge selling us out, The only thing that will bring us out of this depression is free energy, hydrogen from water, have this as your debate, you can make all the hydrogen, as you drive from a tank of water, you know our space shuttles,are powered by hydrogen / oxygen made from water, tell every one not buy a new car / truck, to boycott the auto company’s, when they can’t sell their pieces of junk low mileage vehicles, they will have to bring out water to hydrogen powered vehicles, and kits to change the vehicles now that we have, just think what our world would be like with free energy. a Porge vapor carburetor sitting in the patient office that gets around 200 mpg, Volkswagen diesel gets 264 mpg, we are getting ripped off by the oil company owned auto company’s Don’t you you think it’s time to take our world back.
    Also audit all the Senator’s and representatives, they have wasted, and stole our money, make them repay all, and tax them.

    1. Right on Bryce! But for one thing. We need a great deal more carbon (CO2) in our atmosphere, SOMEHOW, for our plants to make more oxygen for us. Clean energy is a globalist scam-hoax like “climate emergency – it is a death ploy by a death cult.
      As for the Fed, “The borrower is servant to the lender.” Let it sink in.

      A few dead flies ruin the perfume. The wise tend to the right, fools to the left. Even just walking down the street the fool shows how stupid he is. Ecclesiastes10:1-3.

      “If you do not have a sword sell your cloak & buy one.” Luke22:38.

      “There will be no peace in the world until the Koran is eliminated from the earth.” Winston Churchill.

      We are at war coming from every direction & due to the fake media, communist schools & complicit & obstructive government traitors we have failed to fully understand & combat the threat. Trump, & the Patriots in our military & police, do fully understands & are doing all they can do. This will not end until the enemy is eliminated from the earth.

      Leftists are traitors & losers from start to finish even when they act nice or appear to win, they lose.

      …AND Frank Zappa for President 2024::
      “Socialism produces bad art, bad music, social stagnation & really unhappy people.” …and satanists.

      Leftists seem to have full spectrum narcissistic psychosis & inflict PTSD on opponents by using verbal abuse & lies of every kind as well as other terroristic underhanded tactics of the dedicated psychotic-natcissist. See for yourself on YouTube:
      NarcAWAY.
      Narc ology unscripted.
      Surviving Narcissism.
      Michele Lee Nieves.

      For real news go to OANN (One America News Network).
      Also: THE EPOCH TIMES, Truth & Tradition. Dedicated legitimate legal Xtian immigrant patriots who escaped commie China & know they are finished unless they continue to fight the commie HORROR regardless of consequences.
      To remove the blinders & psycho propaganda MASK Read:
      TIPING POINTS: How to Topple the Left’s House of Cards. LIZ WHEELER (OAN Commentator).
      MAKING LOVE GREAT AGAIN: The New Road to Reviving Romance & Winning at Relationships. DEANNA LORRAINE.
      TAKE NO PRISONERS: Battle Plan for Defeating the Left. DAVID HOROWITZ.
      BIG AGENDAç President Trump’s Plan to Save America. DAVID HOROWITZ.
      JIHADIST PSYCHOPATH: How Hw Is Charming, Seducing & Devouring Us. JAMIE GLAZOV.
      THE HISTORY OF JIHAD, From Mohammed to ISIS. ROBERT SPENCER.
      Web sites h channels for truth:
      Stefan Molyneux, freedomain.com .
      YouTube:
      Bill Whittle.
      Acts17apologetics.
      Apostate Prophet.
      Julie Mora.
      American Intelligence Media.

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