“I’m not blaming anybody, but I’m just telling you I think that the Fed is way off base with what they’re doing, number one. Number two, a positive note, we’re doing very well on trade, we’re doing very well — our companies are very strong. Don’t forget, we’re still up from when I came in, 38 percent or something. You know, it’s a tremendous — it’s not like we’re up — and we’re much stronger. And we’re much more liquid. And the banks are now much more liquid during my tenure. And I’m not doing — I’m not playing by the same rules as Obama. Obama had zero interest to worry about; we’re paying interest, a lot of interest. He wasn’t paying down — we’re talking about $50 billion lots of different times, paying down and knocking out liquidity. Well, Obama didn’t do that. And just so you understand, I’m playing a normalization economy, whereas he’s playing a free economy. It’s easy to make money when you’re paying no interest. It’s easy to make money when you’re not doing any pay-downs, so you can’t — and despite that, the numbers we have are phenomenal numbers.”
— President Trump, in an interview with The Washington Post, Nov. 27, 2018
This long section of President Trump’s Nov. 27 interview with The Washington Post caused a fair amount of puzzlement among our readers. It came in the middle of an attack on Federal Reserve Chairman Jerome H. Powell. The White House declined to answer our questions intended to clarify the president’s words, so we consulted with experts in an effort to deconstruct his rhetoric.
We cannot claim complete success, and it’s fairly amazing the White House would not try to offer an explanation. But perhaps aides do not know what he meant, either. Anyway, here’s a tour through his spin, bluster and puzzling claims.
“Number two, a positive note, we’re doing very well on trade, we’re doing very well — our companies are very strong. Don’t forget, we’re still up from when I came in, 38 percent or something. You know, it’s a tremendous — it’s not like we’re up — and we’re much stronger.”
Trump’s phrase — “up from when I came in, 38 percent or something” — appears to be a reference to the stock market. If so, it’s wrong. At the time of the interview, the Dow Jones industrial average was 25 percent higher than Jan. 20, 2017, when he took the oath of office; the Standard & Poor’s 500-stock index was up about 18 percent. Trump tends to date things from the election, in effect wiping out the last three months of Barack Obama’s term. But even that would not explain his use of 38 percent.
While Trump says “we’re doing very well on trade,” the U.S. trade deficit has increased about 9 percent over the same period in 2017, according to the Commerce Department. We’ve explained before that this is not an especially important metric — but it is to Trump, who harps on it. He even prematurely claimed victory in reducing the trade deficit earlier this year when he misread some economic numbers.
“And we’re much more liquid. And the banks are now much more liquid during my tenure.”
Bank liquidity around the world has improved, according to a new report by the Financial Stability Board, an international body that monitors the global financial system. The loan-to-deposit ratio — a key measure for liquidity — for U.S. banks has nudged higher during Trump’s presidency, according to Fed data, so it’s a stretch to say “much more liquid.” (Note: the higher the ratio, the lower the liquidity.)
“And I’m not doing — I’m not playing by the same rules as Obama. Obama had zero interest to worry about; we’re paying interest, a lot of interest. He wasn’t paying down — we’re talking about $50 billion lots of different times, paying down and knocking out liquidity.”
Trump’s reference to $50 billion appears to be about the Fed’s unwinding of its program known as quantitative easing (QE) — large-scale purchases of assets by central banks. During the financial crisis of 2008-2009, the Fed purchased trillions of dollars of government bonds and mortgage-backed securities as part of a low-interest policy that effectively brought interest rates to zero.
Now that the economy has recovered and is doing well, the Fed is trying to unwind its positions, mainly by letting bonds mature without reinvesting them. In effect, the money disappears, which Trump appears to be talking about when he says the Fed is “knocking out liquidity.”
In announcing the plan, the Fed said it would gradually increase the amount of holdings it shed, including up to $50 billion a month in the fourth quarter of 2018. But that was the maximum — the Fed had not actually reached the $50 billion mark. In October, for instance, the Fed’s holdings of Treasury securities fell by $23.8 billion.
The Fed’s decision to unwind QE is actually a vote of confidence in the economy because it is tapping on the growth brakes to avoid an overheated economy. It’s worth noting that when Trump ran for president, he accused the Fed of keeping interest rates artificially low and predicted stocks would crash when interest rates rose. That didn’t happen.
The Treasury is issuing lots of new bonds now because of Trump’s debt-financed tax cut. Over 10 years, the tax cut is expected to add $1.9 trillion in debt.
Jared Bernstein, an economic adviser to Vice President Joe Biden, said that ordinarily when the unemployment rate is so low, there should be little or no budget deficit, rather than the 4 percent of the gross domestic product under Trump. “In that regard, he’s contributed to both of the problems he’s whining about,” he said. “The debt’s higher because he deficit-finances everything (Democrats are implicated too here on spending), and his stimulus at close-to-full employment has the Fed worrying more about overheating.”
“Well, Obama didn’t do that. And just so you understand, I’m playing a normalization economy, whereas he’s playing a free economy. It’s easy to make money when you’re paying no interest. It’s easy to make money when you’re not doing any pay-downs, so you can’t — and despite that, the numbers we have are phenomenal numbers.”
Obama, of course, faced the worst economic crisis since the Great Depression, with unemployment reaching 10 percent. The economy is now basically at full employment. Zero percent interest rates would mean the economy was again in a free fall — presumably not something Trump wants.
Alan Blinder, a former vice chair of the Fed, interpreted Trump’s comments as evidence that the president still does not understand the nuances of government financing.
“It looks like — once again — he cannot distinguish between the U.S. government and a family business. If you run a family business with lots of debt — the Trump Organization for example — it’s a lot easier to turn a profit if interest rates are near zero,” Blinder said. “A super-charitable interpretation might be that, if super-low interest rates give the economy faster GDP growth, then that will help hold down the budget deficit. But, of course, GDP growth has been faster in the Trump administration so far, and the deficit has been far larger.”
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