Trump’s Cross of Gold
US President Donald Trump wants to compress the United States trade deficit and enhance the competitiveness of domestic manufacturers by using tariffs to raise the price of imported goods. And the fixed exchange rates he needs to achieve that goal are the real reason behind his nomination of Judy Shelton to the Federal Reserve Board.
SINGAPORE – There are now scores of efforts to psychoanalyze US President Donald Trump’s nomination of Judy Shelton to the Federal Reserve Board. Some emphasize Shelton’s fidelity as an early adviser to the Trump campaign. Others point to her conversion into “a low-interest-rate person.” Still others highlight her advocacy of the gold standard as insulating US monetary policy from an unreliable Fed.
These interpretations all miss the point, which is that Shelton is a proponent of fixed exchange rates. Her belief in fixed rates is catnip to an administration that sees currency manipulation as a threat to winning its trade war.
Team Trump wants to compress the United States trade deficit and enhance the competitiveness of domestic manufactures by using tariffs to raise the price of imported goods. But a 10% tariff that is offset by a 10% depreciation of foreign currencies against the dollar leaves the relative prices of US imports unchanged.
Countries seeking to maintain the competitiveness of their exports have an obvious interest in encouraging such currency adjustments, or at least in not resisting them. In fact, they don’t actually have to do anything in order for their currencies to fall when the US applies tariffs. The US current-account deficit is just the difference between US investment and US saving, which tariffs do nothing to change. If the current account doesn’t change, then neither can the relative price of domestic and foreign goods. So the exchange rate must move, of its own accord, to offset the tariff.
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