Trump Against the Fed

Economic analyst Vasily Koltashov on whether the Republican candidate can solve America's debt problem if elected.

The Federal Reserve System, also known as the Fed, is widely believed to be the backbone of the American economy. It prints dollars and provides credit to banks. In the past few years, the banks have gotten used to unbelievably cheap money from the Fed. Not long ago, the Fed's interest rate was 0.25 percent; it has since gone up to 0.5 percent. The Fed has been promising to raise the interest rate even higher for a long time now. This is meant to be a sign of the U.S. economy's recovery, showing that it no longer needs artificial support. However, for months already the Fed leadership has been unable to take this step. There are rumors of impending inflation because of their delay.

The Fed is an independent federal agency that fills the role of a central bank. It is largely independent of the government; to the contrary, control over the Fed is exercised by its private member banks. Fed decisions are made more for the benefit of Wall Street than for the sake of national interests, or even the real economy. The more serious the banks’ problems became, the more money they received from the agency. A congressional audit of the Fed in 2012 revealed $16 trillion in secret loans. Still, nothing changed, and the Fed continued business as usual.

U.S. presidential candidate Donald Trump provides a no-nonsense explanation of the Fed's policy. According to him, the Fed, along with the Obama administration, created a huge bubble in the American economy. More than anything, Trump wants to see that bubble burst before his election, and not after. That way, the new president can avoid taking the fall.

For Now, Trump Is Blaming His Opponents

America's national debt exceeds $19 trillion. This is 103 percent of its gross domestic product. Trump rails that "the (Fed) is at the heart of the debt-based system which is eating away at America like cancer." He also notes that "officials at the Federal Reserve have no direct accountability to the American people whatsoever." Trump promises to fire Federal Reserve Board Chair Janet Yellen, whose term continues until 2018, and refinance the debt.

How Trump plans to refinance the overwhelming American debt is a mystery. However, according to the presidential candidate, the U.S. cannot go bankrupt as long as it prints dollars. At the same time, Trump is not an enthusiastic supporter of issuing money without restraint. That position is the hallmark of the Democratic Party, his opponents. Therefore, if Hillary Clinton becomes president, there will be nothing to stop the issuing of dollars or the currency's devaluation. All this was apparent from the first years of the crisis.

The dollar is already weakening. The euro and the yen both gained strength against the American currency in August. This didn't affect either the Brexit referendum in Great Britain or the lamentable state of the Japanese economy. The increased price of oil from $42 to $52 a barrel also occurred as a result of the soft dollar and the Fed's extremely weak fiscal policy. There is another reason for the dollar's weakness: its declining demand around the world, especially under the influence of the crises in the BRICS economies.**

In 2008-2009, the U.S. found a way to alleviate the symptoms of the crisis. The Fed issued dollars and passed them on to the banks. Government debt increased, which also helped the banks, since they owned the debt. The banks received massive assets, which would have depreciated if not for the economic recovery caused by and large by the rate of growth of the BRICS economies. These countries’ governments also tried to help the American financial systems in order to deal with the crisis. But then the "young economies" ran out of steam in 2015, the result of falling oil prices. The U.S. authorities understood that they needed to take others' resources by force.

However, the U.S. didn't have time to break into the BRICS economies. The political struggle went on. The impeachment of Brazilian president Dilma Rousseff didn't produce results. China held off a devaluation of the yuan, which American bankers were clearly pushing for, counting on an outflow of capital to the United States. The "crusade" against Russia has already gone on for too long.

Americans Are Tired of Foreign Policy

Americans are focused on social and economic issues. As if out of spite, U.S. corporations posted losses in mid-2015. Capitals around the world have ceased looking to the U.S. for "safe haven." A financial "shakeup" has begun, which has recently strengthened the euro and yen.

The Fed has refrained from raising interest rates under these conditions. Their goal is obvious. Trump explains it perfectly: if the Fed raised rates even by one percent to 1.5 percent, the U.S. financial system couldn't take it. The markets would collapse. The wounds of the crisis would reopen violently, possibly worse than in 2008. Inflation would rise, like in the now-distant crisis of the 1970s. Clinton would lose the election, while the new president would inherit a host of economic problems. He would have to deal with a disaster.

Therefore, the American ruling banker class, rightist Democrats and people from the Fed will try to keep everything the way it is. Furthermore, it's important to them to preserve the appearance of stability before the election. They aren't thinking long term or preparing economic solutions. It's enough for them that Clinton will give the banks an unlimited amount of money when times get tough. If that weakens the dollar, then she will have to make peace with that and save the banks at all costs. They will punish whomever is convenient, so long as it's not the truly guilty. In the meantime, America's debt keeps growing. It doubled under Obama; it will double again under Clinton.

However, the capitalists might lose the election. A President Trump is unlikely to limit himself to merely cutting taxes. He will need to bring the Fed to heel and normalize the key interest rate. He will need to raise it by more than 1 percent, which will deprive the banks of free money for irresponsible speculation. However, debt payments depend on the Fed's interest rate. America's debt is so great that even a slightly increased rate would make the interest too expensive to pay.

The Democrats have been growing the national debt for a long time, which has helped stave off a default. The Fed even managed to strengthen the dollar by slightly moderating its policy when it decided against "quantitative easing" (buying up private securities) in 2014. But the opportunities provided by this earlier soft policy have been exhausted. Naturally, the bankers do not want to recognize this. After becoming president, Trump should reduce the national debt and its pressure on the budget. Saving money won't help if he doesn't take on the Fed.

The strong dollar will not allow American industry to grow. That's why its necessary devaluation would actually be advantageous. If the American authorities manage to nationalize even 50 percent of Fed-controlled debt through inflation while passing laws to limit payments on the rest, then it may become possible to try out a different economic policy. Protectionism should help too; Trump's campaign is betting on it. A lot could be done with the economy if the country finally overcame the 2008 financial crisis.

*Translator’s note: The quote provided in the article is a mistake. The author seems to think that Trump is being quoted, but the quote actually comes from an article about Trump.

**Editor’s note: BRICS is an acronym for the association of five major emerging national economies: Brazil, Russia, India, China and South Africa.