Paul Krugman, the 2008 Nobel Memorial Prize in Economic Sciences wrote yesterday a great opinion article in the New York Times titled “China Tries to Teach Trump Economics”. In just a few lines Krugman destroys some of Trump’s ridiculous claims, but more importantly, he exposes an impossible equation, how can you win a trade war and a currency war at the same time? If the U.S inflicts damage to the Chinese economy the Yuan is fundamentally bound to weaken, which is something Trump criticizes heavily.
Take today´s example, Bloomberg reported that Trump administration “delayed licensing decisions for American companies to restart business with Huawei Technologies”, so it was not only normal but basic common sense that the Yuan would go even lower against the U.S dollar. Logic prevailed and it did devaluate to 7.06 Yuan for each dollar, higher than the level reached Monday.
Photo by Element5Digital.
The trade war is a political agenda above anything else, Trump wants to extend the positive economic cycle until the 2020 presidential elections, and to achieve it he got the FED to lower its rates when the economy is growing over 2%. In 2001 the U.S central bank began reducing its interest rates from the 6% level, and following the 2008 financial crisis, the easing began when rates were around 5.5%. This time the dovish cycle is starting at 2.25%, with historically low unemployment, decent inflation and good economic growth, how crazy and unsustainable is that?
