2 Very Dumb Ideas

Bad Policies Know No Political Boundary.

“You fell victim to one of the classic blunders! The most famous of which is, ‘never get involved in a land war in Asia,’ but only slightly less well-known is this: ‘Never go in against a Sicilian when death is on the line!’”
 – Vizzini, The Princess Bride

There are bad ideas.

And then there are ideas you truly hope never see the light of day.

Maybe, you hope, those pitching the ideas are just joking. Just floating a trial balloon that society will quickly plunk with a peashooter and pop before it becomes the disaster it’s destined to be.

Two such future disasters emerged last week.

They both need to be neutered before they wreak ungodly havoc on the US.

Now, before I explain these egregiously ignorant and boneheaded ideas, I need to assure you that this dispatch is not political commentary.

The ideas I’ll tell you about come from the camp looking to put Donald Trump back in office.

But truthfully, I’d be sending you this very same dispatch if the source was Joe Biden… or the ghost of George Washington.

You’ve seen me criticize Biden’s budget and all kinds of boneheaded ideas from the current administration in Field Notes…

But bad ideas know no political boundaries.

They spring up like poisonous oleander from both sides of the aisle…

So, let me share with you the proposed stupidity and then explain why the stupidity is so incredibly stupid. And I will note that I have not verified any of this. I’m taking it on faith that the sources of information are accurate. And who knows? Maybe they’re not.

But if they are, then potential disaster is afoot…

1. Destroy Federal Reserve Independence

The Wall Street Journal reported last week that Trump allies are “quietly drafting proposals that would attempt to erode the Federal Reserve’s independence if the former president wins a second term…”

The idea is that the president would have a significant say in interest rate changes, and that Fed policy toward interest rates and the economy should jibe with administration goals.

Not to put too fine a point on this, but this is a horrifying, moronic idea. An idea clearly born of economic imbecility mixed with brain damage.

To allow any president to impose, by law, their policy goals on the Federal Reserve is precisely how Hugo Chavez brought hyperinflation to Venezuela, Robert Mugabe brought hyperinflation to Zimbabwe, and Perón brought hyperinflation to Argentina…

Central banks—especially America’s central bank—demand autonomy to act in the best interest of the economy, not the best interest of a politician who only wants to win power via the voting booth.

The very moment the Fed loses independence is the moment it loses all credibility globally.

Which means that’s the moment the dollar loses reserve currency status—because investors and central bankers abroad will rightly fear that a White House-controlled Fed will push interest rates to the floor, and print money wildly, thereby fueling hyperinflation.

And the moment reserve currency status is gone, demand for dollars dries up… which will immediately send interest rates in the US soaring, since Uncle Sam has so much debt to sell. With limited buyers, interest rates must rise to compensate investors for the vastly increased risk they face.

And all of that means huge price increases for Americans for everything from food to fuel to mortgage and credit-card rates.

In short, relieving the Fed of its independence and allowing the president of the day to call the shots is about as smart as filling a blimp with hydrogen—i.e. the Hindenburg of financial decisions.

2. Beat ‘Em If They Don’t Love You Anymore!

Bloomberg reported late last week that other Trump advisers are pushing a plan to impose penalties on “allies or adversaries who seek active ways to engage in bilateral trade in currencies other than the dollar—with options including export controls, currency manipulation charges and tariffs.”

Since 1944’s Bretton Woods agreement, the world has used dollars as the medium through which global trade happens. If Spain wants to buy TVs from Korea, that trade happens in dollars, not euro or won.

In the post-war world, that made sense.

Eighty years later, the requirement makes little sense.

Countries today are weary of dollar-based global trade that gives the US unfair economic advantages; what a French finance minister in 1965 labeled an “exorbitant privilege,” since it keeps prices and interest rates relatively low in America because of never-ending dollar demand and the fact that America doesn’t have to convert dollars into other currencies to import goods from abroad.

As such, countries all over the world these days are increasingly moving away from dollar reliance and, instead, are trading amongst themselves in local currencies.

That has certain political advisors allegedly hatching a plan to penalize those countries and force them to use the dollar.

It’s the monetary equivalent of an abusive relationship.

If you don’t love me… well, I’m going to make you love me! Just remember, this punishment is your fault.

Forcing countries at the business end of a shotgun to use the dollar or else, is only going to push more countries away. They will rightly see this as financial abuse.

More to the point, the US really is in no position to demand any country use the dollar. 

That’s because of America’s own debt… its Achilles Heel.

China, which is pushing the creation of a new global reserve currency, can nuke the dollar whenever it wants to.

I’ve noted this before, but China quite likely possesses the world’s largest gold reserves. And it has been aggressively dumping US Treasury paper for years. At this point, China has an almost 1:1 hedge against the dollar, meaning it owns $1 in gold for every $1 in US currency in reserves.

In one fell swoop, China could dump all of its US dollars/Treasuries onto the market.

The price of US debt would plunge, and interest rates in America would soar, crashing the economy.

Every time I mention that, I get blowback to the effect of, “That only hurts China!”

First, financially speaking, China plans for three generations, whereas America plans for Friday night. China is well-prepared for this possibility, because…

Second, the value of China’s gold would shoot the moon as the value of its dollar holdings crashed.

In effect, China has the perfect anti-dollar hedge fund in place: The world’s largest gold reserves.

So, to assume that browbeating the world into loving your currency will somehow save the dollar from problems of America’s own creation is as arrogantly ignorant as Napolean waging a land war in Russia (that he lost by a country mile) in the dead of winter—i.e. really, really stupid.

I would be making these same criticisms no matter what side of the aisle these ideas were floated on….

And like I noted up front, maybe the sources spilling the beans on future White House policies are all mistaken.

Maybe the media outlets are engaging in yellow journalism. I really don’t know.

But if true…

Well, you’re definitely going to want a Plan B in place.