The very sharp Barry Eichengreen has a theory of why Donald Trump wants to put ex-tight money advocate Judy Shelton on the Federal Reserve Board. It is certainly a more plausible and sensible theory of what they are aiming at than any other theory that I have seen put forward. But I fear that it is wrong: understanding a word or deed of the Trump administration from the standpoint that there is a coherent vision of the world from which it is plausible and sensible seems deeply flawed to me:

Barry Eichengreen: Trump’s Cross of Gold: "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.... Thus, the challenge for Team Trump is to get other countries to change their policies to prevent their currencies from moving. That’s what the demand for stable exchange rates and an end to 'currency manipulation' is all about.... But in the absence of a global conference—something that would be anathema to Trump—the way to get there is the same as under the nineteenth-century gold standard.... If the US moves first, 'preemptively' as Shelton puts it, other countries will follow. Behind this presumption, however, lie a number of logical non-sequiturs. First, other countries show little desire to stabilize their exchange rates.... Second, gold is no longer a stable anchor.... Today... the stabilizing capacity of the mining industry is weaker.... Arguments for a gold standard and pegged exchange rates are deeply flawed. But there is a silver lining, as it were: nothing along these lines is going to happen, Governor Shelton or not...


#noted

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