Asia’s dollar problem just got worse
Asia’s export-reliant economies will be collateral damage from any exchange-rate stunts from the Trump White House
The best way to destroy the capitalist system, Vladimir Lenin said, is to debauch the currency.
While Lenin didn’t live to see arch-rival America do just that, another Russian leader named Vladimir—Putin—is revelling in Donald Trump’s dollar debauchery.
Smart people can debate what role Putin played in putting the reality-television star in the White House. But there’s no disputing Trump’s dollar devaluation plans. Ironic, really. A US president so openly hostile to Mexico angling to morph the dollar into the “peso”.
No region is more on front lines of the dollar’s descent than Asia. Its export-reliant economies will be collateral damage from any exchange-rate stunts from the White House.
The same goes for the disorder likely to emanate from Trump’s latest staffing gamble: hiring Lawrence Kudlow as top economic adviser.
On 24 January, Team Trump made official its plan to end the 23-year-old strong-dollar policy. Treasury Secretary Steven Mnuchin rocked the currency world when he said: “A weaker dollar is good for us as it relates to trade and opportunities.” The yen’s 6% surge this year, a move that threatens Tokyo’s reflation efforts, speaks to the dangers of Washington taking a beggar-thy-neighbour turn.
Then last week, Trump hired CNBC host Kudlow, 70, to be the economic voice in his head. Confusing, considering Kudlow is a rabid strong-dollar enthusiast. After a stint at Ronald Reagan’s White House in the 1980s—Reaganites, remember, are hard money people—Kudlow served as chief economist at Bear Stearns. Confusing, too, because he doesn’t have an economics degree.
Kudlow is a supply-side ideologue, a cheerleader for the dogma of low taxes, less regulation, free trade and a strong currency. Now, he’s the brain trust and lead spokesman for a president who abhors the last two of these four core ideals. How will this fly in debates with Trump and Mnuchin?
The plot thickens when you factor in Jerome Powell, the new head of the Federal Reserve. Powell has telegraphed about four interest rate hikes this year. US data since then—including 313,000 new jobs added in February—augur in favour of tighter credit conditions.
Trump’s is as chaotic a White House as the world has ever seen. Might markets face public debates among Trump and his team about whether the dollar should plunge or rally? A volatility-inciting Trump-Mnuchin versus Kudlow-Powell brawl?
Stranger things have happened in Trumpworld, often emanating from Trump’s early-morning Twitter habits. Xi Jinping’s China is often a target of Trump tweetstorms, as is Japan at times.
Early in Trump’s first year in office, Toyota Motor Corp. came in for criticism for opening a new factory in Mexico rather than America. A declining yen, at the time, also came in for Trumpian finger-lashings here and there.
All Asia can really do is batten down the hatches, policy-wise, and brace for the fallout. In the Trump age, says economist Barry Eichengreen of University of California, Berkeley, markets “have no way to forecast the impact of policies, because policies thought to be headed one way suddenly veer in the opposite direction. A big infrastructure bill turns out to be small. Withdrawal from the Trans-Pacific Partnership (TPP) trade agreement turns into a possible decision to re-enter TPP.” And then Mnuchin, he says, “seemingly abandons the strong-dollar policy but then re-embraces”.
It’s policy whiplash of the kind one might expect from, say, Rodrigo Duterte in the Philippines. That it’s happening in the biggest economy and protector of the linchpin of global commerce—the dollar—raises the spectre of financial anarchy. It hardly helps that Trump, 14 months in, takes Washington’s rarified position for granted.
Trump, remember, was elected in part by railing against a massive debt build-up under predecessor Barack Obama. Of course, Obama took office just as the subprime crisis was savaging the US economy. A fiscal jolt was needed. Trump just borrowed $1.5 trillion from future generations to fund tax cuts for plutocrats. Were Japan to do that, credit-rating agencies would be announcing downgrades. Next time, though, rating companies might not be so tolerant. Kudlow is already talking about new tax cuts the economy doesn’t need.
But the real worry is trust in the dollar. When Mexico blew up in 1994, Asia in 1997, Russia in 1998 and Europe in 2010, investors rushed into the safety of dollars. Team Trump is busily damaging that hard-won credibility—to the benefit of Putin and Xi. As Lawrence Summers, an architect of the 1995 strong-dollar policy, writes in The Washington Post: “The confidence of global markets is much easier to maintain than to regain.”
That confidence is being squandered by White House chaos. “There are decades where nothing happens,” to double back to another Lenin quote, “and there are weeks where decades happen.” Last week was the latter, as Trumpland made it impossible for Asia to discern whether the dollar is headed sharply lower or higher this year. Debauchery, indeed.
William Pesek, based in Tokyo, is a former columnist for Barron’s and Bloomberg and author of Japanization: What the World Can Learn from Japan’s Lost Decades.
His Twitter handle is @williampesek.
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