Trump, Elizabeth Warren share a bad economic idea about the dollar weakening

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• President Trump and Senator Elizabeth Warren, presidential candidate, have launched the idea of ​​a weakening dollar to help sell US exports.
• It's a very stupid and dangerous idea.
• Weakening the dollar would scare the world of US assets, already shaking confidence in the US government and could potentially trigger a currency war race with China that no one would win.

• Visit the Business Insider home page for more stories.

President Donald Trump and Senator Elizabeth Warren, Democratic presidential candidate, have the same idea about the dollar, and it is very bad.

Trump and Warren would like the United States to intervene in the global currency markets to weaken the US dollar. Both countries say it would help US workers by making US exports cheaper, as foreign currencies could buy more dollar-denominated products at a lower price.

For Trump, this decision would contribute to achieving one of its most valuable but most useless goals: to reduce the US trade deficit. According to the Wall Street Journal, Trump has pitched the idea to his advisers who have so far dismissed it.

Warren has expressed his desire to weaken the dollar in his US job plan announced in June. Just as economist Robert E. Scott, who wrote to support this proposal in The New York Times, she believes that the strong dollar has made US exports too expensive and therefore uncompetitive. This is why you see factories set up abroad, so you can produce cheaper products for foreign buyers.

Scott claims that other countries have managed to hijack US blue-collar jobs thanks to the strength of the dollar, and then they leaned on this advantage by manipulating their currencies downward.

The economist also complains that the strength of the dollar has attracted investors who then buy the currency. This flow of private and foreign capital in US dollars and assets, he calls "a misalignment of the currency".

Others call it a market.

One of the reasons an investor would buy the US dollar, for example the Thai baht, is because it's a global reserve currency – the central banks keep it. They hold it because it's trustworthy – until now, we have not yet had a metal jar dictator manipulating its value. This confidence is ultimately what makes the dollar so liquid, what investors love. In this way, the stability of the dollar is important for the whole world, not just for the United States.

"Foreigners are buying US stocks and bonds (which are denominated in US dollars of course) because they believe that these financial assets (and the currency in which they are denominated) will not be manipulated at random by an impulsive and unprofessional government "said Carnegie. Lee Branstetter, an economist in Mellon, informed Business Insider by email.

"If the United States tries to systematically manipulate the value of its currency, it could have a negative impact on the local currency returns perceived by foreigners investing in our assets." A dollar down makes US stocks less attractive. foreigners would think carefully about investing in our assets, the US government tried to lower the dollar if an influx of capital led to a rise in the dollar. "

A weaker dollar would also provoke a series of other headaches, making it more difficult to repay the public debt by raising mortgage rates.

In addition to all this is the question of How? 'Or' What we would move to a dollar lower. One of the solutions is simply to lower interest rates, as the Federal Reserve has already done. This does not seem to work fast enough for President Trump, which means he can use the 1934 Gold Reserve Act to intervene in the market by selling dollars. Many dollars.

"Since we print our dollars, we could, in principle, print so much that many panic that their price drops," continued Branstetter. "If implemented, it could literally cost us tens of billions of dollars in lost wealth."

The factor Xi

And at the present time, in the middle of a trade war with China and with the central banks feverishly working to deflate, even more pressing complications would come with the weakening of the dollar. Namely, run a race down.

Thanks in part to Trump's trade war, the Chinese economy is weakening. For the first time in 3 years, producer prices fell in August. This means that manufacturing profits will fall. At the same time, the country is experiencing a shortage of pork that is driving up consumer prices. Targeted government stimulus is not enough to stimulate growth. It's a toxic mixture.

The growth of industrial production has slowed considerably in China in all sectors.Societe Generale

A weaker economy means a weaker Chinese yuan, whose anchor is set daily by the People's Bank of China (PBOC). And as the economy slows, prices in China are falling. All of this is a deflationary force that China can export to the rest of the world.

We have worried about it before. In early 2016, as all the world's elites gathered at the World Economic Forum in Davos to worry about their money, the Chinese economy was in decline. The money was leaving the country hand in hand and it was lowering the yuan.

"I think the Chinese situation with the currency is very important, very important," said Ray Dalio, founder of the billionaire's largest hedge fund in the world. "If there is a significant weakness of the currency for the yuan, it will lead to more imported deflation and make things more difficult."

Given that the dollar is such a strong demand as a reserve currency, massive market intervention is needed to lower it. Even in this case, however, economists believe that it could very well be only less ubiquitous currencies emerging markets.

China – currently struggling with a rapidly weakening economy – could simply react to a weaker dollar by lowering its anchor point. This would then lead to a race to the bottom with the United States and China weakening their respective currencies.

Of course, there are limits to what China would do. Set the ankle too low and the money will start to leave China as it did in 2016. This type of capital flight could cause the yuan to fall too fast for the taste of the PBOC. On the other hand, China has to sell its exports.

So if the United States starts a race, China may want to finish it.