Well, there is a method for the madness, it has to do with the president’s obsession with the U.S. trade imbalance (now around $450 billion per year).
There are only two ways to reduce a trade deficit; first, to reduce imports and secondly to increase exports. The latter is highly dependent on the value of the U.S. dollar. A dollar priced too highly makes U.S. goods too expensive and thereby reduces exports.
Mr. Trump seems to be aware of the problem and is trying to talk the dollar down; with little results, since the dollar is highly affected by foreign currencies, especially the Euro and the Yen. However, foreign currencies are influenced by capital movements between countries. It so happens, there is a great imbalance in the yield of safe monetary obligations. Here we have European obligations selling at interests near, or even below zero percent. In contrast, you still can buy a 10 year treasury bond yielding about 1.5 percent.
As such, we see a massive influx of foreign capital which increases the value of the dollar caused by simultaneous decrease of the value of foreign currencies.
Being aware of this relationship, Mr. Trump tries to force the Federal Reserve to lower the interest rates in order to stem the money influx. Unfortunately, the Fed has no mandate to support currencies (it is restricted to inflation and employment).
Ultimately, the stock market will take care of the matter. If more people try to buy more bonds than are offered, the yield will drop. Following this logic, we will see a continuation of the increase in market price for federal funds with corresponding decreases in yield, as we have already seen during the year. Will the yield ultimately touch down to zero? It can happen, but unlikely.
My advice to President Trump, just wait!
Dr. Baumann, a former Corporate Vice President and founder of his company, is a well known inventor, economist, and author having published books on scientific, economic, and historical subjects. He is a member of the American Research Society and an Inductee of the Hall of Fame of Automatic Control, besides also being an honorary member of a number of technical societies. For more of his reports, Go Here Now.
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