Peter Schiff: Making the Dollar Weak Again

Through the last several presidential administrations, the US has maintained a “strong dollar” policy. As Peter Schiff pointed out in his most recent podcast, it wasn’t so much that you could pinpoint the specific tenets of the policy. It was more about the rhetoric that came out of Washington D.C. Everybody talked about the strong dollar being in the national interest.

Having the belief that there was some kind of hidden strong dollar policy helped to create confidence in the dollar. Even periods where the dollar was declining, perhaps it would have declined even more had it not been for the belief that there was some kind of strong dollar policy.”

But times have changed. As Peter put it, “It should be pretty obvious that Donald Trump has a weak dollar policy.”

Now, this weak dollar policy doesn’t actually mean doing anything. It’s all about the rhetoric, just like the strong dollar policy.  And Peter said that when the dollar does start to fall, the rhetoric will help drive it even lower. When the dollar finally starts to fall, it will fall even faster when people think it’s a deliberate policy.

We heard this rhetoric coming out yesterday when Trump once again took aim Federal Reserve chair Jerome Powell during a Reuters interview, saying he needs to do more to help him boost the economy.

I’m not thrilled with his raising of interest rates, no. I’m not thrilled.”

Trump made similar comments last month. Peter said he thinks Trump expected Powell to be more of an “easy money” guy when he nominated him, and the president is disappointed that he’s not getting what he expected.

Trump also called out the Chinese and the EU for manipulating their currencies. “We’re negotiating very powerfully and strongly with other nations. We’re going to win. But during this period of time, I should be given some help by the Fed. The other countries are accommodated,” Trump said.

Peter said part of the reason the dollar is rising is Trump’s own fault.

Ironically, one of the reasons [the yuan and the euro] are falling is because of the trade war he has initiated, because a lot of people believe that we’re going to win this war. And of course, Trump is out there trumpeting the economy, talking about how great the economy is, tweeting about how great it is every day. That’s also what’s driving money into the dollar. It’s not that the Europeans are manipulating their currencies lower. It’s a lot of the things Trump has been doing has been helping to artificially prop up the dollar, and drive it higher. And the president should actually be glad. Because one of the reasons, and probably the main reason, that the US stock market has not suffered as much as global markets because of all the war-mongering about the trade war is because of the strong dollar –  is the belief that the US is going to win the trade war. That’s what’s creating a bid in the dollar. That’s what’s supporting the US stock market.”

Some people have even gone as far as to call the US stock market a “safe haven.” The dollar has certainly gotten a safe haven bid, as we discussed in a recent post.

Of course, the rate hikes that the president is criticizing is also part of the reason for the strong dollar. The expectation of more hikes has been propping up the dollar, which by extension is propping up US stocks.

But Peter said all of this is going to change.

Trump is setting things up so he can blame the Fed if the economy tanks. But Peter said the president has it all wrong.

He’s wrong to blame the Fed now because what he is accusing the Fed of doing is not the problem. The problem is what they did before Trump was elected. The rate hikes are not the problem. The problem was that rates were lowered in the first place. You know, when Trump was a candidate, he criticized the Fed for the right reasons … He said [the economy] was a bubble, that the Fed policy was propping up the stock market. but eventually it was going to come collapsing down, that this was all a bubble, that the Fed was being political, and they shouldn’t do that. And Trump was right. The Fed was being political when Obama was president. The problem now is that Trump’s criticism of the Fed is that the Fed is not being political enough now that he’s president. What he’s upset about is that the Fed under Powell is not extending the same courtesy that the Fed extended to Barack Obama when Yellen or Bernanke were Fed chairmen.”

The bottom line, according to Peter, is that Trump put a guy in as Fed chair whom he expected to be political to his advantage and Powell isn’t doing what the president expected. Peter said this is pretty hypocritical. Either the Fed should be political or it shouldn’t.

So, Trump wants the Fed to “help the economy.” But as Peter pointed out, it doesn’t really help the economy when you’re just inflating a bubble.

What helps the economy is to let the market function freely, to allow resources to be reallocated efficiently, to allow inflated asset prices to fall, to allow the short-term pain that is required to experience long-term gain.”

Peter said ultimately, the Fed will be political. It’s not going to let the bubbles completely deflate. That would expose the failure of their past policies. So, eventually, the Fed is going to bail out the economy – at the expense of the dollar.

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Photo by Gage Skidmore