ECONOMYNEXT – US stocks fell and bond yields remained elevated as President Donald Trump ramped up pressure on Fed Chief Jerome Powell to cut rates saying inflation was on the way down.
Trump has imposed wildcat tariffs on other countries and to create an anti-globalization utopia.
However many US ‘progressives’ backed by protectionists have criticized ‘globalization’ for several years and were also building up a following in developing countries.
Sri Lanka also embarked on a Trump style de-liberatization path from November 2004 with a 25-page gazette issued to restrict non-essential imports as money printing created forex shortages.
Advisors to them President Mahinda Rajapaksa and oligarchs who supported him blocked free trade deals and ratcheted up so-called para tariffs named CESS and PAL, expanding dependency on US and Europe, and blocking export diversification, according to critics.
Trump is now trying to create a Sri Lanka style anti-globalization utopia by raising tariffs, especially against China from where large volumes of raw materials are imported for US industry.
Policy Feud
Last month inflation in the US fell absolutely as energy commodity prices fell, and Trump threatened to sack Jerome Powell unless he cut rates.
He ratcheted up pressure on Powell Monday for a second time.
“With these costs trending so nicely downward, just what I predicted they would do, there can almost be no inflation, but there can be a SLOWING of the economy unless Mr. Too Late, a major loser, lowers interest rates, NOW,” Trump said in a post on truthsocial.com.
“Europe has already “lowered” seven times. Powell has always been “To Late,” except when it came to the Election period when he lowered in order to help Sleepy Joe Biden, later Kamala, get elected. How did that work out?”
In the US the Dow Jones closed down 971 points Monday.
Powell delayed rate hikes after covid money printing and fired a commodity bubble sending inflation to 1980s levels, claiming that inflation in 2022 was transient.
Now the Fed fears higher prices from Trump’s anti-globalization tariffs, which will go counter to its ‘data driven monetary policy’.
Though Trump is putting the blame for a slowing economy on the Fed, which is typical of a stabilization crisis following the original rate cuts. Most other observers have already faulted the US President for the impending slowdown with his wildcat tariffs.
Classical economists including Steve Hanke, who predicted the inflation spike accurately, have already projected a recession saying it was ‘baked in the cake’ based on money supply developments.
However wild state policy, that classical economists call ‘regime uncertainty’ also kills investments and short term and long term growth.
US bond yields are also elevated with many former buyers weaned off the securities by the US Treasury and the International Monetary Fund who forced China and other East Asian central banks to break US dollar harder pegs.
Own Goals
US Mercantilists at the time claimed there was an ‘Asian savings glut’ that undermined the transmission mechanism of the Fed.
China used to own about 1.3 trillion dollars of US bonds under its peg with the US dollar, but it broke the peg shortly before the Fed’s housing bubble collapsed.
The People’s Bank of China started to run a near-floating exchange rate after its governing law was changed in 2014 and it stopped collecting reserves and US holdings were progressively reduced.
The US Treasury also targeted tax havens from where large volumes of American bonds were bought.
Despite having relatively high personal income tax rates, which kill savings, the US has been able to import capital and foreign savings, giving cheap funds for deficit financing and local investments, allowing the country to grow.
Ironically the US trade deficit is also a result of the foreign financing of domestic investments. The filling of the savings-investment gap from foreign capital inflows triggers a current account deficit when the money is spent. (Colombo/Apr22/2025)
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