How Trump Can Trump the Fed (Part Two of Three)
I explained in my previous article how the largest obstacle for Donald Trump is King Dollar, represented by central bank chairman Jerome Powell and the Federal Reserve.
The dollar is strengthening and that’s not good news for financial assets. Trump has called the Fed “loco” and argues they are crazy for their ongoing raising of rates and tightening of monetary policy by taking $300 billion out of the money supply and off their balance sheets over the year. With the massive debt that hangs over the world, this is a one-two punch with a super sharp needle that can pop the greatest debt bubble in world history.
The real question then becomes, what can Trump do to undermine the Fed and cause the U.S. dollar to weaken?
While there are dozens of variables that impact the strength or weakness of a currency, there are three main factors that have the most direct impact: money supply, interest rates, and level of national debt.
These are the most essential fundamentals to the strength of the U.S dollar. Two of these fundamentals, and the ones that have had the most impact on dollar strength in the last 5 years, money supply and interest rates, are controlled by the Fed. The third fundamental is the level of national debt and is controlled by Congress.
If Trump wants a weaker dollar it seems he will need help from the Fed or Congress to accomplish that mission. Now that the Democrats hold the House of Representatives the odds of the president getting help from Congress have greatly diminished. So what can Trump do?
Trump needs to find a way to undermine the Fed. Effectively accomplishing this could cause a shift in their policies.
Trump has already begun this effort by “talking down” the Fed, calling them out, and has positioned them as the fall guy should markets roll over. This approach is not with out drawbacks. The Fed is an independent agency. Their independence is essential to maintaining faith in the U.S dollar. Calling out the Fed publicly could ultimately put them in a position of staying the course if only to not appear influenced or bullied by Trump. It’s a very delicate game whereby the more Trump goes after the Fed, the more difficult it becomes for the Fed to actually change course.
Another way Trump could undermine the Fed would be to remove Powell and replace him with a dovish chairman who will take an easier and less hawkish approach. While this seems right in Trumps wheelhouse, who became famous for telling people “You’re fired,” it’s a move that is politically unfeasible and would create far more problems for Trump with Congress and the media who would invariably oppose it’s legality and sense.
Getting Congress to agree to an even greater spending bill that would add even more to the U.S debt seems far more unlikely given the political polarization. In fact, expect the opposite since Democrats will be likely be calling out the massive size of the National Debt as a part of their 2020 election initiatives.
None of the above options provide great solutions to the issue. All require the assistance of outside groups and take away any direct ability for Trump to counter balance the Fed. They all would have to play out over time, during which the sell-off in asset prices could have already taken place. When looking at the problem through traditional channels it appears that there is very little Trump can do to directly and immediately impact the Fed.
There is however a non- traditional approach that Trump could take. It’s an approach that is immediate, would directly offset the policies of the Fed, and needs no other approvals from other agencies or legislative branches. The approach may also be the most elegant since it would accomplish all of these things without presenting and sort of fight or controversy.
Trump could use gold to devalue the dollar.
Gold has been used effectively by two previous presidents to do exactly the same. It was by executive order in 1933 by President Franklin D.Roosevelt that made gold illegal to own and demanded citizens turn in their gold for paper notes. Once all of the gold was returned, and in one swipe of the pen, gold was revalued from $20 to $36. This was an 80% devaluation of the U.S dollar in an instant. This was done outside of Congress and reflated the economy in the midst of the Great Depression.
Gold was used again by President Richard Nixon to devalue the dollar. Nixon in 1971 ordered Treasury Secretary John Connelly to close the gold window to the world and made the U.S dollar a fiat currency. Since that action, the dollar has devalued dramatically and the price of gold has risen from $42 to over $1,200 today. In fact, it is this specific action nearly 50 years ago that provides Trump with the most elegant solution to today’s problem.
The United States owns the most gold in the world with over 8100 tonnes. We know the gold exists because it has stayed on the Fed’s balance sheet since that time. The gold is held at Fort Knox and at the New York Fed.
What most people do not know is that the gold on the Fed’s balance sheet is valued at the 1971 price $42.22. Even though gold has risen in value to a high of $1,900 over seven years ago and currently sits at a market price of $1,223, on the balance sheet it’s valued at 1971 prices and amounts to about $11.5 billion on the balance sheet of the Fed.
Without any help from Congress, without any controversy from talking down, or worse firing the Fed chairman, without any controversy whatsoever Donald Trump could simply instruct Steven Mnuchin to “mark to market” gold on the balance sheet of the Treasury.
The gold notes held on the balance sheet of the Federal Reserve would then be worth north of $330 billion. This move would lack any real world opposition. Let’s be fair the price of gold is the price of gold. Who could argue that marking gold to market is a bad or controversial thing at all?
Which is why the move is so elegant. It would be impossible to argue against. Marking gold to market prices would accomplish three things. It would first offset the next 12 months of quantitative tightening and add back $320 billion against the $300 billion in bonds coming off the Fed’s balance sheet over the next year. This would directly move against the tightening policies of the Fed.
The approach would also accomplish two other things that Trump would love to accomplish. Marking gold to market would likely see an abrupt rise in gold prices and cause instant dollar weakness. It’s easy to see how this move alone could see gold spike to $2,500 or more immediately and would be an elegant devaluation of the dollar and likely provide for massive tailwinds for the Trump growth agenda. It would accomplish these things due to it’s most important and third impact.
By having gold marked to market, Trump would very effectively undermine the Fed. Since it’s inception the Central Bank has wielded their power by undermining gold. With this one, non-controversial move he would make gold relevant again. It is this relevance the Federal Reserve has spent more than 100 years arguing against and doing so Trump would undermine the Fed without having to take any aggressive steps or actions to do so.
Be sure to check for Part 3, where I will discuss the impact marking gold to market on the Federal Reserve balance sheet.
Adam Baratta is the author of the national best selling book "Gold Is A Better Way." He is one of the leading voices in the field of investments and precious metals today. Adam is the co-owner of Advantage Gold, the highest rated precious metal firms in the country, and the creator of the educational member site, www.goldisabetterway.com.
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