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Donald Trump’s Disastrous Economic Observations

Part of Donald Trump’s appeal to his millions of supporters, and to us, is his real-life experience creating jobs. Trump, unlike all the other candidates, except Carly Fiorina, can legitimately say he has created real jobs for real people. 

But Presidents don’t build casinos, strip clubs and hotels – they formulate policies that either help or hinder private sector job creators like Trump – and based on his comments in recent speeches we think Trump’s Donald Trumpeconomic policies would be a disaster if he were to be elected President and given the opportunity to make good on them. 

Trump has lately taken to bashing the Federal Reserve and Fed Chairman Janet Yellen for allegedly keeping interest rates low to protect Obama from the political fallout of a “recession-slash-depression.” 

That conspiracy theory has been around since Ben Bernanke was Fed Chairman and dropped interest rates to zero and also began the Fed policy of buying assets – in effect printing money to stabilize and stimulate the economy. 

OK, so Donald Trump seems to buy the conspiracy theory, but then in an interview with Bloomberg Television's Stephanie Ruhle, Trump faulted the Federal Reserve for not having acted sooner.  

“Yellen is keeping rates too low, too long,” Trump said implying some as yet-to-be revealed benefit to raising interest rates now. 

So which is it? 

So far the net result of interest rates going up has been a crash in commodity prices and a concurrent crash in economic activity in the American farm belt and oil patch, and a large economic benefit to China and other major oil and food importers. 

If this is Trump’s idea of sticking up for the little guy and American economic nationalism we’d hate to see what would happen if he were on the other side as Obama often seems to be. 

Plus, it seems to us that if Trump really thinks that Janet Yellen is holding interest rates down to protect Obama and that the plan is to raise them to stick Obama’s successor with the political price of higher interest rates Trump should embrace Rand Paul’s audit the Fed proposal – a proposal also supported by Ted Cruz we note. 

And if Donald Trump thinks that an inevitable rise in interest rates is going to cause a “recession-slash-depression” he ought to propose a plan or a set of policies that will mitigate such a devastating blow to the economy. 

As our friend economist Ralph Benko, Senior Economic Advisor at the American Principles Project and a former Reagan official, put it, “… if indeed ignorance is bliss Donald Trump must be among the most blissful people on the planet. And apparently he busily is attempting to make us all blissful, here regarding Fed policy.” 

In making wild allegations against Yellen Benko says Trump is just trash talking. There’s no evidence at all says Benko that Yellen is attempting to push a “recession-slash-depression” out of the Obama years.  

Furthermore, Trump’s position, on which he doubled down for Bloomberg, seems to be that raising interest rates will produce “a recession, or worse.”  

And then he berates Yellen for not raising rates? This, at best, is perverse says Benko, and we agree. 

The problem with his back-and-forth observations on the Fed’s interest rate policy, like so many of Donald Trump’s other pronouncements is that somewhat like Obama and Marco Rubio, he offers commentary, not policy when presented with a question. 

And his “trash talk” commentary as the Heritage Foundation’s Dr. Norbert Michel points out, is not only outside of conservative orthodoxy, it is just plain wrong. 

The Fed cannot “set” interest rates as Dr. Michel has elaborated several times, most recently at

Diedre McCloskey, for instance, pointed out in 2000 that the Fed’s open market operations constitute a very small part of the world’s capital markets.  McCloskey highlighted that, in a capital market of approximately $300 trillion, the Greenspan Fed typically increased or decreased its bond holdings in the neighborhood of $40 billion per year. 

Beyond those numbers, there’s basic supply and demand.  If, for example, the worldwide money market rate is 4%, how could the Fed’s open market operations sink that rate to 1%? 

Presumably, the Fed could purchase every Treasury security it could find.  Let’s assume that these operations are initially successful in that they sink the fed funds rate and U.S. money market rates start to drop. 

Absent explicit prohibitions, there’s no way to prevent US investors from taking the higher rates abroad, so people would invest in non-US based funds.  Maybe the massive US exodus would cause a price increase (and rate decrease) in the foreign funds, but then we’d also see a price drop (and rate increase) in US funds.  Those rates can’t get too far apart for too long. 

Ralph Benko says in his parallel universe, although apparently not in Trump’s, supply and demand, not the Fed, still rules prices, such as interest rates. Under a healthy monetary regime in a free market credit will be both abundant and affordable with interest rates set by the market to the “Goldilocks Standard” of “just right.” 

What we need from Mr. Trump, and other candidates such as Marco Rubio, is an economic plan to restore America’s job creating free market that has been crushed by seven years of Obamanomics.  

Ted Cruz has such a plan; even Jeb Bush has an economic growth plan, which we don’t like because it is largely based on government picking winners and losers, but it is a plan.  

Now that the first votes are being cast it is time for Donald Trump to stop offering conspiracy theories, conflicting comments and disastrous suggestions about the economy and to come up with some real world plans that voters can sink their teeth into and that prove his much-vaunted business experience actually equips him to make policy for what is still, despite Obama’s best efforts to destroy it, the world’s largest economy.

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