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Trump and Sanders: Fiscal Policy Bros

What do Donald Trump and Bernie Sanders have in common? Both are believers in Modern Monetary Theory. There is little doubt that politicians be they democrat or republican ascribe to Modern Monetary Theory in which governments can print all the money it wants and not worry about such silly things as deficits, default or inflation. To wit: MMT says sovereign governments cannot default. They can always print the money to redeem whatever government bonds are maturing – see Greece and Japan. So debt doesn’t matter and governments can function nicely by increasing it through ever growing expenditures. If inflation occurs, as surely it must, then all the government has to do is to increase taxes to take the money out of circulation. Of course, governments rarely do this and use the additional tax receipts to increase expenditures even more.

In the MMT world, the government need not sell bonds to finance its spending since it can create money to do that. Bonds exist to allow the Fed to manipulate excess reserves in the banking system to set the Fed funds rate. If the Fed wants to decrease the rate, then it will buy bonds from the banks which increases their excess reserves and lowers the Fed funds rate. The result will be an increase in the money supply via the banks. MMT says that large deficits don’t matter and that deficit spending is actually beneficial in that it builds people’s savings. 

In our political world it is probably not surprising that Bernie Sanders is a fan of MMT. But so apparently is Donald Trump. MMT provides cover for fiscal irresponsibility. Trump’s budget bill shows that he is a fan of ever increasing deficits. That he is a devotee of MMT is apparent when he keeps pressuring the Fed to accommodate his fiscal policy by lowering interest rates. Never mind that traditional economics says that lowering interest rates in this particular economic climate will create inflation. Trump’s notion is “What me worry?” He also wants the Fed to lower borrowing costs of the deficit. Here, the Fed’s lowering short term rates will actually increase long term yields as inflationary expectations rise. To counter the Fed would have to buy back Treasury bonds. That action would increase Treasury prices and lower their yields. Mission accomplished? Not so fast my friends. The end result of that action would also lead to inflation and more pressure on the bond market. Do we really want to see a repeat of the Fed’s increasing their balance sheet by buying governments? During Covid, the Fed’s balance sheet exploded going from around $3 trillion to over $8 trillion.

Of course, when the Fed buys all these bonds, it creates new money which in turn is inflationary. Although the MMT crowd would say that this is no big deal, I guess one approach would be for the Fed to be the main purchaser of new Treasury bond issues to drive down bond yields and have the Treasury not spend the money. Sure. Then the Fed’s balance sheet can grow without limits. Any interest payments from the Treasury would be made to the Fed which could then remit them back to the Treasury. Who needs foreign investors? Of course, the question is what happens if US inflation causes a de-dollarization in world markets, imperiling the dollar as a reserve currency? In Trump’s world this does not matter since his ideal is a return to mercantilism and a minimizing of imports which in turn minimize dollars flowing into world markets and central banks.

Thus the key to MMT is a compliant central bank. The Fed must always subordinate monetary policy to fiscal policy. This is not a given with our “independent” Fed but would be if the Fed were merely a branch of the Treasury Department. That way the Fed would be to do the bidding of the president. Then Trump would not have to rant and rave about Powell “lowering” interest rates. MAGA folk may want this but imagine what the economy would then look like the next time a Joe Biden is elected president.

Trump’s budget like all those before it depends on spending more and more. To spend the government must either tax, borrow or print. With Trump, increased taxes are out so it is borrow or print. Yet borrowing is expensive as evidenced by the latest Treasury auction – unless we have the Fed purchase all the new issues of Treasury bonds. So print baby print. But in either case, what me worry? As long as the Fed is accommodating. Let MMT reign!

The BBB. I have some good news and some bad news.

The so-called Bib, Beautiful bill (hereafter BBB) is a major disappointment. 

With republican control of both houses of congress and the presidency, one would have thought that this was one of the few chances to get federal spending under control. When Trump came into office the first time, the Federal deficit was $20 trillion. Then came Covid and Biden. The deficit ballooned to $36 trillion. Now the BBB will push it up by $5 trillion more. Yes I know that the Congressional Budget Office – one of my old employers – estimated an increase of “only” $2.4 trillion over the next decade. But that number assumes that the tax decreases extend only through the current administration. Making them permanent adds another $2 trillion. Counting interest the total number is $5 trillion. And this mind you is from the republicans!

The republican mantra is always the same: tax decreases will stimulate growth which will reduce the deficit. However, there is no significant tax decrease in the BBB. It is only preventing the Trump tax cuts from expiring. Therefore, there should be no additional stimulus forthcoming. A MAGA apologist has chided the CBO for its projections saying that its model is flawed. The attack on CBO is not based on a critique of the model but on a critique of the voting of CBO staff. It is alleged that no CBO staffer has voted republican since 2000 (I left in 1985) so how can CBO be “nonpartisan.” It must be that all those democrats would construct models that favor democrats and not republicans, never mind all the criticisms from democrats when the CBO estimates their budget numbers. The MAGA-guy probably doesn’t know that the CBO director is appointed jointly by the speaker of the house and the president pro tempore of the senate. When I was at CBO, the director was Rudy Penner, a republican. Currently, the director is Philip Swagel, who is not surprisingly also a republican. Another “nonpartisan” group is the Committee for a Responsible Budget which provides in-depth analysis of federal budgets. Their estimates are virtually the same as CBOs. So the onus is on the MAGA-guy to produce his model with its assumptions and parameters which show a reduction in the debt. Not happening.

Elon Musk filed for a divorce from Trump citing irreconcilable differences when he called the BBB a “disgusting abomination of pork spending.” I know that Musk may have had personal reasons for attacking the bill. Some say it is because the bill cuts the EV tax credit. But Musk had said earlier that Tesla didn’t need the tax credit and anyway it no longer qualified due to the number of vehicles sold. As Musk tweeted “I’m sorry, but I just can’t stand it anymore. This massive, outrageous, pork-filled Congressional spending bill is a disgusting abomination. Shame on those who voted for it: you know you did wrong. You know it.” Musk tweeted further “It will massively increase the already gigantic budget deficit to $2.5 trillion (!!!) and burden America citizens with crushingly unsustainable debt” and added a USA budget deficit chart.

The markets seem to believe CBO, Musk and not the MAGA-guy. US debt has been downgraded. The recent Treasury bond auction was deemed a failure because the rate that cleared the market was over 5 percent, increasing the cost of interest payments on the debt. The 30 year Treasury is also above 5% while the 10 year is 4.6 percent and inching higher.

But the BBB is a typical DC budget, only this time from the republicans rather than the democrats. It has basically left entitlements unchanged despite all the gnashing of teeth over Medicaid and has all the tweaks to the tax code that inhabit every budget bill. The Medicaid cuts makeup a miniscule $880 billion over 10 years. As Stevie Wonder says “What the fuss?” That is the good news. The bad news is that if the Trump tax cuts are not extended, the net result will be a $4.5 trillion tax increase that will help kill any chance of economic growth. Certainly there must be someone in the administration brave enough to tell the president that his oppressive tariffs will help kill growth rather than kindle it as he always proclaims. So it is likely that the market reaction to the bill not passing may be worse than the reaction if it passes. Such is the world in which we live.

At the start of Trump Part 2, I said that there was no need for Elon Musk and DOGE. Doesn’t every agency have inspector generals? What are they doing to earn their money? Why didn’t Trump command that all cabinet members use their inspector generals to ferret out waste and fraud? Moreover, why didn’t he ask each cabinet member to bring him a budget that was 15 percent smaller than the previous year’s budget? He would then submit those numbers to the House budget committee and tell them to operate within those parameters and bring back a BBB that was at a minimum 15 percent smaller than the previous year’s.

Yes there would be a lot of screaming and shouting. Yes the democrats would repeat their standard mantra of “balancing the budget on the backs of the poor.” Yes Trump would have to work overtime to shore up wobbly republicans. But at least he would have made the effort. As it now stands, there are only a handful of republicans that have the guts to openly oppose Trump. Resistance is building in the senate starting with Rand Paul and Ron Johnson. Trump is losing support in the house, even among those who voted for the bill like Majorie Taylor Greene. But where are the so-called fiscal hawks? Where are Chip Roy, Ralph Norman, Andrew Clyde, Anna Paulina Luna and Byron Donald? Where is Tim Burchett? 

Over one of the doorways at the senate is the inscription “Annuit coeptis” (God has favored our undertakings). In the house chamber it is “In God we Trust.” In reality as I once wrote that the inscription above the doors to the congress should read “Lasciate ogne Speranza, voi ch’intrate” – abandon hope all ye who enter here.

Is that why I have this feeling of foreboding?

National security tariffs? Huh?

Imports fell 16 percent in April narrowing the trade deficit to $61 billion. I guess Trump is doing high fives since he thinks that trade deficits harm national security. So he applies universal tariffs on every good from every country. This thinking is similar to a person with a hammer seeing every problem as a nail. Did anyone ask “what deficits impair national security?” Surely it is not the trade deficit on socks, belts and panty hose. So why impose tariffs on them? What about rare earth minerals? Trump’s tariffs apply to fabrics from Lesotho to lithium from China. Does that make sense to anyone other than Trump and his Harvard Phd advisors? Is it too simple to ask that the administration ponder lifting all tariffs and then subsidizing those items that are considered vital to national security? What? Isn’t that opposite what Trump is doing?

Aren’t aluminum and steel vital to national security? Of course they are. But why did Trump double the tariffs on these metals to 50 percent? Some specialty steel used by the US military is only imported. It makes no sense to impose tariffs on imported steel in that there isn’t a US equivalent. Trump putting tariffs on these products simply make no sense. Won’t that imperil national security if they were not imported due to the tariffs? Trump and his people have forgotten to do a simple thing, namely realize that aluminum and steel are inputs in production as well as outputs. In his last dalliance with tariffs when he raised them to 25% during his first term, the impact was an increase in new domestic steel employment of around 1,000 but a loss of over 75,000 jobs. This is because more workers are employed in positions that use steel as an input than those who manufacture steel as an output. Look for the same to occur this time. Taken another way, Trump’s tariffs on steel and aluminum imperil national security rather than enhance it.

What about rare earth minerals? China dominates rare earth minerals that are indeed vital to our national security. It produces 84 percent of them. Putting tariffs on them is perverse (in the economic sense). Economics implies that there should be no tariffs on those items that are imported and vital to national security. Why make them more expensive? Why tick off the country of origin and motivate them to sell to our competitors? Rather a rational approach would be to make these imports as cheap as possible. Then heavily subsidize US industry to mine/produce them domestically. One drawback will be all the environmental rules dictating domestic production. Waive them. If we can mine lithium, cobalt and all the 17 rare earth minerals here in the US, then do it and do it regardless of the cost – if they are so vital to national security.

But no. The administration has adopted the opposite tactic that is ass-backward. It has imposed universal, not selective tariffs. It has made the importation of vital items more expensive instead of less expensive. In so doing, it has alienated everybody, (former) friend and foe. It has actually brought our (former) allies and current enemies closer by encouraging them to trade with each other in greater volumes to make up for the loss of the American market.

Virtually all of the US’s rare earth mining is at one facility in California which produces less than four percent of the total utilized in the country. Adding to that capacity would not be cheap or easy. There are obstacles strewn everywhere. It would cost billions of dollars to build the infrastructure, mining and processing facilities. It would have to overcome all the environmental obstacles and lawsuits from the greenies. Then there is the expertise. It was noted that in the iphone realm that the US lacked the engineers necessary for iphone production. However, China had them by the boatloads. The same is true for rare earth mineral production.

So what can be done? Subsidize. Subsidize. Subsidize. Contract with private corporations to provide what is needed to build the industry from scratch. Offer grants and aid to attract engineering majors. Pay large salaries and bonuses to existing engineers. Go out and buy the expertise. India, Australia have mining operations and the engineers. Even hire the Chinese and subsidize foreign engineering students. Have the government completely finance the construction of the facilities and to buy all the product at market prices. This is not going to be a task that private enterprise would undertake under almost any rational set of reasoning. So let the government do it. If it is a money loser, then so be it – if it is truly vital to national security. As to the cost, when the fiscal budget is over $6 trillion what’s another several billion to fund an industry vital to national security?

The US can build a domestic rare earth industry. The minerals are here albeit difficult to access and difficult to mine and process. That private enterprise has not done so is an indicator that such a task is unprofitable when all the costs and legal hurdles are considered. The obvious solution is to let the government provide the financing and private industry provide everything else. The other obvious solution is to eliminate all tariffs on stuff vital to national security. But there is no indication that anyone in the administration has thought about the consequences of the “reciprocal” tariffs. That may just be a bridge too far with this administration.

Random thoughts #59

Democrats continue to defend the indefensible with ardor and vigor. They defend males competing in sports against females talking about “trans rights” while forgetting about women’s rights. They defend all the illegals that they brought into the country and now defend against their deportation. They defend Hamas forgetting October 7. Do they think that all their demonstrations will change either Israel or US policy toward Israel? Now they are attacking RFK, jr for telling parents that the Centers for Disease Control and Prevention will no longer recommend the COVID-19 vaccine for healthy pregnant women and children in its immunization schedule. Why the CDC recommended the vaccines for children in the first place is beyond me. Even during COVID there were voices out there backed by scientific research showing that young children should not be vaccinated and certainly not pregnant women. But once again those on the left are taking the position in the words of Elizabeth Warren that Kennedy is taking vaccines “away from millions of mommas and babies.” I thought the left hated Big Pharma? I guess they hate RFK, jr more.

Was there any Covid-vaccine skepticism on the left? If so I didn’t hear any. In fact all of my friends on the left got every shot and every booster out there. Again, I am surprised that when all the bad news about the effects of the vaccines came out, that they didn’t just say it was Trump’s fault to rush the vaccines to the market. Instead they embraced them as they attempted to force the vaccines on us all. I thought it was particularly interesting that so many medical personnel refused the vaccines.

GM’s Mary Barra, while acknowledging that Trump’s tariffs will cost the company $5 billion said “For decades now, it has not been a level playing field for us automakers globally, with either tariffs or non-tariff trade barriers. So I think tariffs is one tool that the administration can use to level the playing field.” Translation: Trump scares the hell out of us. So let’s play nice. I guess Barra must be referring to the higher tariff that the EU has on US vehicles. She probably has forgotten that the US has high tariffs on pickup trucks which has shielded GM from foreign competition (unless they build their trucks here). Note that Barra supported Biden’s EV policies too. But she has to do something to for her $30 million a year salary.

Barra said that the company is still committed to EVs because “I see a path to all EV; it will depend on how much we get the infrastructure ready, but I do believe we’ll get there, because I think the vehicles are better.” Yet GM also in the same breath announced that instead of producing batteries for electric vehicles at a factory in New York, it will instead produce V-8 engines. Aren’t V-8 engines the polar opposite of EVs? Aren’t only some Camaros, Mustangs and Corvettes offered with V-8s? Then again you can get a Bentley, McLaren, Aston Martin or a Ferrari with a V-8 too. 

Denmark has raised their full retirement age to 70 for those born in 1971 or later. Like the US, Denmark was facing a Social Security shortfall. Unless the wimpy US politicians, the Danes passed a law tying the full retirement age to life expectancy. That is a common sense approach so don’t expect it to occur in this country anytime soon.

Fentanyl seizures at the southern border are down dramatically. Is this because of ramped up efforts in Mexico or putting US troops at the border? Regardless this is good news. But remember Harold Black’s First Law that “Any law worth circumventing will be.” Maybe the cartels have figured a work around. Will Trump now lower tariffs on Mexico because of the decrease in fentanyl? Yeah, sure.

Did you see where Martina Navratilova tweeted about two Oregon girls refusing to stand on the podium with a male athlete at a track event? She said “Gender ideology is male entitlement peddled as progressive.” Wow! What do the libs think about that?

Are you watching the NBA? I’m not but I am not a basketball fan. However, I wager that the finals between the Oklahoma Thunder and the Indiana Pacers will be the lowest rated finals ever.

One of the most popular majors at UT is supply chain management. I bet they are reveling in the disruption caused by Trump’s tariffs.

I wonder if Trump will be nice in his tariff negotiations with Japan? Recall that they are the largest foreign holder of Treasurys and could threaten to dump their $1 trillion portfolio if Trump proves inflexible.

Speaking of which, the President’s latest tweet is embarrassing – but obviously not to him. “If the Courts somehow rule against us on Tariffs, which is not expected, that would allow other Countries to hold our Nation hostage with their anti-American Tariffs that they would use against us. This would mean the Economic ruination of the United States of America!” Surely he can’t be serious? But then again, I suppose that he is. A Supreme Court decision cannot come quickly enough to settle this matter once and for all. Although if Trump loses, as is likely, he will try to figure out a work around (HB’s First Law).

Isn’t it about time Trump stopped coddling Putin and treated him like he was Canadian?

In another Supreme Court decision, this time on deportations, the court ruled in favor of the Trump administration in a 7-2 ruling. Again only Jackson and Sotomayor dissented. A bad sign for Justice Jackson. Sotomayor was clearly a DEI appointment. I had higher hopes for Jackson – although I would have preferred Michelle Childs.

Does ambiguous have only one meaning?

Wrong is spelled wrong in the dictionary.

Tesla, Ben and Jerry’s and Real Chocolate

It wasn’t surprising to see the left’s attack on Elon Musk manifest itself in an attack on Tesla. Not content to simply boycott Tesla, the left took to vandalism. It scratched the cars, torched others and picketed dealerships. Tesla’s sales plummeted worldwide. It got me wondering why conservatives don’t protest Ben and Jerry’s ice cream? That product has been an advertisement for the left from its inception.  If not the conservatives then why are the Jews silent? Recently Ben and Jerry’s board issued a statement calling the Israeli invasion of Gaza “genocide.”  Ben Cohen was actually kicked out of a congressional hearing when he disrupted a senate hearing saying that “Congress is paying to bomb poor kids in Gaza and paying for it by kicking poor kids off Medicaid in the U.S.” Cohen, although Jewish, has been long critical of the Israelis’ relationship with the Palestinians. Remember when Ben & Jerry’s halted sales of its ice cream in Jewish settlements in the Israeli-occupied West Bank, saying selling there was inconsistent with its values? Again not a peep from US Jewish leaders. On a personal note, I do not buy Ben and Jerry’s ice cream and never will. I guess if Ben Cohen had been Elon Musk that the lefties would have tossed the ice cream on supermarket floors and harassed employees at the plant’s headquarters. One could point to Target (trans displays) and Bud Light as successful efforts by those on the right to protest leftist positions by corporations. But why the silence on Ben and Jerry’s? BTW, my favorite ice cream is chocolate chocolate chip.

My daughter and her family took their annual trip to Europe and spent most of their time in Italy with a stopover in Lucerne. They sent me back chocolates from the chocolatier Laderach. I was stunned. It was outrageous. I texted them “so this is what chocolate is supposed to taste like!” It was as far from Hershey’s as a Yugo is from a Ferrari. Seriously good. Why can’t American chocolate be this good? I now understand why Europeans differ from us in the consumption of chocolate. Americans tend to be impulse buyers while Europeans consume chocolate more as a staple with it being a regular item on their grocery lists. “They’ll buy a bar and break off a few squares every day,” says one chocolate executive. If our chocolates were this good I would also break off a few squares every day.

Cocoa prices are rising worldwide and European demand has proven to be less elastic than American demand for chocolate. European companies are better able to pass on the price increases than American ones. But, hey, if our chocolate were as great tasting as theirs, our demand would be less elastic too! Trump’s tariffs will harm American producers since most of the world’s cocoa comes from West Africa. Swiss chocolatiers are finding demand for their product to be relatively inelastic and have been able to pass the price increases in cocoa on to their customers. Not so much in the US market where the cocoa prices and tariffs have caused the stocks of candy makers to plummet. Hershey’s earnings per share has gone done 30 percent and its stock is off 35%. Contrast this with Switzerland’s Lindt whose stock is up 20 percent.

All this reminds me of beer. I had my first taste of beer at my high school’s senior picnic. It was awful. I had an occasional beer in college but never developed a taste for it. Then came light beer and I was aghast. How could something that tasted this awful be so popular? Apparently there was something wrong with my taste – or is it the fallacy of composition? Then I went to the University of Konstanz am Bodensee to write my dissertation. At lunch one day I tasted the local brewery’s signature beer and was stunned. I couldn’t believe the difference in it and American mass produced lagers. I became a one a day beer drinker. But when I came back to the states I stopped and did not start again until micro brews came onto the market. Now a good stout or porter – but never an IPA – is welcomed. So why can’t we have a chocolate equivalent to beer?

Frank Glassner is at it again. Here is his post on EVs – and don’t forget that Frank lives in EV heaven – California. I told him that most of the hate mail that I have received over the years has been on EVs, climate change and green energy. I can just imagine the comments he is going to get on this very brave posting.

https://blog.veritasecc.com/drinking-the-electric-kool-aid-dream

Write on Frank!

Bring back blue books?

Not likely.

When I told a professor friend of mine who had recently retired that I was going back to teach a course after being retired for the past 13 years, he said “Are you out of your flipping mind?” But he didn’t say “flipping.” My answer was “apparently.” He then told me that my written assignments that were legend – a bi-weekly news report and a term paper – were now useless because the students did not do their own work. He said that AI and ChaptGPT were now writing the students’ papers. Also everything was multiple choice/ true false and machine graded. No more blue books. No more written exams with only essays, short answers and problems. Since I had never given a multiple choice/true false exams in all my years, I wasn’t about to start now. He said that I might have a revolt on my hands.

Sure enough when I announced what type of exams I gave, six students dropped immediately. Then students asked if they could take the exams on their computers. I said no and a couple more dropped. I was shocked when they handed in the first exam – 8 pages long – and every exam was printed! I was told that cursive is no longer taught. How do they sign their names? One student told me that my tests were unfair in that they had never had a test other than multiple choice in their four years at the university and they were not prepared to write out their answers. Yet another thanked me because she was “sick and tired of multiple choice exams.”  Technology had made it easy to move questions from the teacher’s test bank to an exam template, have the computer administer the exam (it even checks for cheating somehow), grade the exams and post the grades to the students’ ledgers. Why would anyone waste their time spending an entire weekend grading exams? Why indeed? Yet I did. I also took off for misspelled words and was roundly criticized for it. One student said that “this was not a spelling bee.” Au contraire. I would not let them use a calculator either. However, after half the class could not answer a question that involved 5% of 10,000, I gave up using problems.

There was an article in the Wall Street Journal that blue books were making a comeback because of AI. I don’t see it. I can’t imagine today’s professors testing using blue books. Not when you can let the technology do it all for you. I was stunned when the class of senior finance majors could not write the present value formula. I was not as surprised when they could not explain why the equation made logical sense. I wonder what skill sets today’s college graduates bring to the job. I would not be surprised if employers have to teach basic skills that once upon a time were expected to be already possessed by new employees.

I personally find all this sad. There were some really smart students in my class. I have little doubt that some of them will become intellectually curious and will be amongst the minority that advances our society come the future. Or at least, that is what I hope.

What Shoddy Chinese Steel?

Pardon me if I am a bit confused. The president in giving the okay to the acquisition of US Steel by Nippon Steel said that he was going to double the aluminum and steel tariff to 50 percent to stop the importation of “shoddy” Chinese steel. Did he misspeak and mean “shoddy” Canadian steel because we import hardly any steel from China. We only import 13 percent of our steel but nearly half of our aluminum. Last year we imported 23 percent of our steel from Canada, 16 percent from Brazil and 12 percent from Mexico. The other two top countries are South Korea and Vietnam. China is 1.8 percent. Fifty eight percent of the aluminum comes from Canada. The UAE is second with only 9 percent. China is at 2 percent. So the president is using the specter of China when his real intent is to put the Canadians out of business. Recall he said that we don’t need their autos, we don’t need their steel, we don’t need their aluminum and we don’t need their lumber. And he was not talking about the Chinese. The question is whether US production can ramp up to meet the shortfall created by the tariffs.

We are all in limbo now that the U.S. Court of International Trade that struck down President Trump’s use of the International Emergency Economic Powers Act (IEEPA) to place tariffs on China, Mexico, Canada, and the rest of the world. Almost immediately that court’s ruling was stayed by another Federal court. The court’s tribunal was made up of an appointee by Reagan, Obama and Trump. The ruling was unanimous. I think the vast majority of legal scholars agree that Trump had overstepped his authority – with the exception of those who work for the president. Consider the press secretary, Karoline Levitt whose job is to lie with a straight face and defend the president regardless of what ridiculous things come from him. Of course this is the calling for all press secretaries – remember KJP? 

Here is what Levitt said “Last night, the Trump administration faced another example of judicial overreach. Using his full and proper legal authority, President Trump imposed universal tariffs and reciprocal tariffs on Liberation Day to address the extraordinary threat to our national security and economy posed by large and persistent annual U.S. goods trade deficits.” “America cannot function if President Trump, or any other president for that matter, has their sensitive, diplomatic, or trade negotiations railroaded by activist judges.” I bet it was a surprise for these judges to hear that they were the ones that had “overreached” and were “activists.”

This will only be settled by the Supreme Court. But don’t expect a 6-3 decision to favor the president. I would not be surprised if the decision were unanimous against him. I also expect the ruling on birth citizenship to be unanimous against the president. Then he will rant and rave some more – along with Levitt. I actually do hope the rulings are unanimous for Trump will be hard pressed to call Thomas and Alito “overreaching activist” judges.

Speaking of ranting and raving, the president has attacked the Federalist Society and its former chair Leonard Leo. The Federalist Society had recommended judges to the president to be appointed to the federal bench. After one of his appointees ruled against him on tariffs, Trump said of Leo that he was a “sleazebag” who “probably hates America.” Trump tweeted “I am so disappointed in The Federalist Society because of the bad advice they gave me on numerous Judicial Nominations. This is something that cannot be forgotten!” Here is Leo’s response “I’m very grateful for President Trump transforming the Federal Courts, and it was a privilege being involved.”  “There’s more work to be done, for sure, but the Federal Judiciary is better than it’s ever been in modern history, and that will be President Trump’s most important legacy.”

Well at least one participant in the exchange has some class.

Canada, O Canada

Trump won’t give up the notion of forcing Canada to become the 51^st state. He is saying that they can have the protection of his golden dome missile defense system if they just give up their sovereignty. President Tweeter tweeted “I told Canada, which very much wants to be part of our fabulous Golden Dome System, that it will cost $61 Billion Dollars if they remain a separate, but unequal, Nation, but will cost ZERO DOLLARS if they become our cherished 51st State. They are considering the offer!”

Not likely.

I cannot figure out why he wants Canada to join the union. There are 40 million Canadians which would tie it with California for being the largest state. So it would have two senators. Would it have 52 representatives like California. That I don’t know since the number in the House is set at 435. But regardless, they would have the same number as California. Over 60 percent of Canadians live in Quebec and Ontario meaning that most of the representatives would be liberals as would likely be the two senators. I think Trump knows this.

How are new states added? The admission of new states is governed by Article IV, Section 3 of the Constitution:

“New States may be admitted by the Congress into this Union; but no new State shall be formed or erected within the Jurisdiction of any other State; nor any State be formed by the Junction of two or more States, or Parts of States, without the Consent of the Legislatures of the States concerned as well as of the Congress.”

That means that Congress would have to agree to add the new state of Canada provided the Canadian legislature petitioned for admission. Do you really think that the republicans in the Congress would vote for admitting Canada, even if threatened by the president? Even in the unlikely that it passed the House, I seriously doubt if it would pass the Senate. It would be filibustered and no way would there be 60 votes to end the debate. Republicans would be more amenable to admitting Alberta and Saskatchewan but not Ontario and Quebec. However, the democrats would resist that.

Did you see King Charles’ speech to the Canadian parliament? He said in part “By staying true to Canadian values, Canada can build new alliances and a new economy that serves all Canadians.” Pow! Take that Donald Trump! New alliances, eh? Yes, in the world of Trump, our allies are now our adversaries and they seek to build alliances sans the US. Of course, in three years all that will change when Trump exits the scene. The king further stated “The system of global trade, while not perfect, has helped to deliver prosperity for Canadians for decades — is changing. Canada’s relationships with partners is changing.”

Lastly, the king burnishing his woke credentials included in his speech a land acknowledgement. He said “I would like to acknowledge that we are gathered on the unceded territory of the Algonquin Anishinaabe people,” “This land acknowledgment is a recognition of shared history as a nation. While continuing to deepen my own understanding, it is my great hope that in each of your communities, and collectively as a country, a path is found toward truth and reconciliation, in both word and deed.” As I have written before on the land acknowledgments of the woke left including universities, if the occupier of “unceded” and/or “stolen” lands is so guilty, then give it back – provided you can figure out who to give it back to. We need to ask the king if the Algonquin Anishinaabe people were the original occupiers of the land or just the latest occupiers. Is it possible that they “stole” it from some other people?

O Canada! Our home and native land!
True patriot love thou dost in us command.
We see thee rising fair, dear land,
The True North, strong and free;
And stand on guard, O Canada,
We stand on guard for thee.

God save the King!

Trump versus the Fed: redux

President Trump keeps badgering the Fed’s Jay Powell to lower interest rates. He has even threatened to “fire” Powell. Pardon me for being confused. Doesn’t the president know that if the Fed lowers interest rates, the cost of financing the debt is likely to rise? After the Open Market Committee met in May, the headlines blared that the “Fed keeps interest rates unchanged!” Well if that is true then why did the Treasury bond rates go up? More on that later.

First, why insist that Powell lower interest rates? It is the Fed’s Open Market Committee that makes these decisions. The Fed chair – although the most important member of the committee – has to convince the other eleven members to support his position. That committee zealously guards its independence, as does the chairman. Maybe Trump wants to fire the entire committee. But since the reserve banks are private corporations, Trump cannot fire the reserve bank presidents. Trump’s tweeting vindictives only makes the committee dig in its heels to tell the president to go pound sand. Of course, Trump could threaten to fire the entire Board of Governors – much like he has done with two of the three members of the National Credit Union Administration board. But there would be an adverse market reaction and Trump would likely lose in court given the Humphrey’s ruling by the Supreme Court.

Second, the Fed operates in the short end of the Treasury market. Lowering its fed funds rate may lead to other short term rates falling but it will be at the price of an increase in the money supply. The result would be higher inflation. Does Trump really want to see prices rise even more than they are rising given his tariff policies? The threat of higher inflation will then lead to an increase in bond yields as long term investors protect the real value of their investments. It is this threat that is contributing to the rise in the yields of Treasury bonds. Trump’s policies have caused both the 20 Treasury and the 30 year Treasury to climb over 5 percent. So isn’t it ironic that Trump’s policies also make financing the national debt more expensive? Thus, if the Fed did lower short term rates it would increase inflationary expectations and then lead to an increase in the yields on Treasury bonds and increasing the national debt burden. Surely if Trump doesn’t know this, his so-called economic advisors should – although that may be doubtful since they were educated at Harvard.

The Fed’s Open Market Committee met in May and has voiced concerns that the tariffs will be inflationary. The committee said “Participants agreed that uncertainty about the economic outlook had increased further, making it appropriate to take a cautious approach until the net economic effects of the array of changes to government policies become clearer.” Translation to Trump: go pound sand. The committee meets again in June and is taking a wait and see attitude. The indication is that they are in no hurry to fool around with rates. In fact, Fed officials have uniformly said that the committee is setting a very high bar with regard to changing rates. Fed economists have lowered their forecast for economic growth and increased their inflation forecast. It is probably a bridge too far to ask the president to shut up. But shut up he should. His policies are creating uncertainty in financial markets. His policies are creating inflation and unemployment. A decrease in interest rates by the Fed will exacerbate the problems, not ease them. But what me worry? Trump will try to blame any of his economic difficulties on the Fed. But I have the feeling that the public will know who is really to blame.

By the way, I am one of many who cringes when it is said that the Fed keeps “interest rates unchanged”. Obviously interest rates change daily. What is unchanged in the target range of the Fed funds rate. Again, the fed funds rate is the rate that the Fed charges on fed funds which are excess reserves traded in the banking system overnight. Currently, it is set at 4.33% within the target range of 4.25 – 4.50 percent.

I know there are Fed haters out there – that includes one of my good friends. However, what’s the alternative? Do you really want the Fed subservient to the wishes of the politicians who know little about economics and seem to care less of its consequences. Again, the only law that politicians rush to repeal is the law of supply and demand. Thus far, the politicians have always lost.