This is how Trump destroys the global economy

Trump is playing a dangerous game.

Don’t be fooled. This could be the calm before the storm.

The market reaction to Trump’s hostile takeover of the Fed was pretty muted last week.

The Fed is like our RBA. It controls interest rates, and is the cornerstone of financial stability.

And last week, Trump fired one of its governors, Lisa Cook. One of Trump’s toadies, who now runs the Federal Housing Finance Regulator, dug through their records and discovered that Cook listed two different places as her place of primary residence on two separate mortgage applications.

Trump then fired her. (Cook is contesting it, since nothing has been proved yet.)

You wouldn’t think that someone convicted of paying hush-money to a porn star would blush at mortgage misrepresentation, but Trump wants control of the Fed. He’s been bullying the Chair for months, because he wants lower rates.

And he wants control.

(I think it’s pretty safe to let go of any illusions that Trump is a wannabe-dictator now.)

But in doing this, (and there’s a whole bunch of problems but let’s keep our lens focused on the financial), he’s undoing 50-odd years of economic theory that says that the best way to keep inflation under control is to have an independent central bank – one that doesn’t just cut rates because the Supreme Leader does their nana on twitter. (No, I’m not calling it X. Get stuffed.)

Giving Trump control of interest rates, (or any President), is just a bad idea. That’s how we used to do it. It didn’t work.

You get inflation, and then you get stagflation.

There isn’t a serious person in finance or economics that thinks letting Trump fill the Fed with his own stooges is a good idea.

Which is why a lot of people were surprised that the market’s reaction to Cook’s ‘firing’ was so muted. Not all that much happened. Stock markets barely moved.

And maybe that’s because Cook’s firing isn’t a given and TACO (Trump Always Chickens Out), so who knows how it plays out. So stay in the game another couple of months and keep making money until things really hit the fan.

But where you are going to see it play out is in longer-term bond rates. Bonds are how governments borrow money from markets. Sometimes times it’s a short term loan (up to a year), or it’s long term – like 5, 10 or 20 years.

There’s not a lot happening in short term rates at the moment, but the long run is looking dicey.

The 10-year premium (over 1-year bonds) has been rising since the start of the year, to the highest level since 2014.

There’s two things happening here. The first is that markets now think there’s more risk in the longer term – more risk that inflation rises, the US defaults, or both.

But the other thing is that the US deficit is still blowing out in a major way, and the US is flooding the bond market. The US has issued $200bn of bonds in just five weeks.

And bß∑ßecause there’s so many bonds that need to be sold, each one has to pay a bit more to entice someone to buy it.

So risk is up, supply is up, and that’s pushing up yields.

And this dynamic is not contained to the US. Because markets don’t see a huge amount of difference between American debt and German debt, when America floods the market, Germany has to pay more as well.

Which is part of the reason why 30-year yields across the world are lifting sharply. In Frace, they’re at the highest level since 2008. In Japan, they’re at an all-time high.

In the UK, the 30-year is at the highest level since 1998! Even though the Bank of England has cut rates five times in the past year!

The BoE is cutting rates, but the government is paying through the nose for its debt because no one believes inflation is under control.

That’s the risk here.

Once people stop believing that central bank has control of inflation, long term rates can rise, no matter what the central bank is doing at the short end.

And when that happens, government debt becomes more expensive, and more of a burden.

Until eventually, it just breaks. Somebody, somewhere is going to default.

By messing with the independence of the Fed, Trump is pushing up yields at the long end, forcing every nation on earth to pay more for their debt.

At some point, it all comes crashing down.

… but Trump will be well-inside a gold-plated bunker at that point.

JG.