Gary Cohn resigns in a dispute with President Trump over the tariffs which the president has proposed to help domestic manufacturers. Yet the President's solution begs the question: Why does America have a persistent merchandise trade deficit?
There’s a sly, forgotten, and long obsolete deal behind the world trading system. The fix was put in immediately after the end of World War II to privilege American consumers and prejudice American manufacturers. It was designed to, and did, privilege foreign manufacturers and prejudice foreign consumers.
At the time this may have made sense. If so, it no longer does.
Whoever succeeds Cohn will be in a position to really nail this one. Who might that be and what might be the consequences?
Bloomberg reports that prominent among the names circulating to succeed Cohn are veteran Supply-Sider Larry Kudlow and OMB Director Mick Mulvaney (both notably endorsed by House Ways and Means Committee Chairman Kevin Brady), CEA Chairman Kevin Hassett, Supply-Side darling Steve Moore (with whom I have worked professionally in modest ways from time to time), and Dr. Mark Calabria, chief economist to Vice President Pence.
In 1920's Yankees parlance, it's a "Murderer's Row" of Supply-Side talent. Still, there is a reason for me to put my thumb on the scale for Kudlow and to add two other names -- Lewis E. Lehrman and Steve Forbes -- not mentioned by Bloomberg. These three would prove "most likely to succeed" in helping President Trump Make America Great Again.
Why? The so-called "trade deficit" that is sticking in the President's craw derives from a structural flaw in monetary policy. It is more effect than cause. Lehrman, Forbes, and Kudlow get monetary policy. These three are exceptionally well equipped to guide the White House in treating the disease rather than the symptom.
Monetary policy, notwithstanding all its attendant apparatus and the elaborate window dressing of the Federal Reserve, is something over which the White House has extraordinary influence (as noted repeatedly by Forbes.com's own John Tamny). Yet it is not clear that the White House knows its own power here.
Thus, President Trump's choice of Cohn's successor matters in a way few other appointments do. Bad dollar policy sunk Presidents Nixon, Ford, Carter, and at least one Bush. Good dollar policy burnished, and re-elected, Reagan and Clinton.
If President Trump craves the kind of sizzling equitable prosperity that Reagan and Clinton enjoyed -- and, consequentially, a shot at a landslide re-election -- his aspirations may hinge on this appointment.
And the list of people who really get monetary policy is short.
World War II -- in which my heroic father Max Benko fought along with millions of others -- left America relatively unscathed. After V-Day our allies and our vanquished enemies' economies lay in shambles. We could (and did) give ourselves a treat while extending an invisible helping hand -- one much greater than the Marshall Plan -- to war-torn Europe and Japan.
How? After World War II, the world, led by America, entered into an arrangement called Bretton Woods. This made the US dollar the world's "reserve currency."
In practice, Bretton Woods meant that Americans could consume more than we produce -- an exorbitant privilege -- by exporting dollars rather than goods. How, exactly, did that work? As I wrote here:
[A]s summarized at Wikipedia, that "As American economist Barry Eichengreen summarized: 'It costs only a few cents for the Bureau of Engraving and Printing to produce a $100 bill, but other countries had to pony up $100 of actual goods in order to obtain one.'" That privilege, which made great sense during the period immediately after World War II, became a curse.
How did our "exorbitant privilege" transform into a curse? By inequitably prejudicing our manufacturers.
The key element -- the reserve currency status of the dollar -- of the Bretton Woods "Calvinball" monetary treaty remains in place. Time to end that ... as Donald Trump seems to almost preternaturally intuit.
If President Trump wants to employ his preferred hyperbole, let him pour his vitriol on Bretton Woods rather than NAFTA or the Iran nuclear deal. In some ways, Bretton Woods really might have evolved into the worst international deal America ever made.
So... let's end it by absolving the dollar of its role as international reserve currency and restoring the classical gold standard. This is something Donald Trump intuitively understands.
With the departure of Gary Cohn as the director of the National Economic Council, America reaches a possibly defining moment.
Gary Cohn, as Director, demonstrated many virtues. That said, Cohn was not what Keynes called that “one man in a million (who) is able to diagnose” how “to debauch the currency… engages all the hidden forces of economic law on the side of destruction…."
As Seth Lipsky, the editor in chief of The New York Sun, recently and shrewdly observed in his column the New York Post:
Trump hasn’t even played his ultimate economic-policy trump card — monetary policy. That would mean a campaign to end the era of floating exchange rates and currency manipulation.
Candidate Trump complained bigly about that problem when he was on the stump. It offers a strategic way to level the playing field for China, America and others, without playing whack-a-mole with tariffs.
Once Trump got elected, though, monetary reform was belittled and blocked by, among others, Gary Cohn. Maybe his departure will allow it to be brought to the fore.
Maybe Cohn's departure will allow this matter to be brought to the fore.
As it happens, there are three politically and economically superior successors to Gary Cohn. Each has demonstrated loyalty to President Trump. Each -- Lehrman, certainly, Forbes and Kudlow, probably -- understands the importance of monetary policy for safely unwinding the accursed reserve currency status of the dollar.
These three economic elder statesmen, veteran businessman Lewis E. Lehrman (with whose institute I have been occasionally professionally associated), financial media mogul and former presidential candidate Steve Forbes (under whose brand I am privileged to publish), and economist and financial markets commentator, former Reagan OMB chief economist, Lawrence Kudlow (a friend) are all committed to Make America Great Again.
All three have demonstrated an exceptional understanding of the importance of monetary policy. All have a superior understanding of how dollar policy effects America’s trading capabilities. All have shown a shrewd grasp of how monetary policy can be configured to maintain a finely balanced world trading system and thereby how to Make America Great Again.
Lehrman is the monetary grandmaster. He is the protégé of the late French central banker and economic savant Jacques Rueff. Lehrman would have to be lured from a dignified retirement. That said, Lehrman has written many times at length, including book length, about the reserve currency curse which Rueff himself called “deficits without tears.” As Lehrman wrote in the Fall 2011 issue of the Intercollegiate Review (and as reprinted in First Principles):
The greatest economist of the twentieth century, Jacques Rueff, warned in the 1920s of the dangers of this flawed official reserve currency system, designed "in camera" by the experts. Rueff predicted a collapse of this newly rigged official reserve currency system. And it did collapse, in 1929–1931, with catastrophic effects.
Rueff then predicted in 1960–1961 that the Bretton Woods jerry-rigged dollar system, a post–World War II form of the official reserve currency system, would collapse. Rueff warned that the world would groan under the flood-weight of excess American dollars going abroad. Throughout the 1960s, he wrote that Federal Reserve credit policy, combined with the official reserve currency status of the dollar, would cause permanent U.S. balance of payments deficits and a tendency to constant federal budget deficits. Underwritten by the "exorbitant privilege" of the world dollar standard, the twin deficits of the U.S. would be continually financed, at home and abroad, by expanding Federal Reserve and foreign central bank money and credit.
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Free market institutions, grounded on the gold standard, were designed to mobilize the free price mechanism in order to act as the balance wheels of rapid economic growth for an increasingly integrated world economy. International trade among different cultures, various national currencies, and competitive nations was firmly based, despite cultural and language differences, on a common monetary standard defined in law as a weight unit of gold. All countries traded according to one objective yardstick of value.
Lehrman, anticipating Donald Trump by several years, concluded:
It is a great lesson of American history that the classical gold standard is in fact the constitutional American monetary system. With it, we can inaugurate a new industrial revolution—to rebuild America's financial self-respect, to end inflation, and to restore American leadership in the world.
Lehrman’s own primary protégé, John Mueller, now of the Ethics and Public Policy Center, echoed Lehrman’s observations in the Wall Street Journal to make a comparable point, Trump’s Real Trade Problem Is Money: Protectionism won’t cure the import-export imbalance. The solution lies in monetary policy.
Neither President Trump nor any of his economic advisers appear to have heard of, let alone be worried about, the Triffin Dilemma. But Mr. Trump’s economic and trade policies will fail unless he finds a solution to the dilemma—the inherent incompatibility, in a reserve-currency country, of domestic policy with the international monetary order.
Steve Forbes, writing in the February 28, 2018 issue of Forbes:
TWO BIG THINGS threaten the improving U.S. economy: a weak dollar and trade protectionism. Both routinely seduce policymakers, and both always result in bitter aftermaths with terrible political consequences. Yet some in the Trump administration are playing with both--and with fire.
--The dollar. Great nations do not have weak currencies. Nonetheless, with a surety born of ignorance, Treasury secretary Steven Mnuchin has bluntly stated his desire for a weak dollar.
Thankfully, President Trump immediately contradicted him. But the fact that Mnuchin and his department want to undermine the value of our currency is troubling. Mnuchin has bought into the alluring fallacy that trashing the greenback will help sell more of our stuff overseas, thereby strengthening the U.S. economy. Such false and toxic notions obviously mean the poor fellow has completely forgotten real-world experiences.
This is an incontrovertible fact: No country has ever devalued its way to greatness and enduring prosperity. Ever.
Ask Brazil, Argentina and Zimbabwe. Check out what happened to the Roman Empire when its Mnuchin equivalents undermined the empire's currency.
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Tragically, Nixon was beguiled by his Treasury chief, John Connally, into "closing the gold window," thereby effectively ending the gold standard and engineering a major devaluation of the greenback. The idea was that this would generate a trade surplus and election-winning prosperity. Nixon did win his second term, but the net result was a debilitating decade of gas lines, inflation and economic stagnation. An economy that was in the throes of its most serious crisis since the Great Depression contributed to the conditions that ran Nixon out of office. Jimmy Carter pursued similar policies later in that decade. Both Carter and Nixon were economic losers.
In 1987 Treasury secretary James Baker pushed for a weak dollar to--you guessed it--sell more U.S. products abroad and "mend our trade deficit." That October he told Germany: "Either inflate your mark [the German currency at the time], or we'll devalue the dollar." He vowed to "drive the dollar down." Combined with Congress pushing through protectionist measures that could prompt a trade war, Baker's moves triggered a ghastly stock market crash. Thankfully, the Reagan administration backed off, and the markets recovered.
Unfortunately, in the early 2000s the U.S. was back at it. President George W. Bush's Treasury chiefs thought that a slow-motion devaluation of the greenback would stimulate more growth. The weakening of the dollar--as it always does--triggered a fake housing and commodities boom, as markets flee to hard assets when money becomes unstable. We all know how that ended.
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--Protectionism. Trade deficits? In and of themselves, they tell you nothing. The U.S. has had merchandise trade deficits for most of its existence. A key to our growth has been--and still is--investment capital coming to our shores. We're starting to get inflows of hundreds of billions of dollars, thanks to the Trump tax bill.
It's one thing to update trade agreements such as Nafta, quite another to blow them up or try to dictate specific outcomes, such as forcing companies to move their facilities back to the U.S.
Ditto trade abuses, such as China's unfairly restricting access to its markets for foreign companies or forcing businesses to part with their proprietary technology, not to mention its outright theft of trade secrets via hacking.
But the thrust of trade negotiations should be reducing barriers, not erecting them via import taxes or anti-import regulations.
Larry Kudlow also has shown exceptional sophistication in understanding the importance of a steady dollar, or, as he likes to call it, King Dollar, in maintaining American prosperity. As I wrote here and bears repeating:
Lawrence Kudlow, joined by Arthur Laffer and Stephen Moore (with whom I have had occasional professional associations over the years), warned that the Next Test for Trump Is Stabilizing the Dollar For Sustained Growth. After congratulating the president on the passage of the tax cut, they go on to say:
There is, though, still a missing pillar of prosperity in the Trump economic agenda and that is a sound dollar strategy. The dollar weakened in 2017 and we want it stabilized. There’s little in this world that can bring our economy to its knees faster than a weak dollar in the foreign exchange markets.
Just ask people who served in the Nixon, Ford, Carter, Bush 2 administrations and Mr. Obama’s first term — all of which were undone by a weak and depreciating dollar, surging inflation, spiking interest rates, plus financial or commodity bubbles.
Meanwhile, under Reagan the dollar increased by 67% in value in the foreign exchange markets through 1985. The price of gold, interest rates, and inflation all fell as well from their double-digit inflationary highs, while the American economy reignited and the stock market launched its 18 year bull market.
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A strong dollar is an essential pillar of economic prosperity with minimal inflation, but we worry that the White House has not adopted this strategy. So we urge the Trump administration to return to the successful King Dollar policies that worked in the 1960’s, 1980’s and 1990’s.
Devaluations and weak currencies do not create U.S. jobs. Instead, weakened currencies are accompanied by relative price changes leading to inflation in the devaluing country. (Americans can by definition buy less with weak dollars in their wallets than strong dollars.)
So, exit Gary Cohn. In President Trump’s own words, he “served his country with great distinction."
When it comes to appointing the new director of the National Economic Council, someone who will support the President in his quest to restore American leadership in the world, he need not look far. Lewis Lehrman, Steve Forbes, and Larry Kudlow all know how to restore American world trade economic competitiveness without resorting to the booby-trap of tariffs.
Lehrman, Forbes, or Kudlow are on record as being prepared to bring about the needed recalibration in the very way that Trump himself called for on the campaign trail. “We used to have a very, very solid country because it was based on a gold standard,” he told WMUR television in New Hampshire in March last year. … And as Candidate Trump told a reporter for GQ: "Bringing back the gold standard would be very hard to do, but boy, would it be wonderful. We’d have a standard on which to base our money."
Make America Great Again? Enter Lewis Lehrman, Steve Forbes, or Larry Kudlow as the next director of the National Economic Council.
