Trump can be dangerous – also for the economy – Statement

The world’s most important financial institution, the US central bank (Fed), could come under pressure if Donald Trump wins the presidential election in the autumn.

Trump wants to look at the possibility of tightening his grip on the Fed. It is a tightening that can have serious consequences, both for the world currency dollar and thus also for the stability of the world economy.

Last week, the American newspaper The Wall Street Journal wrote that Trump is now examining what opportunities he has to gain more power over the central bank.

The overall goal is probably to gain more power over the level of the key interest rate in the world’s largest economy.

Neither Trump nor people from Trump’s election campaign organization have confirmed the claims, but if it turns out to be true, it is startling to say the least. The independence of central banks is sacrosanct, and most Western politicians are terrified of tampering with confidence in their country’s currency.

Nevertheless, the people around are looking at several ways to influence the central bank, according to the WSJ:

• Replace central bank chief Jerome Powell before his term expires in 2025. Powell was actually hired by Trump when he was president in 2017, but Trump has been very unhappy with Powell’s frequent rate hikes over the past couple of years.
• Enable the government to review and eventually change the policies of the Fed: This means, among other things, that the US Ministry of Finance will supervise the central bank to a greater extent.
• Trump himself will be taken on board when the central bank plans changes to the key interest rate.

Trump often told advisers that he loved low interest rates and expressed frustration that he could not influence them as president. He has not yet decided exactly how he will proceed with regard to the Fed if he is re-elected, sources told the newspaper.

– Completely disastrous

However, the reactions have not been long in coming:

– If the Fed’s independence is diluted, it will be completely catastrophic, Citigroup Chief Economist Nathan Sheets told Reuters.

He was head of international relations in the US Treasury Department when Barack Obama was president.

So what exactly is the problem with removing some central bank independence? It can basically be summed up in one word: trust.

There are several reasons why politicians should keep their fingers far away from the central bank:

Increased price growth

Imagine a country struggling with large deficits and unable to pay for running hospitals and schools. Then it can be tempting to get the central bank to pay for this by printing more money. Money printing is when the central bank produces more money, with the aim of, for example, stimulating the economy. This can cause prices to run wild, people get poorer advice and the country’s economy can be driven straight into the ditch.

Loss of international trust

From the outside, this doesn’t look good either. If investors sitting in other countries discover that the central bank is no longer run independently, but is used politically, they will no longer have confidence in either the country’s economy or currency. For the United States, this is extra dangerous. A prerequisite for the dollar to hold its own as the world’s largest and most important currency is precisely that the American central bank is independent.

If confidence slips, it will be nearly impossible for the US to continue paying its bills by taking on more debt. The United States already has a national debt of 26,000 billion dollars. This debt must constantly be refinanced. If confidence breaks down, interest rates will rise, including on everything from mortgages to credit card debt – and the US will be in big trouble.

Short-term political gains

Think how tempting it is to give people better advice right before an election? Then it is much more likely that you will be re-elected. A simple measure to achieve this is by lowering interest rates, which can make it cheaper to borrow money and service the mortgage, for example.

But giving people overly favorable loans can do a lot of damage – and can, for example, lead to people not being able to service the loans when interest rates rise again. In this way, short-term political goals can destroy long-term economic stability and growth.

Absence of professional integrity

Today, the central banks decide the interest rate based on professional assessments and analyses. If the central bank is suddenly to be governed on the basis of politics, the quality of the decisions will be far lower – because no account is taken of how this will look a few years later.

Conflicts of interest

When the politicians get power over the central bank, individuals can use it for abuse of power, either to make money themselves or to make it look like the country is doing much better than it really is – preferably before an election.

Politician-friendly under Nixon

However, there are a number of obstacles on the way to a less independent central bank. Firstly, the Fed’s task is to keep inflation low and the labor market strong (which is roughly the same as in Norway).

The president has the opportunity to influence this mandate somewhat through the appointment of the bank’s board members, but he is still limited.

The US has also tried in the past to have a “presidentially loyal” central bank governor, which ended badly.

Central bank governor Arthur Burns, who led the Fed from 1970-1978, was initially a well-respected economist, but who ended up running the president’s errands:

Richard Nixon wanted the Fed to stimulate the economy more before the 1972 presidential election. Burns reportedly gave in to the pressure, cutting interest rates and increasing the money supply. The economy improved in the short term, but prices continued to rise.

In that way, Burns put long-term economic stability at risk for short-term political gain on behalf of Nixon. The inflation that followed became one of the major economic challenges of the 1970s – and ultimately produced two major recessions in the 1980s.

Foundation stone for stability

In a world where politics is increasingly important, it is important to remember that independent central banks, not only in the United States but also in this country, are cornerstones of economic stability and trust – both locally and globally.

When someone like Donald Trump openly looks at ways to reduce this independence, it can cause unease. This puts our ability to maintain stable democratic and economic systems that support global economies to the test.

Political gusts come and go, but the consequences of weakened institutions can last much longer – and be far more devastating.