“The way the media reports the weather won’t impact whether the sun shines tomorrow. But the way the media reports on our national economy weighs on consumer sentiment, which feeds into consumer purchases and investments.”
Those are the words of Tomas Phillipson, President Trump’s acting Council of Economic Advisers Chairman, as spoken to Jim Tankersley and Jeanna Smialek of the New York Times.
Phillipson’s comment is a reminder that some conservatives can unsheathe the victim card as ably as their reliably outraged opponents on the left.
The media can talk down the economy? What can Phillipson possibly mean? Why did Tankersley and Smialek so readily accept such ludicrous reasoning from Phillipson?
Missed by those who view consumption as the driver of growth is that we all have theoretically infinite desires to consume that are logically only limited by our individual ability to produce. West Virginia isn’t poor relative to Texas because its people don’t consume as much; rather they consume less because they produce less. Consumption is a consequence of production, not a driver. Keynesians get it backwards.
That’s what’s so unfortunate about Phillipson’s response. Not only is it sappy victimology, not only does it ascribe a power to the media that plainly doesn’t exist, but it also speaks to a misunderstanding of how economies work. Simply put, there’s never a problem of insufficient consumption.
Consider Phillipson himself. It’s not unreasonable to suggest that he has savings. If so, his alleged failure to consume in no way detracts from consumption. Figure that banks would be quickly insolvent if they paid him a rate of interest on funds deposited, only to sit on the funds. More realistically, any money not spent by Phillipson is rapidly loaned out to those who will.
But the bigger story here is that assuming what’s not serious, that the media could convince Americans that the economic sky is falling, this would if anything exist as a boost for the economy. Think about it.
What are businesses constantly in search of, but often fruitlessly? The answer is kind of simple: businesses are endlessly searching for capital, for the savings of others that they can use to build up their inventories, invest in existing employees, hire new ones, etc. It’s a frequent theme of this column, but one can never stress too often the basic truth that innovations and subsequent productivity increases are almost always a function of investment. Assuming reduced spending that results from media fear mongering, the consumption drop off will work as an economic boost for businesses being able to access capital from a more abundant pool of same.
Savings are the driver of economic growth simply because there’s no growth without investment, and that’s a major reason why untouched recessions result in much bigger economic booms. It’s the reduction of spending that boosts capital availability, and it’s the growth of capital availability that gradually redounds to increased productivity. Repeat it over and over again: there’s never a problem of deficient consumption. There can only be production deficiencies.
So while the notion of media talking down the economy is baseless, presidents have power that the media lack. They do because dollar policy, and in particular dollar exchange rate policy, is part of the U.S. Treasury’s portfolio.
This rates prominent mention given a Tweet from President Trump last week. He wrote: “The Euro is dropping against the Dollar ‘like crazy, giving them a big export and manufacturing advantage…and the Fed does NOTHING! Our Dollar is now the strongest in history. Sounds good, doesn’t it. Except to those (manufacturers) that make product for sale outside the U.S.”
There’s so much wrong with Trump’s argument. First off, a weak dollar in no way enhances the competitiveness of U.S. manufacturers. They’re reliant on imported inputs, which means a weak dollar raises the cost of producing all manner of goods and services manufactured in the U.S.
Where it gets funny and sad at the same time is that a falling dollar is logically anti-saving, which means it’s anti-investment. If the dollar is in decline, those with extra funds have every incentive to spend them with abandon. Why delay consumption if the dollars saved will be exchangeable for less down the line? Along similar lines, why commit capital to new ideas if any returns will come back in dollars exchangeable for less? Absent productivity-boosting investment, it’s difficult for companies to be competitive.
To all this, Trump and his partisans will say that the dollar “is now the strongest in history,” but it isn’t. Goodness, the dollar purchased 360 yen in 1971, 250 in 1985, yet now it purchases 105. As for the euro, when the 21st century began the dollar dwarfed the euro. Now it isn’t even exchangeable for one. But the main thing is that every global currency floats. That the dollar is lately “stronger” than the euro and yen only means something insofar as all of the currencies can be measured against something objective. Looked at in terms of gold, the dollar reached its lowest point in August of 2011 when gold rose to $1,900, but at $1,554 the greenback is nearing historical lows.
So while the dollar is “strong” of late, it only is versus floating currencies that are weaker than the rapidly weakening dollar. This is what Trump wants, and markets are complying. It will be an investment negative. During periods of devaluation, wealth that already exists (like gold) becomes attractive to investors seeking protection from devaluation. During periods of dollar stability, wealth that doesn’t yet exist (think stock and bond income streams) becomes a more attractive savings destination. It’s investment in what doesn’t yet exist that powers growth, yet Trump’s devaluationist policies are favoring a blast to the past.
It’s something for readers to think about, and for Trump partisans to ponder. He’s had successes and failures in his presidency as all do. Crucial here is that no presidency since 1971 has prospered amid a falling dollar. It’s once again anti-investment, which means it’s anti economic growth. Hopefully someone inside the Trump administration relays this to a president who is often wrong about dollar policy, but never in doubt.
This piece originally appeared on RealClearMarkets.