10 JULY

Swalwell that ends well 

Californian congressman Eric Swalwell has pulled out of the race for the Democratic Party's nomination for president. With seven months until Iowa voters go to the caucuses, Swalwell said he was ready to “go back to Washington” by running for re-election to the House of Representatives.

“Today ends our presidential campaign, but it is the beginning of an opportunity in Congress... to bring that promise of America to all Americans,” Swalwell said.

Swalwell’s announcement comes nearly two weeks after the first Democratic presidential debates, where the 38-year-old argued former Vice President Joe Biden and Vermont Senator Bernie Sanders should “pass the torch” to a younger generation of candidates.

NEWS WRAP

Abandoned by America?

• Could Australia find itself abandoned by the United States in the face of an attack by the Chinese military? That's the stark picture Hugh White paints in his latest call for Australia to retool its military for a post-American region. In their column for The Australian Financial Review, Ashley Townshend and Brendan Thomas-Noone argue it’s an overly narrow scenario upon which to plan Australia’s defence strategy, and Canberra should instead accelerate efforts to build a collective regional approach to deter Chinese aggression. READ MORE HERE.
   

• President Trump has launched a scathing attack on British PM Theresa May and said the United States would no longer deal with the British ambassador Sir Kim Darroch after the diplomat’s frank assessments of the president as “inept” and “dysfunctional” were leaked to the Mail on Sunday. Trump hit out at Darroch for a second day in a row, threatening to cut ties over the memos that described him as “radiating insecurity”. Trump also said May had made a “mess” over Brexit, contrary to his advice. READ MORE HERE.
   

• Ross Perot, the Texas billionaire who twice ran for US president, has died at the age of 89. As an independent candidate, Perot won 19 per cent of the popular vote in the 1992 US presidential election – almost 20 million ballots. He died after a five-month battle with leukemia. Senior Lecturer David Smith spoke to the ABC's World Today program about his legacy. LISTEN HERE.
   
• The Trump administration's 2017 National Security Strategy gave an unequivocal assessment that the world has entered an era of outright geostrategic competition between “those who favour repressive systems and those who favour free societies”. But will countries want to hear about the benefits of democracy from a White House that appears more enamoured with authoritarian "strongmen" than liberal democratic values? Macquarie University's Lavina Lee joined the 2020Vision podcast this week to discuss her new report on these issues. LISTEN HERE.
   
• Australia and other democratic allies broadly support what the United States calls a 'free and open Indo-Pacific'. But is it impossible to advance that ­vision without the promotion of democracy being on Canberra's foreign policy agenda? Lavina Lee expanded on her report for The Australian newspaper today. READ MORE HERE.
   
• When the winds of the trade war have drifted towards Australia, it has been able to secure exemptions from tariffs and lean on increased agricultural exports to heed them off. That is no longer guaranteed. In their column for The Mandarin this week, Jared Mondschein and Freya Zemek argue that in the likely event a lasting US-China trade deal cannot be reached, trade exposed countries like Australia will need to do more than just rhetorically champion the status quo. READ MORE HERE.
   
• Trump's Independence Day celebrations survived a torrential downpour in Washington DC last week, as crowds braved the rain to hear the president speak. Despite the independence theme, heavy military overtones drew similarities with the displays from less democratic nations. Senior lecturer David Smith spoke to ABC Radio about Trump's new direction with 4th of July festivities. LISTEN HERE.

All these people have their public whatever and their Twitter world. But they didn’t have any following. They’re four people, and that’s how many votes they got.

Speaker Nancy Pelosi on progressive House Democrats, like Alexandria Ocasio-Cortez, who voted against a bipartisan bill expanding funding for Trump’s immigration authorities.
The New York Times
(6 July 2019)

ANALYSIS

Beware Trump weaponising the US dollar

Stephen Kirchner
Director, Trade & Investment Program

Before Donald Trump was elected US president in 2016, there was speculation about his views on monetary and exchange rate policy. While some of his key advisers were advocates of a ‘strong dollar’, Trump’s own mercantilist instincts seemed to favour a weaker exchange rate to promote US export competitiveness, implying a preference for easier monetary policy.

Trump’s early picks to fill vacancies on the Federal Reserve Board of Governors, including Chairman Jerome Powell, were orthodox and reassuring. But Trump has little respect for established institutions or conventions. It was only a matter of time before the Fed would attract the president’s attention.

Whereas previous presidents understood the value of an independent central bank and the dangers of interfering in interest rates and exchange rates, Trump has been pointed in his criticism, not only of Fed policy, but also the monetary policies of other central banks and their implications for the US dollar exchange rate.

It is likely that both US monetary and exchange rate policy will become increasingly politicised under Trump, not least because exchange rate policy is becoming entwined with the president’s trade war with the rest of the world.

His criticisms of Fed policy are not without justification. US inflation expectations, as measured by bond market prices and surveys, have collapsed. The entire US Treasury bond curve now lies below the Fed funds rate, a reliable indicator of an impending recession. These market-based indicators imply that US monetary policy is too tight and financial markets are now pricing reductions in the US federal funds rate.

Yet the president’s criticisms of the Fed will only make it politically more difficult for the Fed to change course. The Federal Reserve system will resist politicisation and this could distort monetary policy decision-making at a critical time.

Trump has leverage over the Fed through appointments to the Federal Reserve Board. Having declined to reappoint Janet Yellen, there is already speculation Jerome Powell will be looking for another job when his current four-year term as Chairman expires.

Trump has recently nominated Judy Shelton to the Board. Shelton has been a ‘strong dollar’ and gold standard advocate, but more recently has aligned her views with those of the President. Trump has also nominated Christopher Waller, a colleague of St Louis Fed President James Bullard, who has correctly called out the excessively tight stance of US monetary policy.

While Shelton’s views are seemingly inconsistent with Trump's desire for easier monetary policy and a weaker exchange rate, there is nonetheless a deeper affinity between the president’s mercantilist views on trade and Shelton’s Bretton Woods revivalism.

Milton Friedman’s advocacy of floating exchange rates beginning in the early 1950s was a reaction to what he saw as the threat the Bretton Woods system of fixed exchange rates posed to free trade. Friedman noted that the trade and macroeconomics imbalances promoted by fixed exchange rates would inevitably lead countries to pursue protectionist policies to correct them. The collapse of the Bretton Woods system in the early 1970s was a spectacular vindication of Friedman’s view. Friedman laid the intellectual groundwork for the floating exchange rates that have since underpinned global prosperity, not least in Australia since 1983.

Unfortunately, President Trump shows every sign of wanting to return to a system of managed exchange rates. Under his administration, the United States has turned away from its traditional advocacy of floating exchange rates. The draft US-China trade deal reportedly contains an exchange rate chapter which would commit China to maintaining a stable exchange rate, reflecting US concerns China could devalue to neutralise US tariffs.  The US-Mexico-Canada Agreement (USMCA) also contains a currency chapter.

The US government has lowered the threshold for declaring other countries guilty of ‘currency manipulation’, while also seeking to make currency ‘undervaluation’ a countervailable subsidy that would attract US tariffs, contrary to World Trade Organization rules. There has been speculation that the US Treasury might intervene in foreign exchange markets independently of the Federal Reserve through its Exchange Stabilisation Fund.

The bigger danger is that the weaponisation of exchange rate policy as part of the trade war ultimately leads to the politicisation of monetary policy and compromises the independence of the Federal Reserve. This would return the United States to the early 1970s, when monetary policy was subordinate to exchange rate and fiscal policy and government resorted to wage and price controls in a futile attempt to contain the resulting macroeconomic chaos.

Milton Friedman devoted much of his life to dismantling managed exchange rates and the economic misery they inflicted on the world. Judy Shelton and Donald Trump are trying to breathe new life into failed doctrines.

DIARY

The week ahead

• Thursday, 11 July: President Trump is scheduled to speak at the Presidential Social Media Summit at the White House. Representatives from Facebook and Twitter were not invited to attend.
   

• Thursday, 11 July: US Senate Armed Services Committee hearing to examine the nomination of Gen. Mark Milley for reappointment to the grade of General, and to be Chairman of the Joint Chiefs of Staff in the US Army.
   

• Friday, 12 July: US House Committee on Oversight and Reform will hold a hearing on the Trump administration’s child separation policy and "substantiated allegations of mistreatment”.
   

• Monday, 15 July: The Des Moines Register presidential candidate forums begin with Cory Booker, John Hickenlooper, Amy Klobuchar and Joe Biden.

EVENT

When will the military have its #MeToo moment?

VIDEO

 Biden: I wasn't prepared for how Kamala Harris came at me

THE WEEK IN TWEETS

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