All sorts of interesting ideas pop up during a presidential campaign. This year one of the ideas floated by candidate Trump is that the Fed has created a false economy. CNN reports the story.
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Now Trump is blaming the Fed for creating a “false economy” with its emphasis on extremely low interest rates.
“They’re keeping rates down because they don’t want everything else to go down,” the Republican presidential nominee told Reuters on Monday.
Trump said the “only thing that is strong is the artificial stock market.”
It’s the latest example of Trump doubting the bull market in stocks and criticizing the Federal Reserve, an institution that tries hard to avoid being seen as having political motivations.
“We have a very false economy,” Trump told Reuters. “At some point the rates are going to have to change.”
What the heck does this mean and if there is a so-called false economy how does that affect investing? The Washington Post weights in on the issue with an article arguing that there is no false economy.
Much of what Donald Trump says about the economy has little relationship to reality. For example, his oft-repeated claims that the nation’s real unemployment rate is 40 percent, that 100 million people are looking for work or that he’s going to bring back all the jobs that have gone overseas are pure falsehoods.
Then there’s the stuff that’s more incoherent than fact abuse, such as his recent statement that “we have a very false economy.” I think what he’s saying here is that the real economy – gross domestic product, incomes, jobs – is pumped up by accommodative monetary policy, and that if the Fed pulled out the rug, i.e., raised rates, which he apparently wants it to do, these variables would tank. Why tank the economy, you might ask? Beats me; that goal makes about as much sense as Trump’s repeated flip-flopping on this rate-hike issue, which he was on the other side of in May after originally embracing his current position in November.
There are purists who believe in a laissez-faire economy which is a policy or attitude of letting things take their own course, without interfering. Over the long haul people who think they can make more money in an unregulated market argue for one and those who are hurt by dirty dealing in an unregulated market argue for controls. Regarding the Federal Reserve, they are tasked with the following according to the web site of the Federal Reserve System.
[The Fed] was created by the Congress to provide the nation with a safer, more flexible, and more stable monetary and financial system. The Federal Reserve was created on December 23, 1913, when President Woodrow Wilson signed the Federal Reserve Act into law. Today, the Federal Reserve’s responsibilities fall into four general areas.
- Conducting the nation’s monetary policy by influencing money and credit conditions in the economy in pursuit of full employment and stable prices.
- Supervising and regulating banks and other important financial institutions to ensure the safety and soundness of the nation’s banking and financial system and to protect the credit rights of consumers.
- Maintaining the stability of the financial system and containing systemic risk that may arise in financial markets.
- Providing certain financial services to the U.S. government, U.S. financial institutions, and foreign official institutions, and playing a major role in operating and overseeing the nation’s payments systems.
Because the Fed’s actions strongly influence the economy, investors are wise to pay attention. The Fed has been in existence for more than a century and gets credit for pulling the nation back from the brink of economic disaster after the Great Recession. This is the world that we investors live in so calling the system false is typically incorrect and usually self-serving.