Based on history and the Trump economic plan revealed, it may be that the Federal Reserve should not lower rates too quickly, and should protect the dollar. But before discussing what the Fed should do, it is necessary to talk about negative interest rates and the Trump plan itself. 

The Federal Reserve Bank has choices to make going forward, laboring under the Trump Administration:

1. The Fed can lower rates, and as the trade war and economic world decline goes forward, take them into the negative. Ultimately, if Trump does enough damage to the world economy, data may require this course of action.

2. The Fed can try to hold the line by doing just a little lowering, hoping that another regime would subdue the trade war with compromise.

3. The Fed can totally undermine the Trump administration by raising rates or by keeping them pretty much where they are.

Negative Rates

At this point, Trump appears to be more preoccupied with destroying China and Fed independence than he is helping America prosper. Negative rates would do serious damage to China and Japan and other nations who have bought US bonds. If the economy gets too bad, then the Fed may act on the data, fearing Trump, and go towards negative rates. 

The Fed obviously knows this. During the Great Depression era, the Fed did not act and did not acknowledge its mistakes. It was clearly too slow in lowering rates. But this time is different. The Fed has no interest rate space as Trump wants it to approach the zero lower bound.

The Fed, which wants US bond rates to remain positive, which is a reflection of real growth, does not want POTUS to force it towards the negative. Some of that real growth may be a pipe dream, based on the stock buyback scheme. But the alternative is much worse, negative rates.

So, what are the ramifications? If the Fed lowers rates down to zero or past, this would act as a default on US bonds without actually defaulting. If you don't want to pay interest, you severely punish those who hold your bonds. Some have no choice, like insurance companies, etc. 

The Trump Plan

So Donald Trump wants to really crash the dollar. He wants Americans to build plants and manufacture more for export. This is his plan for America.

Unfortunately, he will likely impoverish our customers abroad as customers in the US are already unable to buy American. The Chinese use US bonds to stabilize the currency. If China's Yuan goes too low, how can the Chinese buy all the new US goods produced? 

Even if we had the products to sell this plan is dubious. The inefficiency of making cheap widgets and trinkets to sell abroad, while the cost of living remains high in the US is not doable without robotics. Jobs will not explode with robotics dominating manufacturing.

In some ways, even foreign nations have little choice. They can buy real estate, and buy stuff made. Perhaps that is what Donald Trump wants, no more bond buying, just ratchet up his real estate kingdom and create demand for what America makes. He certainly appears to have given up on the American consumer. 

Another problem with the plan is that America doesn't make enough stuff, and bonds finance Trump's deficits. Tactically, Donald Trump has made a big error. He should not have created the need to sell so many bonds. If he was serious about turning the US into Japan and Europe, he should have practiced austerity, but he didn't. Oh, there is still austerity on Main Street. But Trump wanted to help his friends.

So, in essence, Trump is trying to create world demand for US goods while there is no product. Nations who run a surplus with the USA will have no sound places to recycle their dollars if they do not want to hold treasury bonds paying negative rates!

It will take a lot of time to create the supply to match the demand of creditor nations. Historically, the Fed has pruned wages, and the American workers are not able to take advantage of what is made. Trump knows Americans can't buy American goods. 

And how can the Chinese buy things American if they aren't strong? Trump's plan implies American capital would flood out from the US into China bonds, driving yields down. Theoretically that would drive the Yuan up with hot money. But, with China losing money on US bonds that go negative, that is certainly is a risky proposition. Capital would flow into Asia? 

More likely, people would hoard cash outside of banks altogether as is happening now in Europe. 

And even if hot money flowed into China (and Japan), that money tends to wreck havoc and then leave. How does that help China stabilize the world if it is a destabilizing attack? Look at how the stock market reacts to potential instability in China? It drops hundreds of points. 

I am not against investing in China. I am against, and we all should be against, hot money devastating the country. Hot money devastated the US housing market in 2005 and America has lost a lot of middle class folks because of it. Why weaken a potential great customer for the USA. Trump has to be reined in. 

There is a certain pessimism coming from Trump's plans. As the Time article cited above points out:

The problem is clear to business owners like Morris Kessler, who started an amplifier company in 1967. Today, that company, ATI, makes high-end amplifiers and audio equipment in Southern California. Kessler’s experience shows how tariffs put companies that source components globally but make products in the U.S. at a disadvantage: European competitors can undercut his prices because they can buy Chinese components without the added tariffs. Meanwhile, he suspects his Chinese suppliers are getting in on the trade war by raising prices as a form of retaliation, as parts he used to get for a penny now cost five cents. 

So we have Trump frantically wanting someone to buy American goods. Americans can't since unions were busted long ago. And now, American businesses can't be competitive because they cannot make all they need and resource all the components in America and still be competitive. And the other nations can't buy American because the American companies are excluded from the supply chain and the products are too expensive!

It is like Trump wants to bake a cake with ingredients all made in the USA. Even if the dollar loses value. There are cheaper places to buy the ingredients, like cocoa, for the cake. The world does not necessarily want to bake the cake. It just wants to supply the ingredients. Trump putting tariffs on ingredients like cocoa would add to the cost of the cake. A weaker dollar would make it even more expensive for US companies to buy the ingredients for the cake. Their profits would decline and their stock would go down.

Changing My Mind About the Fed

I will tell you this, if Trump does not back off, the Stock Market will be sacrificed, as the Yuan will decline, and likely the Fed can do nothing about it. Perhaps the Fed should take preemptive action and simply destroy the stock market right away. Drive Trump from office and get someone in that will restore American business to the world supply chains. But we have crazies in both parties wanting Trump to "succeed". Chuck Schumer comes to mind.

I have written before about how the Fed is stubborn and not looking at the data and should lower rates. I am slowly changing my mind in this current environment. If Donald Trump's plan is ultimately the goal of the American government, the Fed should stand firm and not buy into Trump's game. 

Raise rates and get blamed, but enunciate the reasons why. The American people need to be educated about this mayhem that POTUS45 is inflicting on the world and on the American consumer and business.

The Fed had room to lower rates in the Great Depression and made mistakes by being slow to act. But now they do not have room to act. Yes, this time it is different. But by data, it is not so different. There is a slowing of the world economy. It is different because rates were higher then and they are not now.

I usually support not destroying worker wages by slowing the economy. But in the current case I believe that the Fed should slow the economy at least some, as a way of slowing Trump's economic plans. I hate to say this because it could put worker wages at risk. But since Trump wants to destroy worker buying power anyway by his support for pushing a weak dollar, the Fed must act to protect the dollar. 

As Michael Hudson said:

Workers are squeezed when a currency’s exchange rate falls, because they have to pay more for goods they import. If the dollar goes down against the Chinese yen or European currency, Chinese imports are going to cost more in dollars. So will European imports. That is the logic behind “beggar my neighbor” devaluations.

Well, we always have helicopter money to fall back on, and it looks really good compared to following Trump down the path to big economic trouble.