What drives Trump to nominate Judy Shelton at Federal Reserve? Try push countries towards Fixed exchange rates?

All kinds of things happening.

Barry Eichengreen writes that Trump wishes to go back to the earlier days when exchange rates were fixed. Why? The idea is to compress US Trade deficit by raising tariffs. However,  other countries allow currencies to depreciate netting out the effects of tariff. This means countries should be pushed to fix their exchange rates which leads to nomination of Judy Shelton who is a major votary of gold standard:

There are now scores of efforts to psychoanalyze US President Donald Trump’s nomination of Judy Shelton to the Federal Reserve Board. Some emphasize Shelton’s fidelity as an early adviser to the Trump campaign. Others point to her conversion into “a low-interest-rate person.” Still others highlight her advocacy of the gold standard as insulating US monetary policy from an unreliable Fed.

These interpretations all miss the point, which is that Shelton is a proponent of fixed exchange rates. Her belief in fixed rates is catnip to an administration that sees currency manipulation as a threat to winning its trade war.

Team Trump wants to compress the United States trade deficit and enhance the competitiveness of domestic manufactures by using tariffs to raise the price of imported goods. But a 10% tariff that is offset by a 10% depreciation of foreign currencies against the dollar leaves the relative prices of US imports unchanged.

Countries seeking to maintain the competitiveness of their exports have an obvious interest in encouraging such currency adjustments, or at least in not resisting them. In fact, they don’t actually have to do anything in order for their currencies to fall when the US applies tariffs. The US current-account deficit is just the difference between US investment and US saving, which tariffs do nothing to change. If the current account doesn’t change, then neither can the relative price of domestic and foreign goods. So the exchange rate must move, of its own accord, to offset the tariff.

Thus, the challenge for Team Trump is to get other countries to change their policies to prevent their currencies from moving. That’s what the demand for stable exchange rates and an end to “currency manipulation” is all about.

Similar to how UK moved all to gold:

Then, the leading power, Great Britain, unilaterally fixed the domestic currency price of gold. Other countries, seeing the advantages accruing to Britain, followed its example. Once multiple countries had pegged the domestic price of gold, the exchange rates between their currencies were effectively fixed. Today, the idea evidently is that if the US moves first, “preemptively” as Shelton puts it, other countries will follow.

But this time things are different (should I dare say that?) as first gold is hardly as stable as earlier years. Second. countries do not really want to go back to fixed exchange rates.

Overall, the story does not change:

In short, arguments for a gold standard and pegged exchange rates are deeply flawed. But there is a silver lining, as it were: nothing along these lines is going to happen, Governor Shelton or not.



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