Category: Donald Trump

Econ 101: Interest rates

President Trump wants the Federal Reserve to lower interest rates thinking that that would reduce the interest the Federal Government pays in interest on its debt, which this last year was $1.13 trillion (yes trillion). Prior to 2008, the Fed’s policy interest rate—the so called Fed funds rate—was the overnight rate on overnight (i.e. one day) loans between banks. I will skip how the Fed determines (brings about in the market) that rate. Since 2008, when the Fed started to pay interest on bank reserves (deposits at Federal Reserve Banks), the Fed’s policy rate has been the rate paid on bank reserves.

The interest rates paid on longer (than overnight) loans (e.g., one, two, ten-year bonds) are related to the overnight rate because rolling over overnight loans for ten years is an alternative to a ten-year bond. This note explains that relationship.

The interest rate on, say, a one-year bond reflects what the market (lenders and borrowers) expects the one-day rate to be each day over that period. That, in turn, depends on what the market expects the “real” rate to be plus the rate of inflation. Market rates reflect the real rate plus the inflation rate. If inflation increase, other things equal, market interest rates increase.

So, the interest rate on a ten-year bond will reflect what the market expects the overnight rate to be over the next ten years, which reflects the expected real rate and the expected inflation rate over that period. So what happens to interest rates (say the ten-year bond rate) when the Fed lowers its policy rate as President Trump wants? It depends primarily on what that does to the market’s expectation of inflation over the relevant future period.

On Wednesday Dec 10 the Fed reduced its policy rate .25% to 3.50 to 3.75%. On that day the ten-year bond rate fell from 4.19% the day before to 4.15% but by Friday (two days later) had returned to 4.18% In short the ten year Treasury bond rate is essentially unchanged by the quarter percent drop in the Fed’s policy rate. Why? Because the market expects the drop in the overnight rate to be largely offset by a slight increase in inflation over the next ten years.

If the Fed is correct that lowering its policy rate is appropriate for continuing the reduction of inflation to its 2% target, then the ten-year rate will fall as well. Clearly an excessive cut in the policy rate (one that increases the expected rate of inflation) will increase longer term interest rates rather than lower them. Class dismissed.

Kill

On Friday President Trump announced that: “Any document signed by Sleepy Joe Biden with the Autopen, which was approximately 92% of them, is hereby terminated, and of no further force or effect….” https://truthsocial.com/@realDonaldTrump/posts/115629010097815862

Rather than evaluating each Presidential order and rescinding those that are inconsistent with Trump’s policy objectives (whatever those might be), Trump rescinds them all if not signed personally by former President Biden.

This reflects Trumps use of his position to attack anyone who disagrees with him—his enemies. Rather than explaining why a policy is bad, Trump simply condemns the work of his “enemies.”

When six democratic congressmen posted a video reminding solders of their legal obligation to refuse to execute illegal orders, Trump exploded.  “The president said lawmakers who appeared in a video committed “seditious behavior” and should be arrested and put on trial for treason.” https://www.washingtonpost.com/politics/2025/11/20/trump-democrats-seditious-behavior/

A prime example of such an illegal order was Secretary Hegseth’s order to bomb boats in the Caribbean he thought were bringing illegal drugs to the US and to kill all aboard. “Hegseth order on first Caribbean boat strike, officials say: Kill them all” https://www.washingtonpost.com/national-security/2025/11/28/hegseth-kill-them-all-survivors-boat-strike/

Hegseth’s order was illegal under both US and international law. SEAL Team 6, which committed these murders, executed an illegal order, thus violating their pledge to uphold the constitution.

President Trump also violated the law by directing the Justice Department to pursue those who criticize him—his enemies. From universities and law firms to former FBI head James Comey, and former national security advisor John Bolton, Trump has threatened to withhold Federal funds from universities that do not bow to his demands or try his enemies for one thing or other. Bolton’s crime is the same as Donald Trump’s – the improper handling of secret government documents. And of course, anything Biden did is condemned as the cause of anything wrong.

Trump’s masked ICE teams arresting and deported supposedly illegal immigrants has been a lawless disaster—occasionally arresting legal American citizen and embarrassing the whole effort to strengthen the enforcement of immigration rules.

Trump’s haphazard announcements of Tariffs, (hopefully) soon to be declared illegal by the Supreme Court, followed none of the rules of the World Trade Organization, which are designed to promote economic efficiency and thus maximize world incomes. They were deployed to bully individual countries to agree to whatever was in Trump’s interest, an interest rarely compatible with American interests.

I am all for downsizing the government, but on the basis of careful reviews of what functions are needed and desirable and the required staff to carry them out efficiently. Elon Musk’s led Department of Government Efficiency (DOGE) took a chainsaw approach that led Trump appointed department heads to object.

This, of course, is not how a mature adult would govern in a constitutional republic. Trump and many of his appointees are not such people. Living together peacefully and productively requires civil discussion of issues and cooperation and compromise—not bullying.

Those breaking the law or issuing illegal orders should be removed from their positions and tried for the crimes they have committed.

Our President

When our government functions properly, each President is elected because the majority of voters trust his/her leadership and largely agree with his/her policy proposals. When he/she assumes office he/she appoints department and agency heads and senior management who agree with his/her policies and are committed to implementing them. However, the vast majority of government employees (the civil service) hold their jobs because of their nonpartisan competence to execute the regular functions of government. Though elected to implement his/her promised policies, the President heads the government for the benefit of all Americans, not just those who voted for him/her.

Our current President, Donald Trump, has adopted a very different approach. At Charlie Kirk’s memorial service in Arizona on September 21, 2025, President Donald Trump gave a eulogy that stated his approach clearly. Following a speech by Charlie’s widow— Erika Kirk– who said she forgave her husband’s alleged killer and urged love for one’s enemies—Trump said, “That’s where I disagreed with Charlie. I hate my opponent, and I don’t want the best for them. I’m sorry, Erika. Maybe you and the group can convince me otherwise, but I can’t stand my opponent”. 

Since returning to office in January 2025, Trump has launched a sweeping campaign to use the federal government against those he perceives as political enemies, fulfilling his campaign promise of “retribution.” His actions have combined formal Justice Department prosecutions with broader administrative, financial, and regulatory retaliation against critics and opponents.​

Justice Department Prosecutions

Trump’s Department of Justice (DOJ), led by Attorney General Pam Bondi, has indicted several high-profile critics including former FBI Director James Comey, New York Attorney General Letitia James, and former National Security Adviser John Bolton. Many of these cases were initiated shortly after Trump publicly urged prosecutions on Truth Social or in speeches.

Expansion of Presidential Control

Under a broad interpretation of the “unitary executive” theory, Trump has expanded direct presidential control over previously independent agencies. He dismissed thousands of career employees in agencies such as the IRS and DOJ, replacing them with loyalists, and ordered investigations into opponents across multiple sectors, including education, media, and civil society. His administration’s “Weaponization Working Group” reportedly monitors and investigates state and federal officials who previously investigated or criticized him.​ Most concerning he has fired all Inspector Generals who monitor the executive’s compliance with the law.

Use of Financial and Regulatory Power

Trump has also leveraged federal contracting and tax policy to punish critics. Liberal law firms, universities, and media outlets that opposed him have been subjected to audits, funding withdrawals, or bans on federal contracts. The IRS—restructured under his direction—has reportedly targeted nonprofit organizations and universities seen as left-leaning, threatening to revoke tax-exempt status for political reasons.​

Broader Campaign Against Civil Society

The administration’s actions have extended to immigration and education systems. Activists, international students, and visa-holders accused of criticizing Trump’s policies have faced deportation or visa revocations, according to multiple reports. Tourism and foreign students are important exports. Their reduction is adding to our trade deficit. Federal oversight of university curricula and media licensing has been tightened.​

Political and Legal Reactions

Democratic lawmakers like Senator Chris Murphy have called these measures an “authoritarian use of presidential power,” warning that Trump’s systematic punishment of dissenters marks “one of the most dangerous moments America has ever faced”. Foreign governments and legal scholars have echoed fears of democratic backsliding as independent institutions are subordinated to presidential control.​

In sum, Trump’s second administration has explicitly weaponized federal agencies to investigate, prosecute, and financially damage those viewed as enemies, blending legal action with bureaucratic pressure in what observers describe as an unprecedented campaign of political retribution.  Trump’s spread of hate is intensified by his frequently claimed authority “to do whatever I want as president” based, he claims, on Article II of the US constitution.

Trump’s bullying has not stopped at our borders. He has attacked our friends with tariffs and sanctions losing allies right and left. The American beacon on the hill has sunk to the bully in your face. America’s place in the world is sinking fast. Will the Republicans on the Hill wake up and stop him. The Supreme Court has been a mixed bag.

Portland, Oregon

Three years ago (June 2022) I accepted an invitation to speak at the Western Economic Association meeting in Portland Oregon because it provided the opportunity to visit with my family. My daughter and her two kids live near Seattle and my son and four of his five kids live in Vancouver Washington across the Columbia River from Portland. My daughter and her kids came down to Portland for the occasion and we have a wonderful dinner together in the city.

Serious crime peaked in Portland that year with 95 homicides.  We were also aware of the unsightly presence of the homeless sleeping on sidewalks. Since then serious crime has rapidly declined, with homicides falling to half that number in 2024. President Donald Trump has repeatedly described Portland as “war ravaged” and a “hotbed of violent protest activity”.  He has directed the Secretary of War, Pete Hegseth, to deploy troops to protect Portland and ICE facilities from groups like Antifa which he refers to as “domestic terrorists”. Antifa, by the way, is not an organization but rather a term to describe those fighting fascism.

“Trump on Saturday said he had authorized the use of “full force” if needed to suppress protests targeting immigration detention centers.  Oregon has responded by suing the Trump administration, arguing that the deployment of the National Guard to Portland is “unlawful”. The lawsuit, filed on Sunday by Oregon Attorney General Dan Rayfield, called the move “provocative and arbitrary”, and said it “threatens to undermine public safety by inciting a public outcry”. https://www.bbc.com/news/articles/cddmn6ge6e2o

Federal Judge Karin J. Immergut, a Trump appointee during his first term, blocked Trump’s activation of 200 state Guard troops, then issued a second ruling stopping the administration’s workaround—sending troops from Texas and California instead.

In a letter from my Senator, Tim Kaine, he stated that “President Trump issued an executive order directing Secretary Hegseth to establish new “specialized units” within the National Guard, explicitly trained and equipped to address “public order issues” and available for rapid nationwide deployment. While the National Guard already maintains reaction forces under the command of state governors, this order blurs the line between military support and domestic law enforcement and raises unresolved questions about chain of command, federal authority, and compliance with the Posse Comitatus Act. By creating a framework that could allow federal authorities to bypass governors and insert Guard units into local jurisdictions, the order heightens concerns that the Trump Administration is seeking to normalize the use of the military in routine public safety functions and expand such deployments beyond Washington, D.C. into other U.S. cities.”

We are surely used to Trump’s many lies, so why have I given so much space to lies about Portland? While addressing the strangely assembled Admirals and Generals at the Marine Corps Base in Quanitico on September 30, Trump suggested that his deployment of the military to American Cities could provide a training ground for our “enemies within.” These uses of our “defense” forces against our own people is unprecedented and totally against American law and practice.

President Trump said Monday that he may invoke the Insurrection Act to deploy federal troops to Portland, calling ongoing protests there a form of “criminal insurrection.” The Insurrection Act permits the federal deployment of troops in extreme cases. Surely the courts will block him.

Week after week Trump has chipped away at our constitutional protections. After each “small” step into autocracy is absorbed, he takes another. He has fired the Inspector Generals, who are meant to provide a guard rail of oversight against government abuses of power, and violated the customary autonomy of the Justice Department by instructing the Attorney General to go after his “enemies,” (not just Comey). What might be next? And where (and how) will it end?

Charlie Kirk, RIP

Charlie Kirk’s assassination was another tragedy. I disagreed with many of the things Kirk said, but respected and admired his patient willingness to dialog with disagreeing members of his audience.  It was a behavior the country would greatly benefit from more of.  But liking or not liking Charlie Kirk should be totally irrelevant to strongly condemning his assassination.

A The Hill headline stated “A top State Department official on Thursday warned “foreigners” in the U.S. against praising the death of Charlie Kirk, the conservative influencer who was shot and killed at an event in Utah on Wednesday.”  “foreigners-warned-Charlie Kirk” I would like to unpack that statement a bit. No one should praise his death. If we are sharing with foreign visitors the behavior we would expect from them and that they should display if they want to get on well, that would be fine. But coming from our current State Department I suspect that the warning is a threat of deportation for anyone who would dare to be so rude, which would violate the fundamental free speech principles that have always been so important to our culture.

President Trump stated that the assassin was from the “radical left.”  As the assassin has not yet been apprehended, we don’t even need to wonder what information the President has that has not yet been shared with us. I very much want to know who the assassin was and what his motivation was. But that information will in no way absolve him of the evilness of his crime (we do know that it was a man/boy from FBI photographs). The President’s baseless claim is not contributing to a better atmosphere in America. It certainly did not reflect Charlie Kirk’s commitment to civil dialog.

Econ 101: Trade deficits

A trade deficit is the difference between what we buy from the rest of the world and what it buys from us. To that extent rather than buying our goods and services, the rest of the world holds our dollars. These dollars are most often held in the form of US securities (Treasury bonds, etc.). Though trade deficits help finance Uncle Sam’s spending that is not financed with tax revenue, and thus reduce the crowding out of domestic investment by government deficit spending, President Trump doesn’t like them. Our trade deficit in 2024 was $918 billion.

Trade deficits can be reduced by reducing our imports (this is what tariffs tend to do) and/or by increasing our exports. We export many things including food and oil. Tourism and foreign students studying in the US generate about 9% of our export revenue. This has dropped sharply this year as the Trump administration has blocked or discouraged foreign students and badly treated other visitors, denying entry to some. It has suspended entry of new foreign students to Harvard and is threatening to revoke existing student visas at Harvard.

Trump has not only reached into the affairs of Harvard (and those of many other “enemies”), he is also demanding that the US dollar surpluses held by our trading partners be invested as dictated by the Trump administration. This was stated explicitly by US Treasury Secretary Bessent in an interview by Larry Kudlow on Fox Business. https://www.youtube.com/watch?v=IgcmRJpE1pc  

It is hard to see much free market here. Gregg Ip nails it in his recent WSJ article “The U.S. Marches Toward State Capitalism With American Characteristics”  https://x.com/greg_ip?lang=en

U.S. – Japanese trade agreement

Free trade of goods and services produced without government subsidies or restrictions would maximize the incomes of all involved. To promote this result, the World Trade Organization has led the effort to reduce or eliminate tariff and other trade restrictions and has authorized the use of tariffs carefully targeted to nullify the distorting effect of government subsidies or other interferences in the competitive market production of goods and services.

This is not how President Trump has used or threatened in his usual bully style to use tariffs. For Trump, tariffs are not established to improve a level playing field for world trade, and not even always to protect inefficient American manufacturers such as the 50% tariff on imported Steel. An outrageous example was his threat to impose a 50% tariff on all Brazilian imports, effective August 1, 2025, if Brazil went forward with the prosecution of his ally, former President Jair Bolsonaro, who is charged with attempting to stage a coup d’état to overturn the results of the 2022 presidential election in Brazil. Incidentally, the U.S. currently has a trade surplus with Brazil. Go figure.

On July 23, “President Donald J. Trump announced a landmark economic agreement with Japan…. [In exchange for a reduction of US tariffs on all Japanese imports from 25% to 15%, it] will invest $550 billion directed by the United States to rebuild and expand core American industries…. The United States will retain 90% of the profits from this investment…. In addition to raising billions in revenue, this new tariff framework, combined with expanded U.S. exports and investment-driven production, will help narrow the trade deficit with Japan and restore greater balance to the overall U.S. trade position.” “Whitehouse fact-sheets/2025/07/”  

As an aside, Trump has also threated to punish any country that stops using U.S. dollars as its reserve and trade vehicle currency. Somehow, he fails to understand that for a country to acquire these dollars (and for Japan to acquire the $550 billion it is to invest in the US) they must have a trade surplus (US trade deficit). Oh well.

“Japanese officials said there was no written agreement with Washington — and no legally binding one would be drawn up — after Trump administration officials claimed Tokyo would back investments in the US from which American taxpayers would reap nine-tenths of the profits.”  https://www.ft.com/content/c1183b13-9135-41f6-9206-7b52af66f0a5

In addition to the fact that Japanese officials are disputing that they have agreed to such a deal, I hope that you are surprised that the American government is proposing to create new state owned companies. The world’s experience with state own companies has not been good. Our private enterprise dominated economy has served us (our standard of living) very well.

If this all seems rather confusing, welcome to Trump land.

The Fed’s policy interest rate

Among the things our protectionist, isolationist President fails to understand correctly is the role of the Federal Reserve’s policy rate. He wants interest rates to be lower and thinks that the Fed can cause that by lowering its policy rate. That rate used to be the overnight money market rate. If the Fed lowered that target it would supply more money (bank deposits at one of the twelve Federal Reserve Banks) to banks and thus the interbank money market for managing bank liquidity by buying government securities from banks. If banks’ liquidity (“reserves”) is increased, their demand to borrow in the interbank money market will be reduced and thus the interest rate prevailing in that market will be reduced. Thus, raising or lowering the Fed’s policy rate (and the consequent change in base –Fed reserve—money) was the instrument by which the Fed controlled the money supply (its own base money and the more relevant boarder bank money—M1, M2, etc.)

If you are into this subject, you will already understand what money is and where it comes from. If you would like a refresher read this: https://wcoats.blog/2024/11/08/econ-101-money/  

The above description of the policy rate was applicable until 2008 when banks held minimal reserves (or excess reserves when there was still a minimum reserve requirement) at the Fed. But in response to the financial crisis in 2008 when the Fed purchased huge quantities of government debt (and mortgage-backed securities), the Fed began to pay banks interest on their now very large deposits at the Fed to keep them from lending them in the market and thus expanding the money supply excessively. So, the relevant Fed policy rate now is the rate it pays on banks’ reserves at the Fed, the so-called Interest on Reserve Balances (IORB).

As with the policy rate in the old regime, the IORB is the instrument by which the Fed now controls the growth in the money supply. When the IORB is reduced below prevailing overnight market rates banks will draw down their Fed deposits to lend at the higher market rate thus increasing money growth.

Interest rates in the market are determined in and by the supply and demand for credit in the market. If the Fed lowers its IORB it will increase the growth rate of dollars. The Fed will do so when it judges that appropriate for achieving its inflation rate target of 2.0 percent. The twelve-month inflation rate in May was 2.4% and rose to 2.7% in June. The Fed decided not to lower the rate further at this time. Doing so could well lead market participants to expect higher inflation in the future, which would raise (not lower) market rates for say 10 year Treasury bills.

Current Fed policy seems appropriate to me. It adheres to an inflation forecast targeting regime that has become popular in recent years in major central banks. But it reacted by raising rates too slowly in response to the surge in inflation in 2021-2 during the Covid pandemic. Inflation reached 9% in mid 2022. A better system is to return control of the money supply to the public that can buy and redeem dollars at a fixed price for a hard anchor (such as a gold standard). I laid this out in the following blog: https://wcoats.blog/2022/06/06/econ-101-the-value-of-money/

Police state

Congress has struggled for decades to adopt a workable immigration and border security policy. Several reasonable proposals have been advanced over the past several decades but never crossed the finish line. We need more immigrants but of the legal sort. But getting the balance right is not easy.

The path for legal immigration should be widened while border enforcement and workplace employment of illegal residents should be made more difficult. More judges are needed to process refugee applicants much more quickly. How tighter rules are implemented matter. The Trump administration’s current approach is wrong and contrary to American norms. It’s as if he is leading the country step by step to a coup. https://www.washingtonpost.com/opinions/2025/06/11/immigration-arrests-ice-raid-masks/

A perfect world (economically)

The goal of policy should be to maximize world income (output) and its distribution that reflects the contribution of each player. That occurs when resources (capital and labor) are allocate to their most productive uses. But how is that achieved? First by ensuring that the government does not interfere. If the government subsidizes an activity, it will draw resources from its most productive use to the subsidized one thus reducing income.

The government’s role is important for defining and protecting property rights and the rule of law and the basic infrastructure on which firms operate. For example, in the U.S. the government funded basic research because there is no market incentive to undertake it. Much of it provides knowledge that is never used or exploited, but some is exploited by private firms for purposes the government could not guess in advance.

In the real world, consumers’ tastes change and the products and services being offered evolve and the optimal allocation of resources (capital and labor) must evolve as well. Those that are not the most productive tend to go out of business, freeing those resources for better uses. When governments intervene via subsidies or differential taxes they invariably reduce the efficiency of resource allocation and thus lower incomes. Bilateral trade deals introduce large distortions in resource allocation and thus lower global income.

The global maximum thus requires common rules for fair trade globally. The World Trade Organization is the institution through which such rules are developed and enforced (or at lease it should be). Bilateral deals undermine the level playing field optimal resource allocation requires and thus lower world income. With the weakening of the WTO and other international rules and norms, the world is increasingly falling below the income it is capable of.