In a previous post I suggested Mr. Trump’s retreat on his tariff proposals (the 90 day pause) made the score Adam Smith 2, and Donald Trump 0. Bereans know that we have repeatedly condemned Mr. Trump’s rhetoric on trade as completely wrong, and to the extent he actually tried to do it, he would Make America Poorer Again. Markets clearly rendered their verdict, affirming that Adam Smith was right and Donald Trump was wrong, and he was forced to retreat, so the score was 2 to 0. A week ago Mr. Trump was threatening to fire Jay Powell, the chairman of the Federal Reserve Board of Governors, since Mr. Powell was too slow at cutting rates according to the preferences of Mr. Trump. With markets under pressure with his trade war, Mr. Trump needs any help he can get from an easy money policy. But with markets taking a tremendous tumble late last week, by Tuesday Mr. Trump was forced to retreat again, claiming that he never intended to fire Mr. Powell–this was just a made up media story. You’ll have to forgive most of the financial markets for misunderstanding Mr. Trump, who said “Powell’s termination cannot come fast enough” and his advisors were reportedly looking for legal authorities to fire Mr. Powell for cause. Media hype? Maybe. But the market consensus is that this was a serious enough risk that you ought to take chips of the table. When Mr. Trump’s approach to everything is the “art of the deal” where you don’t know what he really wants, shock that maybe you didn’t mean something the way markets take them. Markets abhor uncertainty, as Adam Smith suggested long ago. In Smith’s view of justice, it includes a stable monetary framework and rules of the game (e.g., trade rules):

“Commerce and manufactures can seldom flourish long in any state which does not enjoy a regular administration of justice; in which the people do not feel themselves secure in the possession of their property; in which the faith of contracts is not supported by law; and in which the authority of the state is not supposed to be regularly employed in enforcing the payment of debts from all those who are able to pay. Commerce and manufactures, in short, can seldom flourish in any state in which there is not a certain degree of confidence in the justice of government.”
— The Wealth of Nations, Book V, Chapter III

Politicized central banks have performed much worse than relatively independent central banks, as there is always political pressure to lower rates to “juice” the economy. Can you remember a political leader ever calling on their central banker to raise rates? Ever? Bueller? Trumpians may see Mr. Trump as the business genius who knows so much better what the interest rate may be than Mr. Powell*, but markets see just another politicial leader trying to juice the economy for their own benefit and sowing seeds for future inflationary times ahead. There is a price to pay for the uncertainty that Mr. Trump’s policy actions are creating. Market instability is just one of them, and Mr. Trump’s credibility is another. His retreat on Tuesday makes it Adam Smith 3, Donald Trump 0.

And as we’ve warned, Mr. Trump’s unorthodox economic ideas are costing him scarce political capital–his polling numbers are tanking and the public is increasingly skeptical of his management of the economy (as they should be). Next week Mr. Trump is undoubtedly going to be given a lower GDP number and he will also seek an external party to blame (Mr. Powell, Mr. Biden, etc), but I don’t think the public will buy it given his own rhetoric that his policies were essential for long term success but they might cause some short term pain.

One final anecdote. I had the opportunity to talk to an alum (who I will not name), who is one of the largest business owners in his specific line of work, with multi-state operations. He mentioned that he had a $40M project that he planned to expand production for his operations, but that this project is now on hold for at least six months until all this is sorted out. This anecdote is representative of what we’re hearing across the business world. And this doesn’t include the small business owners whose lives are being ruined by his tariffs, or the strained relationships between Canadians and American border towns that depend on those cross border visits and tourism for their economies.

* There is certainly a case for lower rates, and indeed, in this case Mr. Trump may be correct. But Bereans should remember our more fundamental critique of the Fed: No one knows what the correct interest rate should be, which is why the market, not Jerome Powell or Donald Trump, should be setting the interest rate just as markets should determine every other economic price. Indeed, interest rates are the most important prices in the market which is why we need government’s hands off them.