'Numb-skulled thinking behind the havoc': Economist warns Trump will deflate US dollar’s value

Author and Harvard Professor Kenneth Rogoff says President Donald Trump and his “trade Rasputin” Peter Navarro will help the yuan and the euro encroach on the value of the dollar in the legal economy.

"To paraphrase a common saying: it ain’t what you don’t know that kills you. It’s what you think you know that ain’t so. Nothing could better describe the numb-skulled thinking behind the havoc that President Donald Trump and his trade Rasputin, Peter Navarro, have wrought on the global economy," writes Rogoff, who predicts in the Economist that the dollar’s reduced market share will inevitably mean higher interest rates on long-term dollar debt for Americans. Also inbound is a “weakening of the effectiveness of American financial sanctions, among other problems.”

The dollar’s global dominance was already under fire, having peaked around 2015. But it began ceding territory to China’s yuan in more recent years. Now America’s unsustainable debt trajectory is closing a period of very low long-term real interest rates.

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“If Mr. Trump’s chaos keeps undermining the dollar’s ‘exorbitant privilege’ — the borrowing discount America’s government enjoys thanks to the greenback’s dominance — rates will rise even more,” said Rogoff, one of Harvard’s more notable conservative voices.

Trump’s controversial 2017 tax cuts, in addition to other cuts, are primarily responsible for the nation’s increasing debt ratio, claims the Center for American Progress. The public policy research and advocacy organization adds that without the former President George W. Bush and Trump tax cuts, debt as a percentage of the economy would be permanently declining.

Trump’s attacks on the independence of the Federal Reserve, “which he wants to blame for the recession his tariffs might cause, has taken Fed-bashing to another level,” he said, and it hastens the dollar's destruction. Trump tariff’s will further aggravate things, Rogoff warns and the president's attacks on legal immigration and his crusade to crush research at the nation’s top universities will reverse major sources of innovation and growth.

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But it is Trump’s challenge to the rule of law that most weakens the dollar, says the professor.

“Until now, trust in the fairness of America’s legal system has helped convince investors that American assets are among the safest in the world. This includes not just Treasuries, but stocks, corporate bonds, property and more. The prices may go up and down, but at least you own what you own,” says Rogoff. “Now, if Mr Trump’s efforts to vastly extend presidential power succeed, foreign holders of US assets will feel less secure.”

The dollar is not a self-made dynamo, he adds. It owes much of its value to the misfortune of others, including the fall of the Soviet Union, Japan’s economic mistakes of the 1990s and Europe's hasty decision to include Greece in the euro before it was ready for prime time.

But now its our turn to be the misfortune, Rogoff said, and unless Trump "reins in his chaotic trade policy — he could start by firing his Rasputin — America’s luck looks set to run out."

Read The Economist article here.