Many economists, from the University of Michigan's Justin Wolfers to former New York Times columnist Paul Krugman and ex-Clinton Administration Labor Secretary Robert Reich, are warning that if President Donald Trump succeeds in compromising the independence of the U.S. Federal Reserve, the results will be disastrous for the American economy. And they typically cite Argentina and Turkey as glaring examples of countries that suffered severe economic crises and devalued currencies when the independence of their central banks was compromised.
In an article published late Saturday night, January 17, the Wall Street Journal's Rory Jones lays out some reasons why chaos with the U.S. Federal Reserve — including a federal criminal investigation of Fed Chairman Jerome Powell — could benefit Mainland China and their currency, the yuan.
"The criminal investigation into Fed Chair Jerome Powell is being viewed globally as an effort by the Trump Administration to wrest control of monetary policy from the central bank," Jones explains. "That, according to some economists, risks damaging investor confidence in the U.S. financial system and the dollar, just as China is expanding use of its own currency around the world…. China's push to globalize its own currency — recently given renewed importance by Beijing in a five-year policy plan — has already alarmed officials in Washington."
The WSJ reporter adds, "Before entering office, President Trump warned about China's push to globalize the yuan and has since threatened tariffs on the Brics bloc of emerging-market countries — which includes China — should they create an alternative to the dollar. Wider use of the yuan could also allow adversaries to avoid the scrutiny of the dollar-based financial system."
One of the people who is sounding the alarm is Bert Hofman, a former World Bank director for China.
Hofman told the Journal, "The institutional setup of the U.S. — through actions like those against the Fed — is being undermined. Holding dollars becomes a relatively less attractive proposition as a form of safety."
Jones notes that the Chinese government is "competing with the U.S. for global influence by chipping away at the dollar's ubiquity in certain areas such as bank payments."
"The dollar reigns in part because countries and companies consider the U.S. political system stable and appreciate having reliable places to park their extra dollars, especially U.S. Treasury's," the WSJ reporter observes. "Political control of central banks in countries such as Turkey has led to high inflation, which, if repeated in the U.S., would undermine the role of U.S. government debt and reduce confidence in the dollar."
Read the full Wall Street Journal article at this link (subscription required).
