The news media is currently abuzz with rumors of possible Trump
Administration cabinet-level nominees.
However, no appointment Donald Trump will make is more
critical to his Administration’s initial success than his pick for Secretary of
the Treasury.
Trump has signaled that he will pursue comprehensive tax
reform that will result in significant reductions to personal and corporate
marginal rates. He is also looking to roll back onerous regulations that have
burdened business in recent years, including major changes to the abominations
known as Dodd-Frank and Obamacare. The
bad news, however, is Trump has consistently favored a mercantilist trade policy
which could lead to meaningful tariff increases and a trade war. Of course, tariffs are simply another form of
tax. This has the potential to offset
much of the positives on the domestic tax and regulatory front. But I am hopeful that cooler heads will
prevail and the trade policies Trump is able to implement do not come close to
matching his belligerent campaign rhetoric.
Any pro-growth policies will quite
simply lose their potency unless the Treasury is able to deliver a strong and
stable dollar to the marketplace. A stable currency will ensure that pro-growth
fiscal reforms deliver the intended effects.
The value of the U.S. dollar, as measured by the fall in the price of
gold, has strengthened since the election on November 8 as markets price in
expectations that many of Trump’s policies will be dollar-bullish. It is not
unreasonable to expect gold to retest the lows of earlier this year below
$1,100/oz. However, excessive currency
strength is undesirable due to the havoc that deflationary pressures can impart
to debtors, commodity-producing sectors, and many emerging markets.
The country has been without a Treasury secretary that has a
solid grasp of its role as caretaker of the dollar. The last person was Robert
Rubin during the Clinton Administration. A relatively stable currency during that
era helped create an environment that rewarded work effort, savings and
investment. This resulted in immense
prosperity during the mid- to latter-part of that decade.
I can think of no better selection for this key role than
Steve Forbes, who has reportedly served as an informal economic advisor to the Trump
campaign. Arguably no prominent public figure knows more about the importance
of sound money than Forbes. He is an
enthusiastic proponent of returning to a gold standard system. Other worthy candidates include Jeb
Hensarling, John Allison, and Kevin Brady.
Too many economists and commentators focus on the importance
of the Federal Reserve in setting monetary policy. The Fed’s control over the
value of the dollar is greatly exaggerated. When the decision was made to leave
the Bretton Woods Agreement in 1971, it was the U.S. Treasury that led the way.
The Fed Chairman at the time, Arthur Burns, wanted nothing to do with it. As
the mouthpiece for the dollar, if the Treasury secretary stresses that the
Administration desires a strong and stable currency, preferably tied to gold, the
market will deliver just that.
Trump will have the opportunity to name a number of members
to the Federal Reserve Board. He should choose pro-sound dollar candidates such
as Judy Shelton, David Malpass, or Jim Grant to name a few. They can work to
bring sanity to the Fed by helping thwart its attempt to manipulate markets via
interest-rate targeting and foisting overbearing regulation on the banking
industry.
Trump has a grand opportunity to finally fix a highly
dysfunctional U.S. monetary system. The
right Treasury Secretary could also lead a global currency reform initiative
that would stabilize currency values and actually promote trade and capital
flows by helping eliminate “beggar-thy-neighbor” devaluations.
My fingers are crossed.
I wish a blessed Thanksgiving Day to all of my readers!
