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Friday, September 13, 2019

Trump demanded FED to cut rates to zero!

Either Trump doesn't understand economics or he has seen the latest GDP numbers for him to demand FED to cut rates to zero.

Trump is wishfully thinking that he can refinance the national debts at zero interest rates after the US FED cuts them to zero.  He has mistaken the national debts with mortgage debts.  National debts are non-callable while mortgage debts are callable.  Therefore, the US government can only buy back the national debts from the treasuries market and re-issue new bonds at lower interest rates if the US interest rates are at zero.

However, something is amiss in Trump's thinking.  First of all, the US government doesn't have the money to buy back all the national debts because it doesn't even have enough money to pay all the federal employees resulting in a potential government shutdown.  Next, the US government has to pay much higher prices to buy back the national debts in the open market and this will wipe out all the interest savings or incur more losses.  Third, this buyback action will disrupt the treasuries market and create big chaos for the international markets.

In this regard, Trump shows his innateness and lack of proper economics understanding.

In another perspective, Trump must have seen the latest GDP numbers which were so bad that he panicked and demanded FED to cut rates to zero from 2-2.25%.

We had indicated a very bad GDP number for the US after the PMI report.

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