That Mnuchin guy might have a point…

Where a strong dollar is concerned, at least.

Here he is via Bloomberg yesterday, with our emphasis:

U.S. Treasury Secretary nominee Steven Mnuchin said an “excessively strong dollar” could have a negative short-term effect on the economy.

“The strength of the dollar has historically been tied to the strength of the U.S. economy and the faith that investors have in doing business in America,” Mnuchin said in a written response to a senator’s question about the implications of a hypothetical 25 percent dollar rise. “From time to time, an excessively strong dollar may have negative short-term implications on the economy.”

He’s right. It can indeed have negative short-term implications on the economy. In support of that, here’s some very relevant words from the St. Louis Fed from last week. It’s the imports that matter:

It is clear that a strong dollar is associated with net exports contributing negatively to GDP growth. During the sample period’s two-year span [from the second quarter of 2014 to the first quarter of 2016] trade contributed positively to GDP growth in only one quarter.

The negative impact was particularly strong over the first half of the appreciation period. For example, during the fourth quarter of 2014 and the first quarter of 2015, the contributions to the GDP growth rate from net exports were -1.14 percent and -1.65 percent, respectively. The negative effects diminished by the end of 2015, standing at -0.5 percent despite the dollar’s increase in value of another 10 percent…

In response to the strength of the dollar, the contributions from imports played a much more significant role than that of exports. The cumulative contribution of imports to GDP growth was -4.6 percent, while the cumulative contribution of exports was slightly positive at 0.85 percent. This suggests an asymmetric reaction between exports and imports in response to increases in the dollar’s exchange rate. Thus, it is reasonable to conclude that the slowdown in GDP growth was associated more with the growth of imports rather than the reduction in exports.

In sum, the new episode of appreciation of the dollar that began over the past several months is likely to hurt the current growth rate of GDP through an increase in imports rather than a decrease in exports if the trend from the previous period of appreciation holds.

The chart that goes with those pars is worth spending a bit of time with:

Screen Shot 2017-01-25 at 14.24.23

Of course, judging Mnuchin too quickly based just on his words here seems a bit unfair, particularly as, says Simon Derrick from BoNYMellon, “each Treasury Secretary between 2002 and 2011 pledged support for a strong USD, the USD index declined by 39% over the same period.”

Now if only Messrs Trump and Mnuchin could do something about that pesky policy divergence driving the dollar stronger (albeit with a recent dip).

Screen Shot 2017-01-25 at 15.33.56

Of course, that divergence, per Beckworth, “comes from the belief that Trump’s policies will spur robust growth. This belief may prove premature, but if it does come to fruition it will only reinforce the policy divergence by pushing interest rates higher.”

Which is awkward.

Though here’s some more from Simon Derrick on what the Trump administration can do about it:

Here’s what previous Presidents have done:

  • Plaza Accord (Reagan, 85).
  • Bring pressure to bear upon Japan (Clinton 93)
  • Call China a currency manipulator (Clinton 94)
  • Have an FOMC that seems prepared to run policy consistently hot for long periods of time (Bush 02-05)

What can the new administration do? Given the success that the Bush era White House had with their policy of “benign neglect” (although much like fight club, the first rule of a policy of “benign neglect” is that you can never talk about “benign neglect”), that would seem to be the easiest model to follow. That might include:

  • Encourage the Japanese to follow policies that don’t seem so obviously designed to weaken the JPY (a key topic at last Feb’s G20 CB/FM meeting in Shanghai)
  • Have an FOMC that is prepared to run policy a little hotter
  • Intervene (that would be a shock).
  • De-emphasising the talk about infrastructure spending (or at least make it clear how it will be funded) so that yields pull back along the curve might be useful (although it’s worth noting that yields remain historically low). As an aside it was interesting to note this: “We must take advantage of the estimated $50 trillion in untapped shale, oil, and natural gas reserves, especially those on federal lands that the American people own. We will use the revenues from energy production to rebuild our roads, schools, bridges and public infrastructure”)
  • De-emphasise encouraging companies to repatriate funds held overseas could help as well. (

Related links:
Trump’s stimulus plans imply a stronger dollar – FT
Strong dollar to test Donald Trump’s presidential powers – FT

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