Historians may look back at December 2018 as the month President Donald Trump crossed the boundary from rationality to irrationality. Almost certainly, December 2018 will mark the moment where President Donald Trump distinguished himself from his predecessors in becoming a financial market and geopolitical risk.
Since the end of World War II, the United States has built and sustained an enduring relationship of alliances and partnerships aimed at promoting a secure, stable, prosperous, and free world. Through NATO, the International Monetary Fund (IMF), World Bank, and General Agreement on Tariffs and Trade (GATT), which was superseded by the World Trade Organization (WTO), the United States has provided military, economic, and political leadership in furthering its interests and strategic goals. Its investments in leadership and resources have yielded immense benefits. Thanks to the liberal world order the United States helped build, the world today is vastly more prosperous than it was at the end of World War II. Much of Asia has achieved developed economy status. Global poverty has declined markedly. The Cold War with the Soviet Union was ended in a peaceful fashion with the sphere of human freedom being enlarged. No global conflict has erupted for more than 70 years.
Today, the Trump Administration is abandoning the world order that 11 post-World War II Presidents from both major political parties worked to construct, sustain, and then adapt to changing realities. Most recently, President Trump declared that the U.S. would be pulling all of its forces from Syria, ceding that broken nation’s destiny to Russia, Iran, Turkey, and Hezbollah while leaving the fate of that country’s Kurdish population in Turkey’s hands. Unwilling to continue to serve an Administration that is engineering a broad, ongoing, and accelerating retreat from the world stage, Secretary of Defense James Mattis resigned on December 20, explaining:
One core belief I have always held is that our strength as a nation is inextricably linked to the strength of our unique and comprehensive system of alliances and partnerships. While the US remains the indispensable nation in the free world, we cannot protect our interests or serve that role effectively without maintaining strong alliances and showing respect to those allies…
My views on treating allies with respect and also being clear-eyed about both malign actors and strategic competitors are strongly held and informed by over four decades of immersion in these issues. We must do everything possible to advance an international order that is most conducive to our security, prosperity and values, and we are strengthened in this effort by the solidarity of our alliances.
Mattis set the end date of his tenure at February 28, 2019 to “allow sufficient time for a successor to be nominated and confirmed…” Unable to maturely handle the Secretary of Defense’s resignation and driven bonkers by coverage of his principled explanation for his departure, the President removed him from office two months early.
On the domestic front, in a December 11 meeting with Senate Minority Leader Chuck Schumer and House Minority Leader and, soon to be House Speaker, Nancy Pelosi, President Trump said that he would be “proud” to shut down the federal government “if we don’t get what we want.” What President Trump wanted was more than $5 billion to fund construction of part of a highly controversial and politically unpopular wall along the U.S.-Mexico border. President Trump proclaimed that he would reject any continuing resolution that did not fund his barrier. Embracing the President’s position, the House of Representatives revised the continuing resolution that had cleared the Senate to add the contentious border wall funding to the bill. That poison pill led to the legislation’s demise in the Senate. Following December 21, the federal government shut down.
Unable to recognize that shutting down a quarter of the federal government over his inability to secure funding for an unpopular border wall—construction the President had previously and repeatedly promised would be financed by Mexico–is a disproportionate reaction, he rigidly pledged to hold the shuttered portion of the federal government hostage to his demands until Congress paid his political ransom. “I can’t tell you when the government is going to be open. I can tell you it’s not going to be open until we have a wall, a fence, whatever they would like to call it,” Trump declared.
On the same day the partial federal government shutdown began, news broke that President Trump was asking his advisers whether he possessed the authority to fire Fed Chair Jerome Powell. CNN reported:
President Donald Trump has begun polling advisers about whether he has the legal authority to fire Federal Reserve Chairman Jerome Powell, according to two people familiar with the matter, who described the President as newly furious at the Fed chief as markets tumble.
Earlier this year, Trump’s advisers told the President that it was doubtful he would have the law behind him if he fired Powell. But Trump has renewed the issue after the Fed again raised its benchmark interest rate this week.
Economic history is littered with the wreckage inflicted by politically-captive central banks. Examples of hyperinflation in such countries as Venezuela and Zimbabwe and major inflationary outbreaks in others including Argentina, Brazil, and Turkey underscore the importance of central bank independence. The historic lesson is that politically-driven monetary policy serves the goals of those in power, not sound macroeconomic principles. As a result, the captive central banks lose control over inflation, employment, or both. That the Federal Reserve is the world’s most influential and globally-connected central bank raises the stakes even further should President Trump attempt to fire the Fed Chair. It is not implausible that such a move could trigger a major stock and bond sell-off with lasting damage in the form of an enlarged risk premium.
All three cases offer examples where impulse has overridden restraint, emotion has eclipsed reason, and ill-conceived political motives have displaced the national interest as the compass of policy making. Such outcomes have made the current President a source of instability, a risk to financial markets that loathe uncertainty, and a growing threat to a liberal world order that has contributed much in advancing security, stability, prosperity, and human liberty.
It was a wild December in the nation’s capital. Both financial markets and the United States’ global standing were battered. Worse, as the nation’s economic growth rate slows from a combination of fading stimulus and rising trade barriers, financial market volatility increases, and the Special Counsel’s probe nears a climactic conclusion, there remains the potential that the Trump Administration’s conduct could grow even wilder in the coming months.