Article

The trials of Donald Trump

The US faces difficult decisions on the economy and politics in November’s presidential election.

| 9 min read

US politics is dominated by the personality of Donald Trump and by the decisions of 12 jurors who have found him guilty on all 34 counts of false accounting. Sentencing is scheduled for July 11, just before the Republican Convention designed to formally appoint Mr Trump as their candidate. Mr Trump is likely to appeal against the verdict and his lawyers may well put in submissions about the date of the sentencing session and about the sentence itself.

The Republican candidate for president is narrowly ahead in the polls in crucial swing states, and has managed, so far, to use the various court cases against him as evidence of a Democrat plot to stop him running. The polls also suggest that if he is found guilty and if he did have to go to prison then he would lose important swing voters in a tight race.

The Federal action about the Capitol riot and the case about classified papers may not come to trial before November. The Georgia case about their election result has not yet come to court with no clarity about when it will start.

If Mr Trump is found to be not guilty of all the current offences being tried in New York – or if the jury cannot agree – then he is likely to get a small boost. If he is found guilty on one or more charges, there will then have to be a sentencing hearing. Republicans will put on pressure to ensure a non-custodial sentence, arguing that he has no past criminal record – and it would be over the top to send him to prison. A lot of false accounting cases end with fines. Democrats who think otherwise might be less vocal as their intervention would help politicise what should be an independent court matter.

Mr Trump’s long periods on time in court have limited his campaigning but have also limited his exposure to cross examination about his policy platform.

The questions slowing Mr Biden

President Joe Biden is thought to be too old to run again by a big majority of the US electorate. His every visit, walk, speech and interview is viewed by some with the age question in mind as to how he performs. He is finding in the polls that, despite inflation falling back to nearer the 2% target and despite the respectable growth figures, he is behind on the economy and cost of living. The high inflation during his period in office is in people’s thoughts.

Mr Biden retains the advantages of office and can point to a reasonably strong labour market, and to a better economic performance than many other advanced countries. He is under pressure from both sides over the Gaza war and has been losing support amongst younger voters, a traditional strength of the Democrat base.

This week, Michelle Bowman, a Federal Reserve Governor, gave an important lecture on the central bank’s policy and its use of its own balance sheet to manage the economy. She charted the huge increases in the size of the Fed’s balance sheet when they first bought a lot of bonds to respond to the 2008 banking crash, and then bought a lot more to reply to the pandemic. At its peak this amounted to $8.5 trillion.

In masterly understatement, she said: The Federal Open Market Committee would likely have benefitted from an earlier discussion and decision to begin tapering and subsequently end asset purchases in 2021 given the signs of emerging inflationary pressures…whilst a robust and rapid response by the FOMC was appropriate in 2020 I think it is worth asking whether such a robust response for so long was appropriate”. This is her own view, but it is also a big admission by one Governor of the Fed, put out through official Fed channels and worked up with the help of Fed staff. It is very likely the accommodative money policy did contribute to the inflation the Fed is meant to control.

Aggressive policy

Over the Covid-19 lockdown and recovery periods the Fed, along with some other advanced country central banks and the European Central Bank, pursued aggressive quantitative easing policies. They created large sums of money and bought large quantities of bonds at very high prices. The Chinese and Swiss central banks did not do this, and the Japanese central bank did not increase the programme of bond buying it already had in place. These three central banks presided over economies that did not experience the near double-digit inflation rates that the bond buyer countries did.

Whilst it was clearly the war in Ukraine that led to big upwards pressure on oil prices, and general supply interruptions from lockdowns that helped push up some other goods prices, it took expansive monetary policies to turn this into a fast general inflation. A supply shock leading to a big rise in a particular price does not of itself produce a general inflation. Markets can adjust to it by buying less of the high-priced product and/or by cutting back on other things to afford the new price of the scarce good if it is essential. The aim of quantitative easing was to keep activity levels up by letting governments borrow lots of cheap money and by encouraging the private sector to sustain its spending.

Governor Bowman also wanted us to know that she is concerned that the Fed decided to cut back on its Quantitative tightening, the process by which it reduces its bond holdings and the size of its balance sheet. Here her argument seemed less convincing. As party to the decision there are limits on what she can say. She said: “It will be important to communicate that any future changes to balance sheet run off do not reflect a change in the FOMC’s monetary policy stance”.

Left to its own devices the Fed would have brought inflation down more and slowed the economy more over the last year.

She is against inappropriately easing. As she has acknowledged that the easy money stance of recent years was brought on by bond buying and was inflationary in its later stages, she should acknowledge that quantitative tightening has the reverse effect. The bond reductions they are undertaking are designed to help cut inflation and are supportive of the higher interest rate policy. Monetary policy has been tight. She tells us this policy has “proceeded relatively smoothly”, failing to mention the regional banks problems and the need for the Fed to inject substantial money into the system to prevent that getting out of control.

Left to its own devices the Fed would have brought inflation down more and slowed the economy more over the last year. Instead, the continuing effects of President Biden’s large fiscal stimulus have cushioned the impact. Whilst Biden and Trump may spar about deficits and spending, it is likely either of them, given a second term, will favour growth and be tolerant of a large continuing deficit. The Fed will need to keep this in mind as it considers future policy. So far, it has persevered with higher for longer, providing some offset to the fiscal stimulus.

A difficult election to call

The US economy is doing well enough to keep Mr Biden in with a chance of winning. His chances would be improved if the Fed started cutting rates before the election, bringing down the costs of credit and mortgages. If Mr Trump gets a bad answer from the New York court Mr Biden may well get a boost in the polls.

The Republican half of the country do not think the election should be influenced by court proceedings. If their man is damaged by the courts many of them will see that as a political act. People who want a change of economic policy may continue to favour Mr Trump.

We said early on the election was likely to be a Biden/Trump re match, and that a Trump victory was possible. That remains the position. The courtroom and what the Fed do are important influences on how it turns out.

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The trials of Donald Trump

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