Over the weekend, fifteen minutes before U.S. equity futures markets opened, President Trump extended the trade talks between the U.S. and China.
No one should be shocked by this.
Because China isn’t the main problem. We are. Why? Keep reading.
Trump has rapidly become the Appeaser-in-Chief. Everyone on the other side of the negotiating table knows this. Sure, he’s put sanctions on Russia, Iran and every other small global player to show how tough he is.
But when it comes to anyone serious enough to hurt the U.S. economy? He folds every time.
India? Germany? Mexico? Canada?
His renegotiating NAFTA was the smallest kind of win. Effectively, he got Mexico to raise their minimum wage a little. Canadian dairy? Please, don’t make me laugh.
It’s all about getting re-elected, not about changing the dynamic.
The only folks he’s been tough on are the ones he can be — Russia and Iran. Thanks to years of antagonism, they have little important trade with the U.S. With Russia it is strategic metals – titanium, aluminum and uranium.
So, sanctioning them is easy.
Even so, we saw what happened last year when he unilaterally issued sanctions against Rusal, the Russian state Aluminum producer which supplies nearly 15% of the world’s aluminum.
The markets went ballistic and he had to back off. Sure, CEO Oleg Deripaska restructured his holdings to avoid sanctions, but what, in the end did this exercise accomplish? Not much.
That operation felt more like a personal grudge between Deripaska and Goldman-Sachs than strategic U.S. trade policy.
He never even considered sanctioning Russian uranium and titanium. Because that would be suicidal.
Today, China runs a $337 billion trade surplus with the U.S.
Despite the demagoguery, the difference in average tariff rates between the U.S. and China is just under 2%.
This is not enough to cause this structural imbalance.
That stems from our internal policies, which exacerbate the difference between labor costs here and abroad. Trump will run a $1.2 trillion deficit in 2019. The Fed will run another $600 billion in U.S. treasuries off its balance sheet.
As David Stockman points out in his latest book, Peak Trump, that’s nearly $2 trillion in new debt the market has to absorb. And it needs to do so without raising interest rates lest Trump’s budget spirals further out of control.
That money is real and it competes for goods and services just like all other money.
More money, chasing the same number of goods, equals prices rising.
And given the political climate here in the U.S. it’s easier to blame Canada, Mexico and China than it is to look inwardly and see the bloat and inefficiency created by too much government and reform the economy from within.
Yes, Trump was elected to ‘Drain the Swamp,” but blaming China is easier.
And yes, Trump’s ‘tax cuts’ were supposed to help this. And, who knows, they most probably will. But you can’t cut taxes and raise spending at the end of the longest expansion in history and expect it will continue for another five years to see the ‘investment’ from the debt you issued to pay off.
As Stockman points out, if this were the beginning of the Fed’s money printing party, or if China was still a $1 trillion economy then this plan might could have worked.
Interest rates are rising regardless of the Fed or the ECB or anything that Trump does. The world has reached the point where more debt doesn’t create more growth. It just creates more debt.
So, he does what every other President does, he blames everyone except the U.S.
Trump is deathly afraid of two things:
- A falling stock market.
- A rising dollar
If he wants to ‘win’ the trade war with China he has to accept both of these things. That’s what it will take. Slapping a 25% tariff on Chinese goods would gut global trade. As I explained in my first article for Money and Markets this is what will happen if he ‘wins’:
If that trade [with China] stops because of Trump’s 25% tariffs, then interest rates will rise because the demand for dollars will skyrocket. This will cause the budget deficit will widen, asset prices to plunge alongside velocity of money and collateral chains to break like they’re made of spun sugar.
The dollar will rise because of trillions in dollar-denominated non-bank corporate debt out there. This massive pile is a consequence of a decade of zero-bound interest rates. Emerging market companies loaded up on cheap dollar debt to fuel the global boom.
They are now levered to the hilt. And as anyone with large debts knows, the farther in debt you are the easier it is to push you into default.
It’s simply math.
And that’s the math of massive debts and deficits that is staring Trump in the face as he fights with his neocon advisors who want him to stay the course and squeeze China harder.
People like Robert Lightheizer and John Bolton only see what they want to see – the effects on China’s economy. They don’t see the backlash from markets, or simply discount them because we are the ‘indispensable nation.’
These men are the worst kind of ideologues, ones willing to burn the world down to maintain their grip on power.
Tariffs are simply a tax on the domestic population. And anyone telling you otherwise is an idiot, a politician or both, like Trump.
And that is the easiest thing for politicians of all stripes to demagogue on the campaign trail. Those on the right argue for tariffs to protect workers. Those on the Left demand a ‘living wage’ to compensate for the inevitable domestic inflation which will almost always exceed real wage growth.
Either way, purchasing power of the domestic currency falls over time.
Because all tariffs do is keep input costs artificially high if they are first-order goods like steel and consumer goods high because domestic producers don’t get the pricing signals to innovate and drive costs lower.
And it is ultimately why anyone who argues that China is the one vulnerable in trade talks is a buffoon. When you are the one with the debt problem you are the own without leverage.
China’s debt is private. The U.S.’s debt is public. Private debt can be written off. Public debt? Not if you want to remain the world’s ‘indispensible nation.’
The U.S.’s power doesn’t come from its bombs or its aircraft carriers, it comes from the dollar and our track record of always paying our debts. Ours is the risk-free rate of return that all capital markets function on. And even an economic ignoramus like Trump knows that.
So, no one should be surprised Trump caved on his March 1st deadline. It’s why Lightheizer will go home from the talks mostly empty-handed.
Remember, it was Trump’s backing off on his hard-line stance on China that caused the markets to U-turn the day after Christmas. They have been in rally mode ever since.
Insane foreign policy, ruinous tariffs, domestic fiscal debauchery are the Trifecta of Suck that has become Trump’s first term in office.
At least we’ll see the end of one of these things in the next few weeks.
The markets will continue rallying to their all-time highs now that it is clear Trump has no intention of blowing anything up given that he’s in pure re-election mode now.
Make no mistake, Trump folding on trade talks with China is the best thing I’ve seen from him in months.
He knows burning down the house only hands the White House to the crazies running for the Democrats in 2020.
What he wants now is a deal he can spin as a win to the rust-belters who catapulted him in 2016, while not actually changing anything. China will hand Trump that happily.
And if that means selling some small victories over soybean sales and maybe a few cars then so be it. It doesn’t matter, by the way, that GM has been in China for years and can’t gain traction because their cars suck, a hallmark of decades of U.S. import quotas and tariffs proving everything I just wrote correct.
No, it obviously has to be those evil Chinese and their protectionism.
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‘Tariffs are simply a tax on the domestic population and anyone telling you otherwise is an idiot’.
OK I’m an idiot, history doesn’t show the US grew phenomenally in the 19th century behind a wall of tariffs, what was I thinking! Still its so much better now since tariffs were replaced by income taxes.
Those 19th century politicians saying jobs would be lost to foreign countries without tariffs, if only they could see the US economy now eh. Skilled craftsmen flipping burgers must be a step forward and besides its their own fault, should have learned to code.
Sorry Tom, I couldn’t resist. You are correct tariffs might lead to some unintended pain now but if the status quo continues, you will be in a world of pain from the US debt mountain a few years from now. Still at least you have AOC she seems good with money. : )
That has far more to do with the generally laissez-faire economic policy of the United States at the time with the obvious exception of tariffs. After the thirties and then the Second World War the US economy has pretty much been run out of DC and this has not been good for our economy.
The whole business with American cars being crappy in general and GM cars being the worst of the lot has more to do with the fact that the automobile industry has been protected by the government. Usually this is by tariff protection but in the last recession GM was explicitly protected from going under by the government with the stockholders taking the hit. Consult Eric Peters Autos about the insane regulatory burden that the auto industry is under.
Do yourself a favor and read Mises 1920 article titled “Economic Calculation in a Socialist Commonwealth”. Rothbard’s latest book “The Progressive Era” will also enlighten you on what progressives and other leftists have done to our economy.
Sadly, these are problems that Trump does not understand and so can’t fix because of his generally mercantilist economic outlook. Without a philosophical center and economic knowledge beyond what he got in business school this will not change. It is also unlikely that the collection of political and economic interests, sometimes known as the deep state, would allow Trump to fix the problem if he was so inclined. The old spoils system did have one advantage over the civil service system in that it didn’t allow a permanent bureaucracy to take root in the government.
Galen,
Thanks for the feedback but if you don’t think I haven’t read Mises or Rothbard then you’re being a little obtuse don’t you think?
I’ll take you a step further and don’t just read the Mises article you cite but the entire book Socialism: An Economic and Sociological Analysis… which I have.
I recommend that book to more people than I can count. Along with Chapter 10 to Hayek’s The Road to Serfdom, The Ethics of Liberty and all the rest. What I try to do is keep the buzzwords to a minimum and distill out the essential ideas so as to not make this explicit up front. It’s important that it doesn’t just come off as an Appeal to Authority, but rather a cogent argument.
Tom,
That comment was directed at Ogmios because it looked like he was analyzing the difference between nineteenth and twentieth century growth rates strictly in terms of tariffs and it was those works by Mises and Rothbard that helped set me straight on the matter.
I have read “The Road to Serfdom” by Hayek and it is well worth reading. Haven’t got around to reading “Socialism” by Mises yet. For some reason I tend to find Rothbard more accessible than Mises.
It seemed like a good idea at the time to give Ogmios some pointers to things that might help explain what happened to the US economy during the twentieth century in a way that most people have never been exposed to in the past. I should have been more clear about that.
Sadly, it is safe to assume that most people have never read Mises, Rothbard or Hayek.
Once when I was young I read “The General Theory” by Keynes and thought there was something wrong with me. That lasted until read Hazlitt.
So much to read and so little time. :-)
My apologies Galen. Carry on
Galen – Thanks for the suggested reading, I studied Hayek years ago but the others need researching. My rather caustic comments were only to highlight that tariffs can have a part to play, obvious really for something that has been around for centuries. Like any policy they have their strengths and weaknesses which change over time so its a question of getting the balance right.
Trump’s problem is trying to effect substantial change in a system fundamentally against him and within the limited time he will hold office which is probably why there is no finesse in most of what he does. He’s playing a bad hand as well as he can and I’d rather see him try and fail rather than not try at all.
I follow most of this post except for: “….then interest rates will rise because the demand for dollars will skyrocket.”
Until the time when the U.S. is no longer the world reserve currency, I think dollar demand going up would lead to lower rates as there is no need for higher rates to goose demand, to attract that capital. A dollup of fear & uncertainty adds fuel to that fire. Am I missing/ignoring a part of the equation?
RCW, You are thinking in terms of normal times. Rising dollar demand to service debt is not the same as rising dollar demand to fuel expansion, raising bond prices.
It’s the opposite. People will sell their bonds to raise cash to service their dollar-denominated debt obligations. Money that is being extinguished to pay off debt is money that is not being recycled into debt buying.
Demand for dollars is not the same as demand for U.S. treasuries. They are related but not synonymous.
Thank you kindly; I try to boil down complex issues into their components so that my simple brain can compute the possibilities but sometimes ignore/forget an important part. There are many moving pieces in this puzzle.
Yes there are. And believe me I don’t keep them all straight all the time. So its good to talk them through