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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