It’s getting tiresome watching Donald Trump’s bipolar presidency. It seems he can’t let a day go by without making some massive announcement to raise tariffs, threaten sanctions or overthrow a government.
Every 24 hours is another exercise in chasing the Trump Reality Show around. Every lull in the perpetual news cycle has to be seized upon to create more chaos so he can validate his insanity.
Trump has so many plates spinning there’s no way he’s actually thinking anything through. Take the latest fiasco, Chinese trade talks.
One day “Talks are going well,” the next “We’re raising tariffs to 25%.”
That’s where we are today. Because Trump thinks he’s winning the trade war and China won’t give him what he wants so he’ll disrupt global trade until he does.
It doesn’t matter how many times he’s told. Tariffs don’t work. The costs are not paid by the exporter. They are paid by the consumer. Tariffs don’t shift manufacturing of the goods imported onshore, they are supplied by other countries or substituted for lesser goods.
The consumer pays higher prices for end-user goods. The domestic members of the supply chain pay higher input prices while sclerotic domestic producers are subsidized to stay non-competitive.
Warfare is Welfare
The problems with threatening these tariffs are myriad but the main ones are:
- Trump is an economic ignoramus. Who only likes to look at one side of the trade ledger.
- His advisors are all paranoid neoconservatives who can only see the world in terms of power.
Because these ‘advisors’ are who they are they all push Trump to his worst decisions by feeding him exactly what he wants to hear. It doesn’t matter if it’s intelligence about the potential for a Venezuelan coup or the efficacy of sanctioning everyone who buys a drop of Iranian oil.
Trump likes punishing people he thinks have wronged him.
The National Security Council played a key role in driving the argument to end the waiver program — especially Richard Goldberg, a new member of the Trump administration and a longtime advocate for confronting Iran, according to the two sources. He was “instrumental,” one of the sources said.
National Security Adviser John Bolton added Goldberg to the NSC in January.
Previously, Goldberg was an adviser at the Foundation for Defense of Democracies (FDD) think-tank headed by Mark Dubowitz, a leading advocate for tougher handling of Iran since the United States’ first round of sanctions against the country under former President Barack Obama.
In 2012, Goldberg was an aide to then-Senator Mark Kirk, a Republican, and delivered a blow to Tehran by writing legislation that closed Iran’s last legal loophole in selling oil under the Obama sanctions. That legislation targeted the Belgium-based SWIFT financial messaging system over which Iran was conducting billions of dollars in oil trade.
Bolton was in charge of the failed Venezuela operation and is the architect of both the Iran sanctions plan as well as scuttling peace talks with North Korea.
Do you really think he’s not involved in telling Trump to up the pressure on China by giving them an ultimatum to deal or see tariffs raised to 25%?
This, the same day that Bolton announces moving an aircraft carrier group to the Persian Gulf as a message to Iran.
Never forget that all of this can be avoided by Trump having one shred of courage to stop this welfare for the merchants of death.
Dollars Locked and Loaded
That the impetus to weaponize the U.S. dollar through trade and hybrid warfare comes from this corner of Trump’s administration is not news. Neither is Trump’s impulsiveness, cravenness and inability to think systemically.
What is news, however, is that Trump thinks he has the leverage here because the S&P 500 is flirting with a new all-time high. As I said above, Trump is an economic ignoramus.
He refuses to see the opposite side of the trade ledger. We export trillions in debt, which fuels our trade deficit with China and receive goods in return. Those funds created out of thin air aren’t used for domestic investment, they simply goose GDP — Gross National Spending — as that money flows through the economy.
Tariffs won’t solve this.
Trump lowered corporate tax rates to 20%, a good thing certainly, and is trying to cut through regulatory red tape, also a good thing, but it isn’t enough if he doesn’t cut government spending at the same time.
What’s never admitted by mainstream economists is that GDP can fall and economic value created by the economy can rise. Boosting GDP with fake spending fueled by new debt at artificially low rates isn’t wealth creation.
In fact, it is, ultimately, capital destructive. It is malinvestment that shows up everywhere as ghost cities, empty malls, crumbling infrastructure and cultural malaise which leads to political degradation.
This is why Trump is a coward. He doesn’t have the courage to confront this. He just blames everyone else for not paying their fair share. He’s focused the anger and frustration of Americans impoverished by these policies on everyone else.
There is no issue that gets people more angry with me among Trump supporters ripping him on tariffs. It’s insane how deeply this idea is embedded.
It’s economic warfare in which the bombs go up and come straight back down.
A courageous President, however, would level with the American people and say, “We’ve spent beyond our means. We in Washington with our insane policies have destroyed your communities.
“Government can’t solve these problems. Only you can. We’ve cut taxes and and now we’re cutting spending and I will veto any budget that doesn’t do so.”
“The best way to improve the American economy is to get real and put the money back into your hands. Government doesn’t produce wealth, at best it shuffles it around. You produce wealth.
“It will be tough. But I have faith in you the American People.” Stephen Miller will never write that speech.
That’s the fight he won’t have. Instead he does what every other crackpot politician has ever done, guns AND butter. And then sells that as a trade war with China.
No one is ever to blame for their economic messes. Blame the other guy. Blame the corporations. Blame everyone except the people who actually did it and compound the problem by taking it out on the rest of the world.
Trump’s Market Problem
He thinks the stock market is the weather vane of his presidency and that when it’s rising he can make outrageous demands and when it’s falling he has to tack against it.
It’s why everything is so bipolar and we’re being pushed every day in a different direction. A quick look at the Dow Jones Industrials on a weekly basis since Trump embarked on his trade and tariff war should give you an idea of how much volatility has increased.
In case the picture itself is unclear, the numbers are. Since hitting a peak in January 2017 volatility as measured by the difference in closing prices week to week and the range of each week has more than doubled.
For most of the second half of 2018 we saw got used to three sigma or greater movements in the Dow. This is the real effect of political and policy uncertainty. And if Trump’s goal is a rising stock market someone should show him this chart. 2017 is what you want, Don, not 2018.
Because, for all intents and purposes, it hasn’t gone anywhere in over a year.
Not that I think Trump is the only reason for this volatility, but his pressure on dollar liquidity and his consistent scaring capital markets with shutting down trade isn’t helping anything.
He helped break the eurodollar system last year with his overnight tariffs on aluminum and his pullout from the JCPOA.
The U.S. share market is rising precisely because he has embarked on a mad policy of weaponizing the dollar. He thinks there is no possible way anyone can get out of using the dollar and therefore this won’t hurt him or the U.S. in the long run.
In the short run he’s right. Dollar liquidity is causing massive capital flight into U.S. assets. But it isn’t coming here necessarily as long-term investment.
Tariffs Have Consequences
The problem is he forgets that he’s the one subject to an election while China’s leadership is not. Everything China has done politically under Xi Jinping has been to safeguard the Chinese state in the event of a crisis.
Back here we have one major party, half of the President’s party, his own staff and the permanent bureaucracy actively plotting a coup against him.
Oh, and there’s an election in eighteen months. But his advisers keep telling him China is a paper tiger, squeeze them and they will capitulate. But it hasn’t happened yet and it won’t.
China’s not going to implode over these tariffs. It will give Xi and his central bank the opportunity to devalue the yuan in response to the slower flow of dollars. It has to protect the lion’s share of its trade with Southeast Asia and Europe whose currencies are already in trouble.
And it will bail out the most strategically-sensitive banks and businesses over-exposed to them. It’s what they did last year in response to the 10% tariff and it is what will happen this time.
So, if Trump doesn’t want a stronger dollar he can’t look to the Fed to give it to him. The structure of the offshore dollar markets is not under their control. As always, markets are bigger than central planners.
If global trade is the M0 of the world then restricting it at a time of maximal dollar-based debt capacity is the stupidest thing you can do if your goal is a lower dollar and trade balance with China.
We don’t need a lower dollar. We need a dollar that buys more value at home. And that can’t happen with the Fed and Treasury pumping money in while choking us with the debt behind it.
But don’t worry folks Economic Warfare Man has a plan for that too.
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