Thoughts on how to stop a trade crisis turning into a financial crisis, Carney's bid for global leadership, the rise of American poligarchy, and why imperialism is making a return
Do you think it’s possible that people losing money will oust Trump? I mean powerful people are losing a lot of dosh now on the markets and they must surely have a limited tolerance for that?
The only way to oust him sadly is via impeachment or having him certified insane. I don’t see any prospect of either of those happening, given that the Republicans control Congress. In any case, the US line of succession consists entirely of MAGA loons so ousting him may not offer much respite!
I'm not an economist but doesn't (relative) inflation weaken a currency? The dollar sell off is therefore the logical anticipation of US tariffs on imports leading to domestic inflation.
Valuable comment. Not being part of the commentariat, I had not appreciated how easily real world actions can lead to a financial crisis.
Separately, as I monitor the smartphone industry, I will email you a calculation that a respected technology analysis firm has made of the effect of tariffs on the price of an iPhone in the US. Roughly +40%. And the iPhone has more than half the market. Of course, Apple has the margin to offset this but margin compression will lead to a lower valuation for what is, de facto, a national tech champion.. Tim Cook has been placed in a most uncomfotable postion by Trump.
The US Congress takes back the tariff authority they ceded to the executive branch. There was Republican support for this last week, which I can only imagine will grow.
2.
Lawsuits get the tariffs blocked. They were levied under the International Emergency Economic Powers Act (IEEPA), with the cited ‘emergency’ being the existence of a trade deficit.
At this point I think even Trump would welcome a judicial block.
Simon I tend to disagree with you on Carney. He talks a good game, but economics tells us clearly that retaliation is the wrong response. I think here he is - understandably - playing domestic politics. If you think Trump is a rational player, then such tit-for-tat retaliation might be a good strategy in game theory terms, but I thought we all agreed he is not. Leading the rest of the world in maintaining free trade would be an excellent idea. Leading the rest of the world in orchestrating a one-sided trade war against the US seems, at the moment, to only magnify the risks given who we're dealing with.
It's not one-sided; Trump/USA started it. The difference for the Carney/world side is that they are clashing *only* with Trump's America. That makes it a great opportunity for everyone outside USA to develop their other relationships.
My bad, I meant "bilateral" as in the rest of the world all on one side and against the US. (Should have had my coffee before writing the comment). But I agree that if this becomes a trigger for other countries to strengthen their own free trade relations it would be great.
The dominance of the US dollar in global trade and finance has meant that, regardless of domestic economic conditions or policies, the US has been able to attract foreign investment to its markets and economy.
For the last 80 years, rgardless of the economic fundamentals, the US has been able to borrow more cheaply, buy goods more cheaply, leverage the dollar into geopolitical dominance and never have to fear a balance of payments crisis because the dollar status has effectively given it unlimited foreign exchange reserves.
But now, Trump has demonstrated that the US is no longer safe or stable. The tariffs mean US corporate profits will fall, as will the need for investment capital, and the market for foreign goods will shrink.
America’s economic strength and stability revolve around the dollar’s status and privileges. Trump, his tariffs, the plan for massive increases in US deficits and debt undermine the dollar’s dominance and will create an economic and financial crisis in the US in the process.
If I may just plug my piece on the Fed’s USD swap lines @Simon? Essentially, that’s the “kill switch” for the global financial system. https://open.substack.com/pub/thinicemacroeconomics/p/mar-a-lago-vs-the-fed-grand-dollar?r=1oa8fn&utm_medium=ios
Thanks, will take a look. Any chance I might see you in Delphi?
Alas, I won’t be there. But I’m marking my calendar for next year!
Fascinating analysis Simon. We’re at a critical moment…
Thanks Ben
Do you think it’s possible that people losing money will oust Trump? I mean powerful people are losing a lot of dosh now on the markets and they must surely have a limited tolerance for that?
The only way to oust him sadly is via impeachment or having him certified insane. I don’t see any prospect of either of those happening, given that the Republicans control Congress. In any case, the US line of succession consists entirely of MAGA loons so ousting him may not offer much respite!
The men in suits can’t tell him to stand down in favour of Vance?
I'm not an economist but doesn't (relative) inflation weaken a currency? The dollar sell off is therefore the logical anticipation of US tariffs on imports leading to domestic inflation.
Interesting, if also alarming! The ‘Poligarchy’ analogy fits a little too nicely for it to come as any comfort to the rest of us!
Great long article, thanks. This summation of the current reign of Mad King Trump is worth sharing:
“The United States has handed the nuclear codes to a madman, a criminal, a would-be dictator and a moron, all in the same person.”
— Andrew Coyne, G&M
Valuable comment. Not being part of the commentariat, I had not appreciated how easily real world actions can lead to a financial crisis.
Separately, as I monitor the smartphone industry, I will email you a calculation that a respected technology analysis firm has made of the effect of tariffs on the price of an iPhone in the US. Roughly +40%. And the iPhone has more than half the market. Of course, Apple has the margin to offset this but margin compression will lead to a lower valuation for what is, de facto, a national tech champion.. Tim Cook has been placed in a most uncomfotable postion by Trump.
I see two potential solutions.
1.
The US Congress takes back the tariff authority they ceded to the executive branch. There was Republican support for this last week, which I can only imagine will grow.
2.
Lawsuits get the tariffs blocked. They were levied under the International Emergency Economic Powers Act (IEEPA), with the cited ‘emergency’ being the existence of a trade deficit.
At this point I think even Trump would welcome a judicial block.
Simon I tend to disagree with you on Carney. He talks a good game, but economics tells us clearly that retaliation is the wrong response. I think here he is - understandably - playing domestic politics. If you think Trump is a rational player, then such tit-for-tat retaliation might be a good strategy in game theory terms, but I thought we all agreed he is not. Leading the rest of the world in maintaining free trade would be an excellent idea. Leading the rest of the world in orchestrating a one-sided trade war against the US seems, at the moment, to only magnify the risks given who we're dealing with.
It's not one-sided; Trump/USA started it. The difference for the Carney/world side is that they are clashing *only* with Trump's America. That makes it a great opportunity for everyone outside USA to develop their other relationships.
My bad, I meant "bilateral" as in the rest of the world all on one side and against the US. (Should have had my coffee before writing the comment). But I agree that if this becomes a trigger for other countries to strengthen their own free trade relations it would be great.
Capitulating to Trump doesn’t work either, he just ratchets up the ask.
So all else equal, retaliation is more popular domestically.
The dominance of the US dollar in global trade and finance has meant that, regardless of domestic economic conditions or policies, the US has been able to attract foreign investment to its markets and economy.
For the last 80 years, rgardless of the economic fundamentals, the US has been able to borrow more cheaply, buy goods more cheaply, leverage the dollar into geopolitical dominance and never have to fear a balance of payments crisis because the dollar status has effectively given it unlimited foreign exchange reserves.
But now, Trump has demonstrated that the US is no longer safe or stable. The tariffs mean US corporate profits will fall, as will the need for investment capital, and the market for foreign goods will shrink.
America’s economic strength and stability revolve around the dollar’s status and privileges. Trump, his tariffs, the plan for massive increases in US deficits and debt undermine the dollar’s dominance and will create an economic and financial crisis in the US in the process.
It’s interesting watching the entire US government going out of its way to prove the Dunning Kruger hypothesis correct.