Classical conservatism would seem to emphasize stable institutions, small government, balanced budgets and encouraging international trade. Obviously, Trump is offering something different, and has recently doubled down on criticizing China. Trump has accused China (and Europe) of manipulating the yuan (Euro) after rate cuts, and has criticized the Fed for not cutting interest rates. He seems to want a weak US dollar, strong US economy and tariffs to strongarm other countries in to buying more US goods and “balancing trade deficits”.
Unsurprisingly, this doesn’t make a lot of sense to me. Tariffs and economic brinksmanship are going to weaken other currencies and rising volatility will lower investment both in the US and in other countries. The strong US dollar is in part due to Trump’s policies as well as the resilience and strength of the American economy. But given Trump’s rhetoric, I personally thought the US economy would not do as well as it had in recent months. Perhaps the markets weren’t taking him seriously or other factors were at play.
This leaves me with a series of questions, which are factual but may not be easy. The responses may venture into opinion so I apologize if this is not the correct forum.
Why have US markets done so well despite this volatility. If there is going to be a correction, when might this occur?
Is it possible to have a weak dollar, strong economy and significant trade war?
Are there any limitations on Trump’s brinksmanship to reduce the repercussions of a trade war?
Finally, what might be the major repercussions of a trade war? Might there be benefits and opportunities? Will this help correct perceived corporate malfeasance at all?
Also, what might be the reputational implications of Trump got his wish and, say, arbitrarily reduced the interest rate? The US has a reputation for laissez-faire policies and “unfettered markets”. How much damage would this cause?
All good questions, but I suspect the real answer is: nobody knows. The last time a trade war was undertaken, tariffs and all, it didn’t end well (ie 1930s). But economic conditions have changed so much who knows what will happen now?
Trump doesn’t take advice from anyone (that I have heard). So his economic decisions are based on personal experience not informed guidance. So far, what he has demonstrated is that the President has less actual immediate impact on the national economy that the public realizes. No-one knows what impact all these actions will have long-term. All that matters to Trump is what consequences will become apparent before the next election.
So, in answer to your questions-I don’t think we know. All the “answers” that can be offered will be mostly opinion even if the person doesn’t believe that. (including my Trump answer above )
Your questions assume that the economy is a game for ‘rational players’.
It is a post-rational world, and Donald Trump is its avatar. Anything can happen and some things are happening already (negative interest rates and negative rate mortgages) for which there is little or no precedent and no good model.
I’m not really assuming “rational players”. Certainly Trump is more spontaneous. I’m just surprised this volatility has taken so much time to find economic expression.
The US economy is about 19.5 trillion. Trade with China is about 660 billion. A trade war with China is just not enough to wreck the entire economy.
Demand for dollars is still strong worldwide so that is more important than Trump’s preferences.
Central Bank independence is very important but there have been times where there has been political interference, Carter was the last time, it is bad because it makes inflation more likely and means the fed has to be more active to regain credibility. However it would not be catastrophic.
One interesting point I’ve read - China effectively has an unspoken agreement with its people since Tien Amen. “You let us govern, and we’ll make you rich.” The last 3 decades have been amazing and the economy of China has certainly boomed. The fear is what will happen if things slow down, which they’ve been threatening to for several years now. Can China survive an actual recession without civil unrest? Is it safe for the rest of the world for China to descend into civil turmoil? What happens to the things made in China, if the supply becomes disrupted or unreliable? What impact will that have on the rest of the economy?
Plus, much if the rest of the world seems disinclined to follow the American lead into Lemming Economics. Can China get by without the USA as a significant market? I think the USA is finding that shutting the door on China won’t happen, it’s too late. This is another fallacy of tariffs. They are designed to make it cheaper to bring manufacturing home. However, unless the factories and production slack already exist, companies have to see a long-term benefit. If the tariffs disappear next week or next year, why bother moving your factories home? So far, the tariffs don’t appear to be permanent and will likely disappear with the next election. Even low or negative interest on loans for factories won’t help persuade corporations that the tariffs are here to stay.
I suspect that it will put a lot of small retail business owners out of business. Surprisingly there are a lot of people who still think dropshipping commodity merchandise from Alibaba is a profitable business. Those will eat it first. But then there are more rational retailers who hold inventory and sell either online or brick and mortar (or both). I agree with you that it’s not going to hurt any of the major corporations, though.
I believe what’s propping up the US economy is the immense budgets being passed year after year without consideration of balancing, let alone reducing the deficits. I don’t understand why a $22 Trillion dollar deficit isn’t sufficient to snuff out the economy, but it wasn’t sufficient when it was $11 Trillion, or $16 Trillion, etc. At this point it just seems like a number that nobody considers that important except when planning next year’s record budget and making sure the next increase is in the ballpark of the previous years increase. I get the sense that the deficit that’s being financed by China and other creditors is viewed like Roslie Goes Shopping: If you owe $10K in debt and can’t pay it, you have a problem; If you owe $1M in debt and can’t pay it, the bank has a problem.
Even a 1% reduction in GDP is a big deal. And uncertainty about the future will cause American businesses to delay investments.
I hope you explain what you mean about Jimmy Carter and the Central Bank. I thought he appointed the inflation-fighting Paul Volcker and then kept hands off even though he knew that Volcker’s high interest rates would lead to lay-offs and was likely to cost Carter his re-election.
I don’t think it’s the trade war itself that’s causing problems – businesses can adjust for that and either find new sources or take some production in house. It’s really the uncertainty – importers may think they have to find some other low-cost source, but are waiting to see how it all shakes out; manufacturers don’t want to start building capacity in the US under the assumption that tariffs will remain in place, just to have them reduced or eliminated. Trump is all over the map, sometimes on the same day – we’re coming to an agreement with China in the morning, and he hereby requires manufacturers to find non-Chinese sources in the afternoon. It’s impossible to plan for, and I believe it’s depressing business investment.
Has a single CEO/CFO/COO even paused to consider changing where they buy their widgets based on Trump’s “orders”. They buy from the least expensive and most reliable supplier regardless, and will switch at the earliest opportunity if they can find a cheaper source - which won’t be in the US for most inexpensive consumer products.
Steve Madden (douche and cheap shoes manufacturer), said he had no plans to stop sourcing and manufacturing in China. He said there was zero chance those types of consumer goods manufacturing was coming back to the US. He’s not alone. Apple isn’t packing up production and moving it to the US. Nobody is. They will all wait it out because the cost of doing so will be far greater than the marginal rise in prices they can pass on directly to the consumer.
but he talks about it a lot in his Twitter feed and provides some cites to show falling business investment. I’m sure he wouldn’t say that it’s a rock-solid connection or anything. But, it’s seems true that business typically dislike uncertainty and our trade policy has been anything but certain.
My point is that it’s not just the effect of the tariffs themselves, but other effects, such as business investment, that may have a negative effect on the economy.
Not on Trump’s orders, but there have been moves to other low price manufacturing countries like Vietnam. That’s not going to help US manufacturing at all.
But remember a lot of the tariffs haven’t kicked in yet because Trump keeps chickening out. If they do kick in, and prices rise (I think I read $150 or so increase for a laptop) then we’ll see the impact.
There is a lot of momentum for a bull market. It’s not like the market was anything but hot before the last two recessions before it wasn’t.
My investment advisor said that his company thinks that Trump will keep things up until the election. But he said this before the recent chaos. I’m personally dubious, but I’m sure there are investors all over telling their clients to have faith.
Me, I’m ready for a crash. And rooting for one.
Krugman’s whole column today is on the effect of flailing around on tariffs on business investment:
It’s not as well cited as his blog pieces are. I don’t know if that’s because he has to make it more generally approachable or because there’s not much research into what happens when there’s an erratic leader of a major economy flailing around on tariffs. So, take his conclusions with a grain of salt to be sure.
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