peacefare.net

The damage is vast and continuing

I’ve been at a workshop in Boston for these last few chaotic days. On the perhaps mistaken theory that President Trump will stick with the current tariffs, where do things stand?

The ugly

The losses on the stock market still amount to more than 10% of its value and trillions of dollars. If your timing was bad, you sold just before Trump suspended tariffs on most countries yesterday, causing a bump upwards. Odds are Trump, his family, and advisers did not make that mistake. Even if they didn’t use insider information to trade, they no doubt used it to desist from trading.

Trump’s on again, off again tariff decisions have done serious damage not only to the stock market. The bond market fall was a decisive factor in his “off” switch. That suggested strong inflation and rising interest rates, which would kill the Biden expansion Trump inherited. Stagflation is still a serious possibility.

With stocks and bonds collapsing, it would be surprising if Americans were to stay confident in the markets. The same is true for foreigners. The cash flow into the US that enables the trade deficit Trump wants to get rid of is in danger. Among the big buyers of US government bonds are the Chinese. Are they going to continue to buy, or even hold, those?

Markets rely on confidence. Trump has done everything possible since his inauguration to undermine it. Consumer confidence is declining sharply towards the relatively low level it hit during the COVID19 epidemic:

The bad

Trump’s tariffs are still there. The Economist estimates we’ve gone from an average effective tariff level of 3% to 25%. That is a giant increase that will hurt the American economy in many different ways. Because of our dependence on Chinese products, America is going to lose the trade war with China. Tariffs are still raising American costs, and Chinese retaliation is hurting US exports.

The automobile sector will be hard hit. American manufacturers, and foreign producers who manufacture in the US, are going to face sharply high costs. The capacity to ramp up domestic production of parts is limited. While the United Auto Workers union is applauding, few new jobs will result in the near term. Many more will be lost to the impending slowdown in the economy.

The good

If there is a silver lining, it is in national consciousness. Americans are becoming aware of their connections to the rest of the world. No one can ignore the damage that an incompetent and capricious president can do. Trade and alliances count. A Federal government that can think clearly and act sensibly is indispensable.

Some of this consciousness will help people understand the damage that cutting the Federal work force and budget will do. The so-called Department of Government Effectiveness has already demonstrated its vast incompetence. It is also hurting states and cities all over the country. The $2 trillion cut the House is asking for will cut deep into Medicaid and likely Medicare as well. Social Security is also at risk.

The simple fact is we were better off on January 19 than we are today. If Trump keeps this up, he will rank as a disastrous president.

People are not pleased but it will get worse

Hard to picture a worse reception than President Trump got for his latest tariffs. American consumers are recognizing that they are inflationary, the stock market tanked, and the rest of the world gasped. That presumably includes the penguins on Heard Island, one of at least two places subject to Trump’s tariffs where no people live.

Not good for Americans

Trump’s minions are out trying to convince Americans the tariffs will not increase prices. But they will. Domestic producers will raise their prices, because they can once the competition raises its prices. The tariffs will act as a tax on consumption, reducing disposable income and slowing the economy.

The protection for domestic producers is badly targeted from a labor perspective. Americans don’t want to work in tee shirt factories that can compete with Vietnam’s. Nor do most Americans want to pick peaches. The US is a developed country that has moved up the value chain.

The re-shoring of manufacturing jobs to America will be slow. It takes years to build serious factories. What investor, seeing how capriciously Trump behaves, would lay out a few billion just because he has announced a 10% tariff? That could disappear tomorrow. Under Biden, the American economy had already created a record number of manufacturing jobs. Manufacturing in Trump’s first term lost jobs, partly due to the COVID-19 epidemic he mismanaged.

Eighty per cent of our jobs are in services. Retaliation will hit those hard and fast.

The economy

So inflation will be up, jobs will be down. The odds of a recession are way up. The firing of tens of thousands of government workers will hit communities all across the country, not just in Washington DC.

Wait until those who own stock have a hard look at their portfolios. They will cut back on spending. This “wealth” effect will be particularly pronounced for retired people, who are required to take amounts fixed on December 31 from their retirement accounts. Unless they anticipated the downturn in the market, they’ll have to raise those amounts by selling stock worth much less than it did a few months ago.

Meanwhile the Fed will have to do what it can to moderate prices. Its only real tool is to raise interest rates, which will pinch consumers even more. Trump will rail against the Fed, but it will have to hold the line.

The rest of the world

Trump is telling people the tariffs are not a negotiating ploy. He wants them to stay for years, which is the only way they can boost domestic production. This means America’s trading partners will be retaliating hard and fast, while turning to increased trade with each other. That will give them the competition they need to enhance productivity, while American industry grows fat and lazy behind high tariff walls.

The consequences will be felt in many ways. Innovation will lag. Trump has already done enormous damage to America’s research universities and government research institutions. His erratic enforcement of immigration laws is also actively discouraging foreigners from coming to the US. Young scientists and engineers will be going for advanced education to universities in Europe, Latin America, Australia, India, and China rather than the US. It’s not only the tourism industry that will suffer from their absence. Immigrant entrepreneurs are a far higher percentage of the total than immigrants are in the population.

Is it all purposeful?

It is tempting to suggest that all this is not an accident. Trump has repeatedly shown an inclination to weaken the United States, especially in Europe. Is that the real purpose?

But I’m afraid that would give him too much credit. The tariffs and immigration policy are just dumb. He is a profoundly uneducated mercantilist and racist. But I wouldn’t say the same about the attack on the universities and research institutions. That is an effort to rid the country of people who would dare to challenge him on factual and rational grounds. He wants an America swollen with racial prejudice and isolated from the world. Half the country supported that objective in last November’s election.