Gold Thinks Trump Gets Tariffs

‘Off the charts:’ How Trump tariffs would shock U.S., world economies

Listening to media, including financial media, will get you financially killed in the coming Trump administration. This will be at maximum if he gets general, revenue-raising tariffs implemented. Once a tax is implemented, it is extremely difficult to get rid of because the government apparatus becomes addicted to the revenue. There will be all out war to prevent it. The battle recalls the phrase, “It’s not the end of the world. It’s just the end of you.”

Everyone from Wal-Mart and Amazon to Wall Street benefits from the current system. They have an interest in scaring the public from any type of serious financial or economic reform that shifts power away from capital and towards labor and manufacturing. Make no mistake, this is a battle over the fundamental structure of the economy.

Ricardo Was Wrong

Mainstream economics is wrong about free trade. Absolute advantage exists. Nicaragua can out-produce the U.S. in bananas and the U.S., short of developing fusion power, would be crazy to try.

Ricardo was wrong about comparative advantage though. He assumed (or cynically argued, see below) that capital would stay within a country even if the production went overseas. If winemakers are wiped out in England, they will become textiles manufacturers. That’s not what happens. Winemaking equipment, expertise and capital migrate to Portugal over time.

His assumptions were boiled down into the “learn to code” joke. When coal miners were being put out of work by government regulation, politicians said they could learn to code. As if you can transform people and businesses like clay, remolding it into whatever you like. Yes, some people can be retrained for new jobs, but there’s no guarantee it will be a higher wage one, particularly if there is a loss of capital, including knowledge. Evidence shows the capital flows overseas. Even research moves to where production is taking place. There is often nothing to replace the lost jobs and production in “factory towns” where the factory left.

The same thing happens between the U.S. states. Factories moved from the higher-cost Northeast to the Southeast for many decades. The same negative impacts were seen in hollowed out towns, but there was one crucial difference. People could move. Labor could follow the capital. If all the factories in Vermont go to Georgia, the workers in Vermont can move to Georgia. The European Union made free movement of labor part of the package because it would be impossible to have a union without this. The fiscal union was a bridge too far.

Does Free Trade Work at All?

A country with excess capital and a labor shortage can turn to trade to satisfy consumer demand. A small country that cannot produce everything it needs must rely on trade. A large nation with excess labor on the other hand, should first maximize domestic labor utilization. For the past 30 years or so, the economic system has increasingly devalued domestic labor while benefiting international capital.

1,000,000 economists can be wrong: the free trade fallacies

But there is an obvi­ous fal­la­cy to this neat and plau­si­ble argu­ment: To effect spe­cial­i­sa­tion, Eng­land has to shift labour and cap­i­tal from wine to cloth (and Por­tu­gal has to do the oppo­site). Arguably labour can be retrained—a vigneron can become a machinist—but how do you con­vert wine press into a spin­ning jen­ny?

The obvi­ous answer is that you don’t. Instead, you sell the wine press and buy a spin­ning jen­ny with the pro­ceeds. But because of the intro­duc­tion of trade, the price of wine in Eng­land would have fall­en, so that the sale price of the wine press will also fall (econ­o­mists have mod­i­fied Ricar­do’s mod­el to intro­duce curves where Ricar­do had straight lines, so that total spe­cial­i­sa­tion is no longer required and there would still be some wine pro­duc­tion in Eng­land under the “new” mod­el of Free Trade), while the price of spin­ning jen­nies will have risen, giv­en the new export mar­ket to Por­tu­gal. Some cap­i­tal is nec­es­sar­i­ly destroyed by the open­ing up of trade and it applies in reverse in Por­tu­gal as well.

Since cap­i­tal is destroyed when trade is lib­er­alised, the water­tight argu­ment that trade nec­es­sar­i­ly improves mate­r­i­al wel­fare springs a leak. If eco­nom­ics were a real sci­ence, this real-world com­pli­ca­tion to Ricar­do’s argu­ment would be con­sid­ered, but it has nev­er been seri­ous­ly addressed.

These and many oth­er fail­ings that explain why, when Dani Rodrik took a care­ful look at the empir­i­cal record of trade lib­er­al­i­sa­tion, he found that it had fre­quent­ly reduced mate­r­i­al wel­fare rather than increas­ing it. Writ­ing back in 2001, he sum­marised his find­ings for For­eign Pol­i­cy mag­a­zine with the state­ment that:

dvo­cates of glob­al eco­nom­ic inte­gra­tion hold out utopi­an visions of the pros­per­i­ty that devel­op­ing coun­tries will reap if they open their bor­ders to com­merce and cap­i­tal. This hol­low promise diverts poor nations’ atten­tion and resources from the key domes­tic inno­va­tions need­ed to spur eco­nom­ic growth.

Is Trump a renegade economist who has pored over the works of Rodrick and Keen to gain a deeper understanding of international trade? No. He’s merely what we might call a Noticer, a person who despite all societal propaganda, can see that the Emperor is not wearing any clothing. The first step to reforming the system is breaking the existing order. Tariffs will achieve it.

Ceteris Paribus

There’s a phrase in economics, ceteris paribus, meaning “all else held equal.” It’s impossible to change one variable in reality, but economists consider how changing one variable can affect a system. The mistake in many models is they aren’t complex enough, hence why central planning usually fails to beat the free market. (There is a role for government when markets cannot price an externality such as pollution.)

How would tariffs change the global economy?

First, how does the world operate today? Many export nations rely on the U.S. consumer for demand. A common fallacy: the Chinese will simply consume their own goods instead of exporting them. What does the insight above argue? The Chinese factories will close because the exports are made for American consumers. Chinese do not want them, at least not in the quantities manufactured. The manufacturers will lose money and close. Unemployment will rise. China’s currency may decline instead of rise, but this will not help the situation if the U.S. counteracts with higher tariffs. I could go on to discuss China’s development model which depresses consumption, but hopefully the point is made. China would be in a position similar to that of the USA in the late 1920s when its export model ran headfirst into currency devaluations. Now, they might face the problem like Deng faced communism down in 1978, and come out of it in a far better position, but it doesn’t change the reality of short-term economic adjustment. It also, indirectly, would mean U.S. tariffs benefit Chinese people in the long-run by being an outside stressor that forces reform.

Many people argue the U.S. dollar has to devalue because, in part, like the USA in the 1920s, China and other mercantilist nations have been undervaluing their currencies. Tariffs could potentially forestall a devaluation by offsetting the need to devalue. The tariffs will shift the relative cost of domestic production.

Prices Go Up?

One-dimensional arguments such as “consumer prices will rise” are like the blind men feeling the elephant. The past 4 years show the government can find other ways to devalue the purchasing power of consumers. If currency devaluation is an expected outcome of the current policy path, tariffs are not necessarily the worst of all available options. Suddenly people downplaying inflation for 4 years get excited about a potential price increase that benefits U.S. manufacturers and workers, instead of benefiting tech companies, Wall Street and various types of socialists? Interesting!

What About Wages? Taxes?

We can again look at the past 4 years. Do consumers enjoy rising prices with stagnant wages? No. What would be the outcome from a currency devaluation? Higher prices first, and eventually higher wages since the U.S. would be forced to produce more at home to afford more expensive imports. Something like the last 4 years, but perhaps far worse.

How do tariffs impact prices? They would raise consumer prices while shifting production and economic activity into the United States, increasing wages. Consumption would shift from buying overseas goods to consuming domestic goods and services. Instead of the latest TV, maybe an extra week of vacation for example.

And tax revenues. More economic activity would take place inside of the USA. If imports drop because of tariffs, other tax revenue will rise as this activity shifts onshore.

What About the Dollar?

All else being equal, will the dollar weaken or strengthen if the U.S. economy starts growing faster and producing more goods and services for its own domestic economy?

What About Reserve Status?

The dollar loses reserve status via being expensive. Mercantilist nations do not want their currencies to rise. They create more money and credit than the USA. During credit booms, however, the eurodollar market (bank-to-bank dollar lending with no actual dollars backing up the transactions) expands, depressing U.S. dollar exchange rates. During recessions, when debts suddenly must be repaid, the U.S. dollar surges as debtors scramble for increasingly scarce dollars.

If the U.S. dollar is too strong and getting stronger, foreigners do not want to borrow it. Domestic borrowing will also slow. Existing debts go bust. As balance sheets are wiped out and dollars become hard to obtain, foreign countries will turn to domestic currencies or other alternatives. The U.S. use of sanctions has also made assets such as gold a viable alternative. If tariffs end up making the dollar stronger, that will accelerate a move away from the dollar.

Counterintuitive to Common Wisdom

Consider U.S. tariffs from the broadest possible angle. The U.S. imports about $4 trillion worth of goods and services each year. The trade balance is in deficit to the tune of around $1 trillion. That’s $1 trillion emitted into the world each year. If that number goes down, does the dollar become more or less valuable? All else held equal, you’d think more valuable, but it all depends on whether people need the U.S. dollar or not.

Does the U.S. have exports that can be substituted the way the U.S. can substitute imports of say, shoes? If not, demand for U.S. exports will not decline as much as U.S. imports decline when tariffs are imposed.

If the U.S. grows faster than the world because of tariffs, and the U.S. dollar strengthens, imports might not fall as much as expected either.

At the widest possible angle, and admittedly ignoring monetary policy, exchange rates are a derivative of an economy’s value. The more valuable economies will see rising currencies, relatively speaking, and those with less to offer will see their currencies decline. Assuming they aren’t running tight monetary policy designed to force structural adjustments by other means.

Inflation is the lazy, cowardly solution to losing at the game of economic competitiveness. Most people are lazy and most politicians are cowards. Look no further than the USA repeatedly kicking the can down the road via QE and massive deficit stimulus every time a serious recession risk cropped up over the past 17 years.

An Aging World with Slowing Growth

An alternative way to look at the whole picture: in a world of slowing growth and bad economic policies, countries will boost their economy via capturing more of the global pie. Or they can unleash dynamic reforms that change the structure of their society, such as in China, the CCP handing more power to consumers and entrepreneurs. The push into emerging economies, the hope that India can grow faster, is the world facing the reality of rapid aging. Open borders policies in the developed West are only one facet of it. The climate panic is another. Growth is gone, so lets tear down our energy infrastructure and build a new one to make GDP go up! You will be poorer, sadder and own nothing, but politicians will get rich and maintain power.

Cold War Relic

The U.S. wielded free trade as a weapon against communism. It opened its market to Japan, South Korea, Germany and Taiwan in part to battle the appeal of communism. It was willing to pay a price to defeat a greater threat. China then used the same system, but the impact was devastating. Germany and Japan combined helped make the 1970s a difficult period for the USA. China was a magnitude larger impact with lower tariffs and more open trade, along with communications technology facilitating a faster and more extensive offshoring, along with it being a far larger economy that could theoretically replace all U.S. manufacturing if it wanted to.

Automation

In an automated world, there’s no more labor advantage. Capital matters, ingenuity matters. Distant manufacturers become more expensive, relatively speaking, because goods must be shipped. The cost of transportation rises as part of the total retail cost. Energy prices are also more important. Cheaper energy, production closer to the consumer wins. China is far away and German’s managerial class tragically ruined their energy infrastructure with an assist from USG.

Even Bad Policy Can Seemingly Win

Even if you don’t believe tariffs can have a net positive impact by increasing domestic economic growth, thereby increasing government tax revenue, while cutting welfare costs as more Americans find work at higher wages, it’s possible that existing trends such as geopolitical risk, automation, the slow, very slow demise of the reserve currency still conspire to achieve what tariffs would accelerate. Or will have a far larger impact than tariffs in the long-run. Or if you believe new economies built on AI, space industries and so on will make the U.S. a continued global economic leader, tariffs will have limited economic impact when measured against the whole picture.

Geopolitics

Tariffs are mainly feared because they drive a stake through the globalist project. Free trade is part of the world government playbook. If you pay attention, you might have noticed countries don’t simply drop tariffs and allow free trade. They sign complicated deals with other governments. The world has managed, centrally-planned trade. Tariffs change the rules. Governments asset sovereignty to a greater degree. Multinational corporations are downgraded. It changes the winners and losers within an economy. Trade will still exist, but getting access to markets will be renegotiated on new terms.

Expensive Dollars are the Bad News

A dollar that maintains its purchasing power is good. A dollar that becomes ever less valuable is the way of the world for the past 111 years. Most governments are fine with it. An ever more expensive dollar is a break from the past. That’s the real threat to the global monetary system. If the U.S. were to lose reserve status inside of 5 years, it doesn’t happen at DXY 60, it happens at DXY 160.

Tariffs Might Be Bad News, If They’re the Pin

The greatest risk from tariffs isn’t the tariffs themselves. It’s the risk of reform, that the U.S. finally reforms its economy in a new direction. That a world banking on continuation of the current system, up to its eyeballs in debt, finally meets the pin that pops the credit bubble.

Pay Close Attention to Gold and The Dollar

Gold is sitting on the cusp of a multi-generational breakout and yet, the U.S. dollar is also potentially setting up for breakouts. This is precisely the outcome predicted by the United States slowly abandoning its reserve status intentionally. If the U.S. moves ahead of time, it does so from a position of strength instead of weakness. The whole fiat system collapses from the periphery to the core, from the weakest, most inflated currencies inward to the dollar itself. DXY peaks right before it dies, as one of the few remaining currencies that has not devalued yet. Foreigners unable to obtain USD in this scenario will have to use alternatives such as gold, silver and likely Bitcoin.

Tariffs could put the reserve status of the dollar under serious threat because the U.S. is defecting from the globalist world order. A Different World Order would be created, unilaterally or at least with far fewer allies.

The world is already breaking into economic blocs. There’s a whole separate topic as to the geopolitics of it, and on that score I suspect Trump may not be thinking big enough (though perhaps, hopefully, he’s picked better cabinet people this time around).

Instead of predicting though, I’m going in without assumptions because many variables could change. Expect a Trump economic package with tariffs and deportations to generate a relatively inflationary domestic growth story that boosts the dollar. If Harris wins, it’ll have more inflation than growth, a continuation of the past four years. Media will make you think Trump is more chaotic than Harris, but it’s more a case of who is getting the chaos package. If Trump wins, the ruling class, media and government eat the chaos. If Harris wins, the working class keeps eating it.

Ultimately, the destinations are the same because the larger economic forces can’t be stopped. All the elections can do, if they do anything at all (they usually only change the letters from D to R and back again), is change how the impact hits the economy.

America’s unipolar dominance is also receding. Nationalism is ascendant globally and within the West, including the USA. In hindsight, historians will say something like, “Of course Americans defected from the global system once they stopped running it.” These debates will look frivolous when natural forces were headed there anyway, but they matter. Many in U.S. ruling class seek to direct global events and impose their will on foreign nations. Globalists. Others are more live and let live, even if they are “America First.” Nationalists.

Nationalism will not reach a potential zenith until the depth of the next global recession. It’s very possible that nationalism will not recede after, but emerge out of that recession, cemented as a new global order for at least a generation or two. European and American electoral events bear this out. The tide is turning against migration. If Trump wins, trade and economic policy will follow.

The greatest risk for the world is not tariffs, or Trump, but a USA that uses war to fight the changing world and maintain its dominant position as global hegemon. Trump is very pro-American, but most of his policies are, intentionally or not, aimed at dealing with this new reality. As long as war is avoided, the USA is headed somewhere in the direction Trump is proposing to go…no matter who wins elections.