My only market commentary is if they don’t back off this misguided plan to restructure global trade through tariffs, all rallies will fail at Fib levels, and a prolonged bear market is likely. Here’s the question to ask yourself: what is the potential time frame of the headwind causing the selling? Compare the acute fast nature of the Yen carry trade unwind vs a lasting policy change like universal tariffs trying to restructure global trade. Captain chaos is hurting consumer confidence, spending, and capex. The bottom half is already broke, and tariffs are a regressive tax upon their nonexistent discretionary income. There’s massive debt refinancing just ahead and it’s only been 2 months since the high of the most expensive market in history with potential for earnings to go down not up. The Fed can certainly change the game, but they’re on hold due to the unknown short-term effects of tariffs on CPI, except if they’re forced to bail out treasuries, but that won’t help the consumer. This is not what a bottom typically looks like and the whole debacle is the perfect example of how dangerous ideologues in power can be. Milton Friedman once called tariffs the one thing that nearly every economist agrees upon.
Here is my argument against tariffs as a policy. 3400 words.
Intro
Hey ChatGPT, did the US acquire gold through WW2?
Yes. Over the course of World War II the United States became by far the world’s largest gold‐holding nation. Key drivers were:
-Allied gold shipments for safekeeping
As war engulfed Europe, the U.K., France, Belgium, the Netherlands and other nations transferred much of their central‐bank gold to New York for protection.
-Lend‑Lease settlements
After the war, the U.S. was repaid (in part) with gold for the massive transfers of military equipment under Lend‑Lease.
-Seizure of Axis gold
Allied forces recovered large quantities of Nazi‐controlled gold and looted central‐bank reserves, some of which were shipped to the U.S. for processing and redistribution.
As a result, U.S. official gold reserves rose from roughly 13,700 metric tons in 1939 to about 20,000 metric tons by 1945, giving America roughly three‑quarters of the world’s monetary gold on the eve of Bretton Woods.
Summary
-Our trade deficits are not caused by the tariffs of foreign countries; they are caused by the differential of our cost of production vs overseas, stemming from our acquisition of gold, our free markets, innovation, and socioeconomic political systems. The deficits are caused by US exceptionalism post WW2.
-Globalization is the free market's self-correcting mechanism balancing gold back to the world, which Nixon interrupted in 1971. Since then, the forex currency system of relative values without a unifying neutral asset, and the Triffin dilemma, prevented the dollar from depreciating to keep global trade in balance, so globalization is the growth of US global businesses penetrating world markets, and the recycling flow of US dollars overseas back into US assets. Trying in vain to reverse this will not be a detox; it will be a death.
-If you imagine our monetary system as 100% hard money, globalization is gold flowing overseas, which would impoverish this country, except it’s our businesses overseas receiving much of the gold, so anyone who owns those businesses got rich as the rest of the country was impoverished.
-Tariffs are not the answer - they prevent the consumer from benefiting from low prices, and they prevent domestic businesses from competing in global markets. Creating trade frictions will end in disaster and result in the removal of tariffs. The sooner, the better. It seems most market participants and people in business understand this. It’s only people putting politics ahead of truth that are twisting themselves in knots to rationalize this policy.
-There are two outcomes: if tariffs end up as nothing but a negotiating tool and return to what they were, or less, or zero, for as many countries as possible, including the US, that would be a positive outcome as globalization resumes in full force with even less trade barriers getting in the way of US tech from global penetration. However, if tariffs become a prolonged policy, the destabilization of markets will inevitably force the removal of the tariffs after a period of chaos that accomplishes nothing in comparison as globalization resumes in full force with even less trade barriers getting in the way. The only difference is how long it takes Trump to realize tariffs are a misguided policy that will hurt, not help, us.
-How come it was so obvious to the MAGA crowd when Biden was trying to force adoption of EV’s that his policy was imposing itself on free market forces and could result in a massive misallocation of resources, but Trump’s attempt to force manufacturing to reshore against their economic best interests isn’t the same thing? Imagine the teeth gnashing if Weekend At Bernie’s was trying to evade the constitution with tariffs beyond any semblance of reciprocal. If it’s not okay for one side, then it’s not okay for the other.
Through The Mind of a Pragmatist - Tariff Edition
The MAGA Trump team either doesn’t understand the consequences of tariffs, or they’re lying about them. I’m not sure which is worse, so I’ll leave that up to you. Since there’s a lot of people drinking the Kool Aid they’re selling, I thought I’d explore the concept of tariffs to show that they are not the problem, so when they don't work, the natural order of globalization will resume because it’s irreversible.
Imagine the world before globalization, but an alternate, idealized history where the US maintained independence from the world, so our military was self-contained within our borders, our government paid for itself with current taxes and had no debt, our banking and monetary system was built upon sound money, and we had a strong manufacturing base sprinkled with a balance of services. In other words, a sustainable, healthy system.
Time goes by and the world becomes more aware of itself through the inventions of media. Less developed cultures from across the globe see our markets and realize they can make knock-off versions of our products at a fraction of the cost, so they build hyper-efficient manufacturing plants and produce a line of products and sneakers called Schmikees, which they start exporting into our country. Our citizens, particularly the lower 50%, realize they can replace all their brand name domestically produced clothes, furniture, electronics, and sneakers with the Schmikee knock-offs and save a lot of money, so next year they can go on 3 vacations instead of 1.
As our domestic businesses lose market share to these foreign competitors, they beg their workers: “if you don’t stop buying Schmikees, you're gonna put us out of business and lose your job.” But the workers give them the face palm and play Phil Collins’ “I Don’t Care Anymore” on their drive home, thinking about where to vacation next month with all their freed up discretionary income. So our domestic businesses get the government involved to erect tariffs to protect them, making the imported Schmikees cost the same as their domestically produced Nikes.
The foreign businesses with quite the profit margin react by absorbing half the tariff and continue to market their Schmikees into our country as a discounted alternative to the brand names. Now the domestic workers can only take 2 vacations because they have to pay a higher price for their beloved imports. So our domestic businesses push the government to raise the tariff again to equalize the price of their Nikes, and it works - the foreign producers withdraw their products since no one wants a generic knock-off at the same price of the local brand name, so all is well, crisis averted, tariffs worked!
Unfortunately, that is not the end of the story.
The foreign businesses pivot to the rest of the world and sell their Scmikees everywhere there’s feet, and their global market share grows and grows, so Fortune magazine puts them on their cover. Our local Nike owners read the article and realize, “hey, there’s a big bad world out there - why don’t we sell our much higher quality sneakers to the fine folks of India?” So they develop a marketing plan and make a special sneaker called Shiva and prepare to dominate. The only problem is they sell zero Shivas in India because they’re way too expensive, so the executives convene and ponder how the Schmikees are being produced at a fraction of their cost. They send in their best investigative reporter, a guy named Rico Berrera, who wears purple snake skin suits and black alligator boots, and he discovers these Schmikee guys cram all their workers into factories and pay them in Cheetos because they have no regulations over there. So the Nike execs are like, “hmmm, we have Cheetos. What if we move overseas and make our sneakers there?”
Insert dramatic music here. When one goes, they all go since they have to compete on price, which is the free market doing its job of creating the most efficiency for the sake of the consumer.
Except, wait a minute, there’s a problem: that pesky tariff. So the Nike execs lobby the government to get rid of the very trade barrier they begged them to create in the first place, convincing them that free trade will produce the cheapest products, and their workers, cough cough, ex-workers, will be able to take 3 vacations with the savings - after they find a comparable income, which they won’t, so it’s no vacations for you, only cheap imported high quality goods.
So the tariffs go the way of the dodo bird and globalization begins with a giant sucking sound of manufacturing across all products relocating overseas for the enormous profit margins and soaring market caps for their shareholders. Our overseas US manufacturing base starts exporting to every country in the world, except many of them erect tariffs to protect their local businesses. In some cases, it doesn’t matter because the cheap expenses of overseas production creates such a huge profit margin they can still capture some of the market share by absorbing some of the tariff, but they certainly hurt their ability to penetrate everywhere. And, of course, they export back into the US and create enormous savings for the lower and middle class for the products they purchase, which allows a much higher quality of TVs and laptops and phones that they’d never be able to afford otherwise, but it also creates a massive wealth divide as Wall Street booms and Main Street dooms as the middle class erodes.
Back to reality with King Trump and his Trumpeteers who are claiming our trade deficit is due to the tariffs foreign countries impose upon us with all their cheating and currency manipulation, which is resoundingly false and misleading. Our trade deficits are due to the cost of domestic production being too expensive to export our products to poorer nations, which is a byproduct of our success that you can ascribe to things like winning WW2, the baby boom that followed, the innovations and domestic manufacturing that produced those products in a mostly free market society, and our debt-based, maxed-out-credit, pull-forward monetary system etc etc.
The point is our trade deficits are caused by the enormous differential between the cost of production domestically versus overseas due to our wealth as a developed nation, so erecting tariffs is not going to fix that without severe consequences like losing sight of the bigger picture of technology and a withdrawal of foreign money from US assets, including the dollars of our trade deficit being recycled into Treasuries that puts downward pressure on yields, which will destabilize markets until this misguided policy reverses.
Onshoring our production means our companies would have no chance of competing in world markets against knock-off foreign products produced overseas. A tariff would crush their profit margins, hurt their global TAM, and make their products consume a much higher percentage of the disposable income of the American consumer because tariffs are a regressive tax that hurts the lower 50% the most through higher prices, and, no, the currency does not offset their loss of discretionary income. If that sounds like a bad idea, it’s because it is. Trump is attempting to raise taxes on the lower half through tariffs to fund a tax cut for the rich, which is the opposite of populism. Their rhetoric misunderstands the cause of our trade deficit or dramatically underestimates the macro forces of our USD reserve system repressing yields and boosting stocks and the dollar. The pain of reversing this process is not a detox - it’s a death.
If the world was nothing more than shoes, clothes, and cars, maybe it would be tolerable to lose our competitiveness in global markets and shrink back down into a domestically constrained manufacturing base via tariffs, and let the rest of the world conquer each other with their products and cultural values as we remain independent of it all. But we live in a world with nuclear bombs and technology that controls our perceptions and influences our thought, so each culture is dependent on the information they have access to in order to understand what’s going on in the world to prevent governments and corporations from abusing their power against their best interests. In other words, the 21st century is an arms race of who will own the technology taking over the world to control the perceptions of the people with their values. Will it be: Freedom? Individual rights? Truth? Democracy? Checks and balances on power? Or the quest for control and an Orwellian enslavement of humanity?
This is the larger story of globalization. This is why trying to revert back to a self-contained pre-globalized world threatens our collective future, particularly if China dominates the rest of the world with their technology, and their values, in our absence overseas from an ignorant, misguided reshoring. China would be able to control the information and perceptions of everyone who adopts their phones, laptops, search engines, social media, LLMs etc., as it spreads throughout Asia, Russia, Africa...instead of ours, so it’s in our best interest to eliminate all trade barriers preventing our companies from penetrating global markets, including our own since, in large part, it’s our companies exporting back to us, which means giving up the ideal of reshoring manufacturing as a way of restoring balance. There is a larger balance playing out that is uplifting the developing world as they adopt our technology, which is in everyone’s best interest because it’s our US companies who own it.
I recently read someone trying to defend Trump’s doomed tariffs by suggesting a dystopian technocracy has been debunked and is a flawed concern, but we don’t have to speculate on this - it’s already happening. Even here in our US culture with a Bill of Rights that values freedom of expression, there is a war of misinformation fighting for control of what people think and express - from self-censorship in a highly charged political environment to who moderates the content on social media to appeasing advertisers in mainstream media, and subtle political biases - all of which has the power to shape elections, and policies, and form tribes based on lies, so what chance would there be for the future of the planet if the misinformation was created on purpose from a communist government with the goal of controlling the population? It is not a coincidence that the country who values freedom and individual rights is the one in control, nor is it a coincidence there hasn’t been a world war on the scale of the previous two since our military has been on guard globally, so this allegiance to an isolationist and idealistic view of our Founding Fathers’ vision is ignorant of the purpose and broad forces of globalization, which will ultimately liberate humanity from work, if we don’t get in the way.
Even if Apple maintained a manufacturing plant overseas and made a stripped-down cheap version of an iphone for foreign markets while also reshoring back here to keep producing their top of the line model for us, most of our citizens would not be able to afford the new higher priced phone, so Apple would have to make a stripped-down cheaper version with less features for us too, which is essentially devolving backwards and forcing them to compete with lesser generic brands for tiny margins, so they would take a dramatic hit to their cash flow domestically and globally, which would stunt their ability to fund the rollout of their technology into global markets. Trying to shrink megacap tech is going backwards. The sooner the Trump administration realizes globalization is irreversible, the better off we’ll be.
The solution is a global digital currency that dynamically adjusts the values of sovereign currencies against itself as a neutral asset to balance trade so each sovereign currency can reprice lower independently against it instead of being relatively valued against each other through Forex like two dumb robots perpetually smashing into each other in a Battle Royale of Incompetence. Essentially, this would be a global devaluation of all sovereign currencies that eliminates the upward pressure of the USD as reserve currency, which would benefit everyone if it was phased in over time so the dramatic loss of USD purchasing power was spread out over years while AI evolves and increases our productivity. Essentially, offshoring is an effect of our currency system.
There would still be relative values between sovereign currencies, so you might argue that China would not agree to let the USD devalue that much more than them, but they need to devalue as well, so this would be a lifeboat for them; it’s just the USD would be devalued the most, partly due to the USD debt in foreign countries, but phased in slowly over a decade. That’s how you balance global trade without the frictions created by tariffs, which is the foolish version of a currency devaluation in disguise since tariffs accomplish a similar result of increasing the cost of imports while lowering the cost of exports but without reducing the burden of debt. Austerity and debt restructuring are also misguided because the depression that would follow in our imbalanced global system would immediately require fire hoses of liquidity and defeat the purpose. The answer is global devaluation, or a productivity miracle. This is the way.
The only potential positive that could come from The Tariff Man Cometh, which, btw, is also how he can spin this as a win and stop the madness, is if he truly gets the rest of the world to drop their tariffs completely it would allow easier access to their markets for our technology, but that includes our tariffs being zero too, which means our manufacturing stays overseas to maintain the profit margins and cash flow to fund their continual expansion into global markets with their products. Unfortunately, that does nothing to balance the wealth divide domestically, but it does continue to balance the larger global wealth gap as developing nations increase their standard of living through our technology, which is the sacrifice our middle and lower classes are making in order to control the technology taking over the world with our values.
As much as I would love to see a balancing of the wealth divide in this country, tariffs are not the way to accomplish that, largely because they would have to become permanent law for any business to have confidence in policy continuity in order to go against their best interest to invest massive amounts of money for worse margins and a broke consumer base unable to afford their products. Luckily, our country is designed to restrain power in case an idealogue dictator gets elected, so hopefully Congress will be more economically literate than this.
When critics of Trump’s tariff plan pointed out our lack of domestic labor willing and able to do these “reshoring” jobs, and how much more the price of the products would be since we earn more than $2/hour, the administration changed their story like a teenager caught in a lie to “robots will do the work so the price stays the same,” but…I thought the whole point was to restore the middle class? So Lutnik counters: “we’ll need robot technicians and HVAC guys too,” which is disingenuous at best because now we’re talking about threatening the future of humanity for like five extra jobs, and if the technology was ready for full automation as a viable business model, why wouldn’t Apple move back on their own without the need for tariffs?
Manufacturing will reshore when it is a viable business decision, which would happen from a devaluation into a new global currency system designed to maintain balance. Either you understand free market forces or you don’t. If you think tariffs are a good idea, then you don’t. I read Miran’s paper. The false assumption underlying their plan to rebalance global trade is that tariffs are paid for by the tariffed country, or the currency revalues to neutralize it, so there’s no burden on the tariffing country, but they are relying significantly on the effects from Trump’s 2018/19 tariffs when those were niche in scope, not across the board, universal tariffs aimed at reversing global trade and dollar flows, which is an entirely different beast. Not to mention, the yield curve in 2019 was suggesting an impending recession before Covid hit. The bottom line is tariffs hurt the tariffing country, particularly the lower half they claim to be helping. It’s not a coincidence we have one of the lowest tariff rates and the most global penetration of our businesses.
Businesses pursuing their best interest with the least government intervention possible will always produce the best result. To think otherwise is to believe in all government interventions like price controls and currency pegs. The pressure of free market forces will always break government controls. Even the OG tariff man himself (McKinley) abandoned them to open ourselves to global trade, which is something Trump will either succumb to voluntarily or be forced into by financial markets blowing up. We’ll see how much damage they cause in the process, but it’s only a matter of time before the natural order of globalization reasserts itself as tariffs get exposed as a doomed dam trying to contain the unstoppable, irreversible flows and natural incentives of free market competition producing the lowest cost products for the consumer as a Trojan Horse installing our technology across the world.
