Stocks are sliding again today. They will most likely finish today a bit higher than their low on Tuesday, but most of the gains from Wednesday will be gone. I’ve been bearish, in fact probably overly bearish, on stocks for a long time. Hence a correction in stock prices doesn’t worry me. The correction in stocks was probably likely to happen regardless. The decline and volatility thus probably reflects more than just a reaction to tariffs. The tariffs may be simply the trigger. Unless your retirement is very heavily in stocks and you retiring in a year or two, you can probably just ignore the churn in the stock market. Maybe.
What is much more concerning is the rise in Treasury Yields, which means simply, interest rates are going up. This is in combination with a dollar that is devaluing. According to most sources, Trump wanted a lower dollar to be negoatied a la Plaza Accords at Mira Lago. The problem is he wants a low dollar, lower interest rates and dollar hegemony- three things that are actually hard to have simultaneously.* Instead, we seem to be headed for higher interest rates, a lower dollar and a possible end to dollar hegemony. Higher interest rates, while not computed in the inflation rate, mean higher car payments and mortgage payments for consumers and higher borrowing costs for businesses.
CPI inflation for last month was actually down month to month-as in the overall price index was actually a very, very little bit lower than the previous month. Most of this was due to energy prices and energy prices look to fall farther. In spite of this, the FED is saying they are more concerned about inflation than slow growth. Tariffs and a falling dollar are both inflationary and with a falling dollar, I don’t think that they can lower interest rates. But notably, households do not generally compute whether they are better or worse off based CPI calculations, but rather, based on their actual expenses.
So this is the part where I think we should start getting really worried-as in possibly worse than 2008 worried. One can quarrel, or agree with the Trump administration’s goals, as I think one should on multiple points. The goal of reshoring and re-industrializing is a legitimate goal as is renegotiating the global order and rethinking the structure of the GATT system and the WTO. This global order is one that is largely the creation of the US. So if there are costs that have come with it, they are costs of our own making and we have also obtained benefits-the chief one has been the extraordinary privilege attached to dollar hegemony. But if the Trump administration wants to reshore, lower the dollar, lower interest rates, keep the dollar as the world’s reserve currency and force the rest of the world to bend the knee to the US, these goals these goals should not be supported.
That said, given the goals, the Trump administration is pursuing them in ways that are actually counterproductive and probably can’t be reconciled. You cannot undermine international confidence in US markets, provoke a run on Treasuries, have higher interest rates, devalue the dollar, provoke a bear market and maintain the dollar as the world’s reserve currency. There are arguments to be made that a negotiated and orderly end to dollar hegemony, and indeed, of US hegemony overall, over the course of a decade or so, would make sense and could be accomplished in an orderly fashion. But this is not what Trump is producing. And this where I worry that unless the course is reversed and we return to negotiating through existing global institutions and passing legislation through Congress, we are heading for a serious crisis that far from putting America first, is going to leave the US and the global economy in a much worse overall condition.
An end to US hegemony might seem desirable. US hegemony has certainly had its darker side. Nevertheless, I do not think that a world order characterized by chaos or led by China will necessarily produce a better, more humane world. Of course, this is not the Trump administration’s goal: they want a world order in which the US is able to have Empire with no costs. Instead, our self appointed Dragon Reborn threatens to break the wheel and unleash chaos.
*Not to be confused with the other “unholy Trinity” theory originating with Mundell-Fleming that you cannot have exchange rate stability, domestic balance and open capital flows or necessarily with the Triffin dilemma.
Citizen Rat 