The Third-Worlding of America

How to destroy 80 years of credibility in less than 3 months

Source: CNBC

Oops, they’re doing it again.

Major news media organizations sanewashed Donald Trump all through the 2024 campaign, cleaning up his incoherence and downplaying his extreme policy positions. Aaron Rupar reminds us of this:

It’s hard to know how much that contributed to his victory, but it must have been a factor.

But the desire to see Trump as reasonable is a more widely shared syndrome which isn’t confined to the media. It was abetted by the business world, which was gripped by “euphoria” after he won, despite clear signs that he would implement destructive economic policies.

Remarkably, the sanewashing continues despite the unprecedented craziness of the past 10 days. Many observers assert that Trump has backed down on tariffs and will speedily make a bunch of trade deals. The first assertion is just false, while the second is very unlikely.

In fact, savvy traders have realized that there’s no coherent economic strategy. There’s an old line about military analysis: “Amateurs talk about tactics, but professionals talk about logistics.” Well, when it comes to taking the pulse of financial markets, amateurs talk about stocks, but professionals talk about bond and currency markets. That’s because bond and currency markets are generally less driven by emotion. There’s no “meme gambling investing” in bond and currency markets. And these markets are both signaling major loss of faith in America.

First, about tariffs: It’s true that for the time being Trump has scaled back some of the tariffs displayed on his big piece of cardboard last week. For example, unless we have another policy swerve, the European Union will now face a 10 percent tariff over the next three months rather than a 20 percent tariff. But the tariff on China, our third-biggest trading partner after Canada and Mexico, has gone from 34 percent to more than 130 percent. And we still have high tariffs on steel, aluminum and so on. In effect, observers who claim that tariffs have gone down are missing the biggest part of the story.

Economists who have actually run the numbers, like those at the Yale Budget Lab, estimate that the April 9 tariff regime will raise consumer prices more than the April 2 regime because of the extraordinarily high tariff rate on Chinese imports. Specifically, the budget lab estimates that the latest version of Trump’s trade war will raise consumer prices by 2.9 percent. This is roughly ten times the probable impact of the infamous Smoot-Hawley tariff of 1930.

It’s hard to overstate the craziness of announcing a radical tariff plan, then announcing a quite different but equally radical plan just a week later. Furthermore, the claim that the wild zigzags in policy were always part of Trump’s plan just adds to the destruction of the administration’s credibility.

But are these tariffs just an opening gambit for trade negotiations? I doubt it. Bear in mind that Trump and Peter Navarro, his tariff guru, start from the premise that other countries are cheating, that they’re taking advantage of America and treating us unfairly. In fact, however, most of them aren’t. Take the case of the European Union. The EU imposes an average tariff on U.S. goods of just 1.7%, and there aren’t any significant hidden barriers.

So what are we supposed to be negotiating about? Nations can’t promise to lower their trade barriers when there aren’t any barriers. Navarro has been claiming that value-added taxes are de facto tariffs, but they aren’t, and EU nations literally can’t afford to give them up.

I guess other countries might make fake concessions that Trump can claim as fake victories. This is what he did with China during his first term, claiming that it had made significant concessions — claims which were, in the end, false. In fact, American soybean farmers have never fully recovered the loss of market share. And remember too how Trump made minor changes to NAFTA and claimed to have negotiated a whole new trade pact.

However, Trump is now clearly high on his own supply. Even with the April 9 tariff regime, Trump is imposing high tariff rates on our three largest trading partners. Currency and bond market traders — no fools they — are certainly not acting as if we’re on a path to successful deals.

For example, economic theory and history both say that the imposition of tariffs normally leads to a stronger currency unless other countries retaliate. During his confirmation hearing Scott Bessent, the incoming Treasury secretary, argued that a 10 percent tariff would lead to something like a 4 percent rise in the dollar. But not this time. Instead of going up, the dollar has plunged.

Source: xe.com

The obvious explanation is that crazy policies have shaken investors’ faith in America, which has traditionally been viewed as a safe haven.

The topic of how Trump’s policies have messed with the bond markets – including the market for US Treasuries -- is too difficult for me to cover today, but here’s more. The key point is that massive tariffs have disrupted the plumbing of the financial system, leading to soaring interest rates on U.S. government debt. That’s abnormal: rising odds of a recession usually lead to falling long-term interest rates, because the prospect of a recession raises the likelihood of future cuts by the Fed, which controls short-term rates. This time, however, rates are spiking, especially for very-long-term instruments like 30-year bonds, shown at the top of this post.

The common thread in currency and bond markets is that, thanks to Trump, dollar assets — traditionally the foundation of the global financial system — are no longer perceived as safe.

The combination of interest rates soaring amid a slump and the currency plunging despite rising interest rates isn’t what we normally expect for advanced countries, let alone the owner of the world’s leading reserve currency. It is, however, what we often see in emerging-market economies. That is, investors have started treating the United States like a third-world economy.

Did I see this coming? No, not really. Unlike the sanewashers, I knew that Trump’s policies would be irresponsible and destructive. However, even I didn’t expect him to destroy credibility accumulated over 80 years in less than three months. But he has.

And even if Trump were to backtrack on everything he’s done, we wouldn’t get the lost credibility back. The whole world, sanewashers aside, now knows that America is run by a mad king, surrounded by enablers, who can’t be trusted to behave rationally.

I don’t know how this ends. In fact, I don’t know what policy will be next week. But that’s basically the point.

MUSICAL CODA

Dreaming of sanity, without much hope