Trump as Mun?

We need new indices.

We need new phrases.

We need new frameworks.

We need new, well, everything.

If there’s one thing we have learned in that past week it is that the current American administration is overseen by a egomaniacal fool.  A dullard who basks in the glow of constant hyperbolic praise flowing from the sycophants he has carefully surrounded himself with.  

There.  I said it.  And, no, I am not suffering from what his loyal followers call “Trump Derangement Syndrome” [TDS].  I am suffering from reality.  

Oh dear.  Where to begin?

This time last week we were being led to believe that our genius leader was launching an attack on the evils of America’s chronic deficit in the trade of goods and services.  Well, mainly in the trade of goods.  This deficit has grown steadily in size since the 1980s and has grabbed the attention of our leader ever since.  He regards it as an assault on our wealth.  He uses language hoisted from the early to mid 1600s to describe it.  

1600s?  Yes.  Here’s Thomas Mun from back then …

“Although a Kingdom may be enriched by gifts received, or by purchase taken from some other Nations, yet these are things uncertain and of small considerations when they happen.  The ordinary means therefore to increase our wealth and treasure is by Foreign trade, wherein wee must ever observe this rule; to sell more to strangers yearly than wee consume of theirs in value.”

We must, Mun urges us, sell more to foreigners than they sell to us.  Otherwise our national “treasure”, he goes on to argue, will be diminished.

So Trump is a latter day Mun.  Except Mun was exceptionally articulate and successful in business.  

Most historians of economic thought would regard Mun as a leading exponent of what we nowadays call mercantilism, and, please note, he was writing back in an era when most money circulating was made of gold or silver — the “specie” that David Hume,  a century and a half later,  taught us would be subject to a self-correcting mechanism.  Not that such things have relevance to our current mess.

The point being that Trump’s views on trade deficits are decidedly neither novel nor modern.  But they are, apparently, views shared by some of his closest advisors.  Peter Navarro, for instance, in an op-ed in the Financial Times referred to the accumulated deficit of some $20 trillion since the 1980s as a loss of American wealth, stolen from us by nasty foreigners taking advantage of  American naivety and foolishness.  Either way this administration, we have been told, is determined to end this exploitation.  Strong measures have to be taken.  Even if short term damage has to be inflicted as we navigate to the promised golden land of American self-sufficiency.

Incidentally, it is also telling that Mun offered advice to the monarch to whom he addressed his thoughts as to the need to reduce the addiction of the English consumers of the day to the luxuries provided by exploitive foreigners.  It was necessary he argued to wean such consumers off their desire for things like fancy silks, porcelains, and so on and to redirect them to good old solid English alternatives.  Sound familiar?  Is it ever thus?

Well, that was last week.  And, apparently, the 1600s.

And last week strong measures were, indeed, taken.  So strong that the earth shook.  Tariffs were the chosen weapon to resolve the inequity inflicted on poor America.  Such is this inequity that the tariffs had to be equally huge and all-encompassing — broad and deep enough to get everyone’s attention.  The message was clear: America is not going to be taken advantage of anymore!  Even penguins on some obscure island were sent the message: no more mucking with America.

There is no record of the penguin’s reaction.  Perhaps they were more sanguine than the rest of the world.  Perhaps they just ignored the message.  We simply don’t know.  But the rest of the world shook.  The trading system of the past few decades suddenly stood swaying as if hit by an giant earthquake.  And like all after-effects of such events, it has shifted permanently.  The tectonic plates are re-arranging themselves — whether they will follow the lead of Pangea and simply separate into several large blocs, or whether they will shatter more severely, we will only learn over the next few months and years.  What we do know, is that the old single continent of an American dominated world system is no more.  Gaps have opened up.  Separation is the order of the day.  A new trading world has arrived.

Well, as I said, that was last week.

One of the problems with playing fast and loose with well-established systems is that the players within them have all settled into a nice groove.  They know how to play the game.  The rules are clear and have been absorbed.  So when you take a hammer to it everyone is suddenly exposed.  Business as usual is now aberrant, but no one knows why and how to react.  In particular, asset values that rely upon the old system become highly suspect.  Especially highly suspect.  Those values depend on the predictability of all the connections working well together.  Everyone, it turns out, places a high value on stability.  They can trust and have confidence the system.  They can play safely within it.  They can invest, hire, trade, buy and sell all while knowing no one will do anything to undermine the game.  Who knew? What they don’t like much, if at all, is uncertainty and unpredictability.  Foundations have to be, well, foundations.  And not the quicksand of personal whim.

Until last week.

Then came along our latter day Mun.

Not that his views are a shock or surprise.  His simplistic attitude towards deficits was well advertised.  His threats about tariffs were explicit throughout the election campaign.  There can have been no misunderstanding.  Or ought not.  Which is where the true TDS enters the equation.  It is not Trump’s opponents who suffer from derangement.  It is his supporters.  They seem to think that his rhetoric is simply that: rhetoric to unnerve his opponents.  It is not, in their understanding, an indication of what he will actually do once in power.  He will, they assure themselves, moderate and adopt the pragmatism so endemic throughout the business community that supports him so loyally.  They told themselves, sotto voce naturally, that he would never do anything to disrupt business.  After all he was one of them.  No! He was going to deregulate and lift the yoke of the state from their necks and set them free to profit and rent to their hearts content.  He was a friend of business.  

Really?  Then how do we explain the past week?

One of the more satisfying spectacles of the last week’s chaos has been to watch these business leaders splutter out loud as they digest the irresponsibility of their chosen one’s actions.  This was not supposed to happen.  Billionaire after billionaire lined up to shout out in protestation.  Who had seen this shattering of the foundation coming?  How could he do this?  To them?  Fool after fool revealed the depth of their incapacity of judgment.  They had been taken in willfully.  The glitter of the promised golden age was too glaring, and  their desire to make more profit so sufficient that they ignored his own track record, or that he appeared to care little about the business world and its profits.  They had overlooked that his success, such as it has been, is as a realty television actor, not as a business man.  In business he was a flop.  A big flop.  But he knows how to act.  And they fell for the act.  So much for their pragmatism.

Until last week.

The good news, amidst the debris of America’s reputation, is that some of the most TDS-affected of his followers were hedge fund magnates.  They were the ones telling us all to suck it up and take our medicine as the stock market registered its rage at the attack on trade.  One or two even went as far as suggesting we take one for the team.  We ought not, they said, even care if our retirement accounts are wiped out.  The greater glory of a deficit-free America is all that counts.  Trade deficit free that is.  Other deficits, like fiscal deficits, are fine if they are on the back of big tax cuts for our impoverished billionaires.

Anyway, the good news is that even billionaires have limits.  So whilst they were lecturing us about taking a hit for the team they were all busy checking their own fortunes.  Which were teetering on the brink of disaster because the financial markets were in deep trouble.

Which is why some of us were not watching the stock market, but were glued to our screens watching the bond market instead.  And it was not a pretty sight.  After only a few days of freedom post “liberation day” the market for US Treasury bonds was showing decided signs of stress.  Deep stress.  As in financial panic deep stress.  As in, when you deliberately trash the entire global trading system bad things happen sort of deep stress.  Yes, bad things were happening.  Telltale signs of a disaster were accumulating underground within the depths of the usually rather dull bond market, which even at its best is an opaque and obscure place populated by a special breed of inhabitants who rarely get the spotlight.  But when they do, it is always for bad reasons.  This was looking like one of those rare and bad moments.

So, this week, and for a short time only, a reversal is in order.  Those hedge funds need a breather.  Our billionaires need time to re-order their accounts.  Then we can get back to war.

Our very own Mun has stepped back from the brink.  He did the flip, now he has flopped.  How long for is anyone’s guess.  

Or has he?

The Great Trump Flop [GTF?], or hasty retreat from the brink, still leaves us with an enormous increase in tariffs.  The largest since the bad old days of the 1930s.  Not that we should argue that those tariffs way back then actually caused the Great Depression.  They didn’t.  They merely made it a lot worse.  But, still, it is salutary to have to look back to the 1930s for similarities to our current predicament.  When our commentariat has to tell us that 10% tariffs on everyone — including on those penguins — and 125% tariffs on those nasty Chinese are a step back from the front lines of war, we all ought to think hard about the lunacy of the moment we live in.  Calculated as an average on the goods actually traded into America, such ”lower” levels of tariff amount to a tax of 25%.  The potential inflationary consequences of which ought give us all pause.

And, no, this is not all part of some genius plan on the part of our leader.  No, it will not resolve the trade deficit.  No the world will not come crawling on its knees and beg forgiveness for being so nasty to America.  

It isn’t a genius plan for the simple reason it wasn’t a plan to start with.  It was, and still is, a peeve.  Trump just hates trade deficits.   As I said, he is Mun in modern clothing and without the erudition.  He sees the world in incredibly simple terms.  For or against.  Black or white.  Up or down.  There is no nuance.  There is no clever complicated theory to play by.  It is just pet peeve.  The problem being that the peeve belongs to someone who likes to act autocratically and on a whim.  It give him pleasure to watch the world squirm at the irrationality of his oddities.  It’s a power play.  It is not a plan.  And, as the world realizes that there is no “there” there, it will simply begin the long and painful re-wiring necessary to ignore the American games.

No, there is no plan.

For a plan would have required a lot of work.  Our leader does not like work.  The work would have entailed things like working with the business community to get them prepared for the earthquake.  It would have needed making the effort to soften the blow so that supply chains could be relatively insulated and altered to make the inevitable cost increases lower than those inflicted by a shock.  It would have also required calculations of so-called “reciprocal” tariffs that made sense and not look like they were invented by a last minute inquiry of artificial intelligence.  And they probably would have excluded the poor penguins.  

No.  This was no plan.

Nor will it eliminate the trade deficit.  That will stay with us until America decides to re-balance its consumption and savings mix.  Ever since Reagan plunged the Federal budget into red ink the imbalance between savings and consumption has led, inevitably, to a corresponding deficit in trade.  Because America does not save enough it does not have the capital it needs to support the level of investment it wants to make.  So it has to borrow from abroad.  And, accounting being the boring thing that it is with its debits and credits having to match, an inflow of capital must be balanced somehow.  The balance being an inflow of goods.  So the “cause” of the trade deficit — besides our addiction to all that cheap foreign stuff — is the shortfall in capital for investment.  Which those horrible exploitive foreigners have been only too happy to provide us.  

One of the contradictions of recent economic activity has been the claim that America is “exceptional” in its ability to generate higher growth rates and thus returns on investment.  But this is a circular argument.  The lack of domestic capital creation might, on its own, have both slowed growth and reduced returns, but it was augmented by the inflows from abroad consequent to the deficit in the goods account.  The subsequent higher level of investment produced greater productivity and growth, thus producing the very “exception” that is supposed to have attracted the capital in the first place.  Had all that foreign capital remained domiciled abroad it would have produced better results for those foreign source nations and the American exception would have been less — if existent at all.  So an American weakness became an American strength.  Sort of.

Anyone seriously interested in eliminating the trade deficit would begin by restoring a balance to the savings/consumption mix domestically.  Which would, amongst many things, include reducing the flow of US bonds onto the investment marketplace.  There are options available, but in our more orthodox world the primary option would be to narrow the funding gap in the Federal Budget.  To do his you either raise taxes or cut spending.  Maybe both.  Duh.  The idea being that you free up capital for investment in the private economy, reduce consumption, and thus, ultimately, resolve the trade deficit.  Let’s not debate, here, the more unorthodox ways to get to a similar result.   Our point today is simply to suggest that a “plan” would not target the trade deficit without also targeting domestic imbalances.  And it certainly would not include blowing a hole in the Federal budget to give your billionaire friends a big tax cut whilst you institute the equivalent of a 25% tax increase on imported tradable goods.  The inconsistency and incoherence of such a plan ought to be obvious even to our leader.  Or to those around him at least.

As for the world coming crawling … there is little to no evidence of it.  Claims by the administration of lines of chastened foreigners calling day and night for forgiveness are laughable.  If the idea that said foreigners will surrender their evil ways and level the playing field it beggars belief that places such as Botswana or Madagascar have anything to level the field with.  Their economies are not such that they will suddenly import loads of American-made goods.  Nor are they major players in offloading boatloads of goods into America.  They are a negligible part of the problem.  So negotiating with them is a nonsense victory, if victory at all.  The only goal of maintaining a 10% tariff on such places is to impoverish their citizens.  A goal that suits an administration one of whose hallmarks is overt cruelty, but it amounts to an incentive for its victims to re-focus on other less overtly harmful trade partners.  Like China or Europe. 

And that is what the last week appears to have resolved itself to.  A trade war with China and Europe, both of whom have the assets and incentives to mollify our leader in the short term and to reconstruct their trade relationships in the longer term.  It will be a challenge both diplomatic and economic for the world’s biggest traders to rebuild a trading system that largely excludes America, but they can succeed.  If they do, and if America is left to one side, all that talk of American exceptionalism will look quaint.  The benefits of trade will accrue abroad.  Growth rates will diverge, and America will slide backwards relative to the others around it.

What a week.  The wreckage will take a while to pick over.  Markets will heal.  Claims of success will be made.  The genius of it all will be extolled.  And sometime in the future historians will point to it as further, if not irrefutable, evidence of American decline.

Meanwhile: I wonder of any of our leaders, most of whom claim to admire the work of the invisible hand, are aware that Adam Smith was motivated in large part to put pen to paper when writing his “Wealth of Nations” — ostensibly the font of free market thought — by his rejection of the thinking of none other than Thomas Mun?  Surely a “free market” cannot be mercantilist by definition.  Restrictions on one hand and none on the other?

It can get quite confusing.

But not, presumably, for our genius leader.  Nor for his plan.

What a week.