Monday, August 5, 2019

Trump's trade war

This is a chart of the S&P 500 over the last five days. If you're not a stock market person, but you're curious about the weird effects of Donald Trump on the economy, I'd like to tell you about it.

At first we're on a plateau for a while, and then there's that quick jagged shock from which we recover. That's the Federal Reserve's decision to make a single interest rate cut, but not suggest more. The market seems to have more or less expected this. The economy has continued the upward trend that began in the early Obama administration, so the Fed didn't want to give more.

Trump has been feuding with Jerome Powell, the Fed chair. Trump wants more economy-boosting interest rate cuts as he goes up for re-election. He's unhappy that the Fed gave him only one.

In his statements afterwards, Powell said that he would cut rates again if things looked worse for the economy. He also said that trade wars were bad for the economy. Trump likes trade wars. And he likes pushing people around. So why not push Powell around with a trade war?

So then we fall off a cliff, and we don't get back up, and then slide down further. That's Trump tweeting surprise 10% tariffs on Chinese goods. (Into Christmas season! Think of the poor retailers!) The market understood interest rates, but so far, it's acting like it didn't understand Trump.

In the last part (today) we fall off another cliff. That's today's 3% decline, off the weekend's news that China devalued its currency. The Chinese are saying, "You want to make our goods more expensive? Well we can undo that by making them cheaper to you! Also forget about exporting to us, nobody can afford dollars here go away."

On a scale of zero to trade war, we're past the talking phase and into the action phase. It's just small actions now, but it's actions. Also Trump is having what has become a dominance fight with Powell on the side, and it pushes US-China towards further intimidation.

A moral of the story: Trump is less controlled by Wall Street than most Republicans. Instead, he's controlled by ego and racism. At least on the tariff issue, I think this is worse.

I think there can be good reasons for trade restrictions. Don't buy stuff made by slave labor, or stuff that destroys the environment. (In general, explore Pigouvian strategies).

But these aren't Trump's reasons. And in general, it's good for everyone to get the best deals in the world on stuff. If not, there's some interesting explanation of why not. What's going on inside Donald Trump doesn't correspond to any such interesting explanation.