Underscoring once again Trump's massive ignorance regarding how international trade and capital flows work, his administration is now floating the idea of imposing a 20% tax on Mexican imports as a way to pay for building a wall along the US-Mexico border. This of course would penalize Mexico to a degree, since it would make Mexican goods more expensive to US consumers and thus would likely reduce to some degree the amount of Mexican goods that US consumers purchase. But whatever tax is eventually collected on Mexican imports would unquestionably be paid 100% by US consumers. This is just plain stupid, like cutting off your nose to spite your face.
Most of the things Trump has done in his first few days have been impressive: e.g., mostly good people appointed to key positions, decisive moves to roll back some of Obama's more egregious regulations. But his approach to trade remains abysmally wrong-headed and potentially threatening.
Any decent student of international trade and capital flows knows that there is nothing per se wrong with a deficit in commercial trade, since it is automatically offset by a surplus in capital flows, much of which could be investment-related. This is particularly true in the case of the US, since the dollar is free-floating: imbalances in trade and capital flows, if they exist, must inevitably show up in a compensating manner in the exchange rate. In the past year or so, the dollar has been stable to stronger, and that suggests that more people want to buy dollars than sell them. Since our trade deficit persists, it is logical to assume that foreigners are apparently more eager to buy dollars for investment purposes, than to buy dollars for the purpose of purchasing our goods. What's wrong with having foreigners anxious to invest in US assets?
Instead of marching to protest all the things that the left imagines Trump will do to trample civil rights and denigrate women—none of which has yet to happen—everyone should be marching to protest his professed desire to make life more expensive for US consumers.
If the MSM can't figure this out, they deserve to go out of business.
UPDATE: Don Boudreaux says the same thing, perhaps in a more concise way.
I can't believe anybody is supporting this guy, he is clearly a mental case. At the rate things are going, even the Scott Grannis's of the world will soon begin to wonder if Hillary might not have been the better choice after all. The guy cares about himself and nothing else. Ask his biographers:
ReplyDeletehttp://www.politico.com/magazine/story/2017/01/trump-biographers-presidency-legitimate-214655
Scott, wealth is not created by consuming, but by jobs, work and saving.
ReplyDeleteTrump is such an incredibly successful businessman, a genius in detecting talents, a man with such a big heart, I'd urge you to be open minded.
Everything has been poisioned by the false propaganda of the globalists, that free trade was good - while the Western middle class was INTENTIONALLY DESTROYED and COMMUNIST China INTENTIONALLY built up by them.
This is to be reversed. The middle class jobs are coming back to the USA. This is a HUGE TRANSFORMATION, a REVOLUTION. A peaceful revolution against the globalist world tyranny the leftist had almost reached.
Very strong and capable forces are behind Trump. Brexit was their first step, to get out of the marxist EUSSR. Trump step #2.
Now follows the dismantling of the Marxist illusion and lies.
And that free trade was good, is one of those lies! Only fair trade is good. Free trade was their tool to dismantly the econopmic foundation of the West and to build up China.
I believe the technology transfer at least from USA/UK to China will stop completely.
Merkel's EUSSR will try to continue with it, but with Marine Le Pen, the chances are there, that soon France will also get out of this hidden transfer of wealth and knowledge to Communism.
And if Merkel would be removed from power, then the chances are intact, that the German government will no longer work as fifth communist column!
You underestimate the size of the changes. Historic times.
Historic times indeed. Scott is spot on-and I have been saying this as nauseam. Yes, DT has done some good things and has some great ideas BUT his trade policy will undoubtedly overwhelm any good he does and result in recession-or worse. And who will be blamed? Those meany republicans! When in fact DT is about as "republican" as Hillary! Disaster waiting to happen. And I suspect we'll know if I'm right soon enough. If I'm not I will fess up, I promise. But as the Eagles song "Victim of Love" goes; "I could be wrong, but I'm not".
ReplyDeleteInterestingly though, the stock market seems to like DT so far while the bond market isn't sure. Bond traders (me) are smarter than stock traders. Just sayin...
Isn't this sort of thing the likely outcome? Lot's of action - some coincidentally aligned with one's ideals, and some potentially catastrophic? Trade war or worse with China seems highly possible.
ReplyDeleteYou are wrong to say that Trump hasn't " trample(d) civil rights and denigrate(d) women", it has already started with freedom of speech and abortion.
ReplyDeleteScott: A question for you (that's slightly off topic):
ReplyDeleteHow does the debt/GDP level of roughly 105% factor into your thinking? That is, even supposing Trump can get through some meaningful pro-growth policies (which I assume he can) is it correct to think this could be anything like what Reagan brought about in the early 80s? I ask because Reagan took office with a 27% debt/GDP. He made a rough deal with Tip O'Neal to spend like a drunken sailor on whatever both sides wanted while Tip let him enact his pro-growth policies. It would seem to me that that rough deal is not available today simply because of the huge difference in debt/GDP. So while any enactment of pro-growth policies is all to the good, does the debt/GDP level act like some sort of cap on the possible swoosh upward in economic activity? (Side note: Trump has alluded to basically not touching the four big buckets of federal spending - medicare, medicaid, social security, and military. He's strongly suggested spending more on military.)
Matthew: the current debt/GDP ratio is about 76%. The 105% you reference is an overstatement of the debt burden because it adds debt the government owes itself (about $5 trillion) to the debt the government owes the public ($14. trillion). The proper measure is the latter. This is the biggest debt burden we've had since the 1940s (coming off WW II). It dropped rapidly after WW II because the economy boomed. It could drop significantly from the current level if Trump's policies provide true stimulus (e.g., lower tax rates, fewer deductions, fewer regulatory burdens). It's all about growth.
ReplyDeleteSpending money that is raised through debt sales is not a good way to stimulate the economy. We tried that 8 years ago and it was a huge failure. Cutting taxes and essentially freezing government spending would be the ideal solution. Corporate tax rates can be slashed without adding meaningfully to the debt burden, and if they were slashed I'd bet serious money that economic growth would pick up, thanks to a boom in business investment.
Trump's instincts about what to do are almost spot on, with the huge exception of trade. He really wants to reduce tax and regulatory burdens. Trade is the thing to worry about. Will he actually start trade wars in a foolish attempt to reduce our trade deficit? The press and the left think that's very likely, but I think he's more bluster than anything else on the trade issue. I sure hope so. But even if he screws up on the trade issue, the rest of his program could outweigh the trade negative, giving us stronger growth and a slowly declining debt/GDP ratio.
Re Trump and abortion: he hasn't made abortion illegal, and it's highly unlikely he would. All he has done is to cut back the degree to which the government funds abortion. I don't see a problem with that.
ReplyDeleteBoth parties have problems with freedom of speech. The left won't tolerate anyone who doesn't toe the party line on global warming, for example. Universities, the vast majority of which are liberal, have trampled free speech to such a degree that they now have "safe zones" where people aren't subject to hearing things that they disagree with—meaning others do not have the freedom of expression.
Trump wants to make it easier to sue people for expressing unfavorable views of others, and that is unfortunate.
Scott, I fail to see why you think DT is bluffing on trade. Sure as HELL ain't bluffing anywhere else. I think what you see is what you get with DT and I cannot believe you truly think that a "pro-growth" agenda sans free trade will play out well.
ReplyDeleteScott,
ReplyDeleteregarding Trump and trade:
Besides the fact, that this man is a pure genius in discovering talents (in his company he always recognized capabilities, which people themselfes had no clue about), it is also said, that he is a master in negotiations.
This man is so good, that almost every early conclusion is false, because behind his first step, he has planned already two steps ahead.
And when it comes to negotiating bilateral trade deals, you Americans (sadly not president of my country!) must also put the TRUMP MULTIPLICATOR into consideration:
One of the best negotiators, with almost unique capabilities to identify good people, will also create incredibly good negotiating teams.
Imagine the difference, if a politician, who has never managed to make a good big deal in the private economy, is picking his negotiators - and then imagine how big the differences could be, by a team guided by Trump.
I have the feeling, that the bilateral trade deals will become his masterpiece.
Scott: Thank you for your response but it didn't really get to the heart of my question.
ReplyDeleteLet's use public debt as you suggest. Public debt of 14.3T against '16 GDP of 18.4T yields a ratio of 78% (about in line with your numbers). Let us assume the GDP grows at 4% in 2017 and another 4% in 2018. (Note these growth assumptions are significantly higher than consensus.) Let us further assume that the deficit grows $600B in 2017 and another $600B in 2018. (Note these deficit projections are lower than consensus.) Even with these rosy assumptions, the debt/GDP ratio stays at 78%.
I know it's impossible to know what Trump will actually do but I believe him when he says he won't touch social security, Medicare, or Medicaid. I also believe him when he says he'll spend more on the military.
With the rough assumptions and observations, back to my original question: Does the high level of debt/GDP and the likely outcome of a still higher ratio in the near future affect your thinking as to the rate of growth? That is, is there a point at which debt starts to inhibit growth just by its level?
I know full well this has almost nothing to do with the investment climate in the short term (few years). I know full well we can afford our current levels of debt. I'm not asking this as a means to a market call. Nor am I any kind of debt doomsdayer, probably more the opposite. I'm asking because I'm trying to get a sense of the plausibility of significantly higher GDP growth and whether or not debt could inhibit that growth (in a way that Reagan didn't have to contend with).
Matthew: You have neglected to account for inflation. If you assume inflation will be 2% per year and the economy will grow 4%, then nominal GDP ($18.86 T as of Q4/16) will grow by 6% and it will be $21.19 T in two years. If total debt (now about $14.4 T) grows by $0.6 T each year, then the debt/GDP ratio will fall from just over 76% currently to about 73%.
ReplyDeleteThe key, obviously, is for total debt to grow at a slower pace than nominal GDP. It's not impossible at all for nominal GDP growth to pick up to 6% in coming years. If total debt grows by 4% per year, as you assume, then the debt burden will gradually decrease. We are not necessarily doomed.
Trump may be the first President who does what he said he would do before the election ... and then his supporters wished he had been a pre-election liar / exaggerator like all the "real politicians" !
ReplyDeleteIt does not appear easy to change Trump's mind.
Such as his beliefs about Obama's birth certificate (considering it never mattered where Obama was born, he was a US citizen because his mother was a US citizen, no matter where he was born, so what was the point of stirring up trouble on that point for so long ?)
Much more important, and we all knew this was coming before the election, is Trump's hatred of trade imbalances ... with no obvious knowledge of the incoming capital flows from foreigners with surplus US Dollars lending to the US government ... which could be doing more deficit spending under Trump than under Obama (if Trump does everything he's promised )!
Here's what appears to be coming:
Spending a lot of money (even compared with Obama)
Borrowing a lot of money (even compared with Obama)
Starting at least one trade war
Make corporate taxes unreasonably low (versus other developed nations)
Get rid of regulations ... but without eliminating the BIG ONE: CO2 is pollution!
Trump may be the first President who does what he said he would do before the election ... and then his supporters wished he had been a pre-election liar / exaggerator like all the "real politicians" !
ReplyDeleteIt does not appear easy to change Trump's mind.
Such as his beliefs about Obama's birth certificate (considering it never mattered where Obama was born, he was a US citizen because his mother was a US citizen, no matter where he was born, so what was the point of stirring up trouble on that point for so long ?)
Much more important, and we all knew this was coming before the election, is Trump's hatred of trade imbalances ... with no obvious knowledge of the incoming capital flows from foreigners with surplus US Dollars lending to the US government ... which could be doing more deficit spending under Trump than under Obama (if Trump does everything he's promised )!
Here's what appears to be coming:
Spending a lot of money (even compared with Obama)
Borrowing a lot of money (even compared with Obama)
Starting at least one trade war
Make corporate taxes unreasonably low (versus other developed nations)
Get rid of regulations ... but without eliminating the BIG ONE: CO2 is pollution!
Obama executive actions - Dictatorship !!! Trump executive actions - Brilliant !!! Obama infrastructure spending - waste !!! Trump infrastructure spending - Guess we need it.
ReplyDeleteIts going to be very interesting over the next four years to see Trump supporters twist themselves into a pretzel in order to justify their support for this conman. Its amazing what the prospect of lower taxes will do to rational decision making.
one wonders if the " decent " international trade students predicted the
ReplyDeleteloss of 70000 factories and incomes to emerging countries
tarriffs are not a zero sum game
are the 160 countries currently using tarriffs participating in " free trade " ?
what happens if the emerging country is dumping eg steel to achieve
full employment , forcing steel prices well below the " fair " price ,
and suppose tarrifs put pressure on the dumper to allow a "fair" price?
http://ngdp-advisers.com/2017/01/28/real-estate-challenge-market-monetarists-orthodox-macroeconomists/
ReplyDeleteThe above post references a very interesting NY Fed study on nations that run trade deficits and what happens to real estate price thereafter. I think the Fed misses the whole property zoning angle, and I add it in.
Property zoning is becoming an increasingly important structural impediment, to the point that global capital flows and results are being impacted.
In commercial real estate, values are high enough now I see some of the same arguments I saw back in 2007---a building is purchased at a very rich price, and the acquisition justified on the basis the building will be rehabbed, and then "repositioned" to gain higher rents. Given the ubiquity of properly zoning (barriers to entry), and a growing economy, this is still working out.
But as we saw in 2008, if the Fed pulls out the rug, you get a sudden reversal, and a snowball recession going downhill…when a lot of over-levereaged real estate hits the market at once…banks stop lending…egads.
If a nation consumes more than it produces, it imports the difference, and then sells assets to pay for the imports. Think USA. We are selling real estate. Since we refuse to un-zone property, it is price that equates supply to demand. Not more supply.
Tricky situation. And the propertied and financial classes have deeply embraced property zoning. Unzoning property is never a right-wing blog post, or plank at the GOP convention. I see no chance that the Supreme Court will undue its 1926 split decision that zoning is constitutional.
Keep an eye on real estate markets.
ReplyDelete"CO2 is pollution!"
Carbon dioxide is a product of oxidation reduction and is what plant matter uses to produce energy through photosynthesis. The last thing C02 is, is a pollutant.
In the history of the planet earth, life has been much more abundant when C02 levels have been high. The last thing CO2 is, is a polutant.
Climate change/global warming (formerly global cooling) is the biggest scam ever perpetuated on the human race.