The Trump Team has just embarked on the Second Major Crackpot Financial Experiment of our lifetime. Bloomberg:
Trump Boosts Tariffs Across World, Reshaping Global Commerce
We’re down in the South of France, not far from the Spanish border. We’ve come for a wedding…the daughter of one of Elizabeth’s old classmates is getting married. Details to follow…
Meanwhile, we’re watching another long-term disaster as it hatches.
The first was the one we’ve been tracking for many years — the 1971 switch from real money, tied to gold…to fake money, with nothing to connect it to the real world of goods and services. So far, this new dollar — not supported by anything other than the untrustworthy full faith and credit of the US government — has lost 86% of its value.
This had two pernicious results. It jacked up the nominal cost of American labor and US exports — making them less attractive to foreign markets. And it made dollar credits so readily available (with lower interest rates) that Americans could buy what they wanted from abroad rather than making it themselves. The effect was to strip the US of its manufacturing base…keep the working class from getting a real raise for half a century…and saddle the country with $103 trillion in debt.
Mr. Trump failed to understand what Crackpot Experiment Number One was all about. He blamed its consequences on ‘unfair trade deals.’ This led him to Crackpot Experiment Number Two.
Both experiments test the same hypothesis — one that everyone who’s been paying attention knows to be untrue — that politicians and bureaucrats can do a better job of controlling financial forces than free markets. The Soviet Union — to whose long-suffering people we are all deeply indebted — ran that experiment over a 70-year period. Such a disaster was it, that the leadership not only abandoned central planning but gave up on their whole Soviet government.
Back in the US, the lesson seems to have been missed.
Crackpot Experiment Number One gave the feds greater control of our money, with the inevitable undesirable results. Crackpot Experiment Number Two has the feds taking over trade. The New York Times:
Over the last six months, the US has left behind the global trade order that persisted for decades in favor of something drastically different and largely untested.
But US government-managed trade was tested in the 1930s. Misters Smoot and Hawley put on tariffs that were lower than those of Mr. Trump. In a matter of weeks, two out of three cross-border orders had been canceled. The world economy sank into depression and took more than ten years to climb out.
Nevertheless, Mr. Trump decided to re-run the experiment. He announced his Liberation Day in April and said he was liberating the economy from…free trade. Henceforth, US trade would be centrally planned with Mr. Trump himself setting the tariffs. And instead of paying tariffs of 2% to 5%, importers will pay 15%…and more. Poor little Switzerland. Bloomberg:
Switzerland Slammed With 39% Tariff Rate in US Trade Blitz
And copper, an essential metal for the modern economy, will be hit with a 50% tariff. This includes pipes, wires, rods, and sheets and other ‘semi-finished’ copper products. Copper cathodes, the raw material for copper used in cars, construction, electronics, and renewables, are apparently exempt from the tariffs.
A shame. The prosperity of the modern world was largely a product of copper, container ships and increased trade. Trade barriers had been coming down since WWII. And it was the absence of internal trade barriers — between California and New York, for example — that created the world’s largest free-trade zone and made the US such an economic powerhouse in the first place.
But here we are. The tariffs are supposed to kick in today.
But wait. Lobbyists are on the job. Within hours of Trump’s Wednesday announcement, the message had changed. Bloomberg:
Trump blinked, announcing for the first time that his 50% tariff [on Brazil] didn’t mean 50% on everything…Brazilian goods will face an effective tariff rate of about 30%, Fernando Goncalves, the [Itau] bank’s head of economic research, said in an interview.
Then, he blinked again. The Daily Beast:
President Donald Trump announced he was delaying new tariffs on Mexico… The president announced his decision to delay tariffs set to go into effect on Friday for 90 days in a post on Truth Social after speaking on the phone with Mexican President Claudia Sheinbaum.
And then, POTUS went kooky, threatening to use trade deals to force a change in Canada’s foreign policy, The Daily Beast continues:
The president posted on Wednesday that it would be “very hard” for the U.S. to make a deal with Canada after the country backed Palestinian statehood.
As for copper, almost all electrical connections — which are embedded in just about everything — depend on copper. Jacking up the price of copper by 50% is no small matter.
So valuable is copper to a modern economy that it is sometimes called ‘the metal with a Ph.D. in economics.’ When prices go up…it signals an economy that is running hot. When they go down, watch out…a recession is coming. Bloomberg:
The US copper market suffered its largest intra-day fall on record after President Donald Trump shocked traders by exempting the most widely imported form of copper from his planned tariffs.
But what kind of a signal is this? Now that the feds are controlling the price, does it mean anything? Or, has the metal suddenly become retarded?
We don’t know. But central planning won’t work any better with trade than it did with money. Both experiments — like a meth lab run by mental defectives — will blow up.
Regards,
Bill Bonner,
For Fat Tail Daily
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