Most of what happened today is obvious. And I’m no expert on macro- or international economics. But allow me a few observations. Start with the obvious: Trump rolled out an absurd policy which on its own terms would need to be held to for years to have any hope of success. After repeated pledges never to relent, he caved after one week. He now looks like an even bigger fool and menace on the international stage than he already did which is a feat of some magnitude. I also doubt he undid the damage he’s done to himself domestically as a custodian of the nation’s prosperity. Perhaps most of all he looks weak, reckless and stupid.
But what he did doesn’t greatly change or perhaps change at all the ways he’s added huge uncertainty and drivers of inflation into the economy. Yes, the markets surged. But I think the additional tariffs added to imports from China adds about the same amount of net duties on imports as the ones he reduced for every other country in the world took away. (If you have an economics PhD and a calculator can you help me on that?)
We now have 125% tariffs on products from China, which is close to a blockade on imports all together. That’s still going to be a big driver of domestic inflation and there are still 10% tariffs on almost every other country on the planet. Those are still draconian and ruinous tariffs by any standard other than the status quo ante of this morning. And as I mentioned, taking all the new tariffs of today in toto, they may be roughly identical to this morning. It’s virtually certain that few if any countries were lining up wanting to negotiate.
The one additional thing to mention is why this happened. Every sign is that it was not about the equities markets but rather the bond market, where the demand for U.S. Treasury bonds seemed to be softening as the global economy moved into crisis. That defies all the rules of the 21st century global economy. It means either something very, very bad or something armageddonly bad. The first is that banks and hedge funds and other big financial muckety-mucks were under so much cash-crunch stress that they were forced to liquidate Treasuries at any price. That points to a real danger of being on the precipice of a 2008-style financial crisis, albeit with very different drivers. The other possibility was that global buyers were losing the confidence in U.S. Treasury debt itself which is basically the sheet anchor of the modern global economy. Take that away and things get much worse for the United States and our global primacy starts to evaporate.
What it all amounts to is that Trump had to cave in a way that all but his most diehard fluffers will recognize as humiliating. But he did that without actually undoing that much of the damage. Maybe any of the damage. And that’s where we are.
