The trade war with China is heating up. Yesterday the Trump Administration threatened to put tariffs on 1,300 more Chinese exports. China has threatened 25 percent tariffs on 106 U.S. products. The stock market promptly dropped 500 points when it opened today.
Conventional wisdom says the stock market is over-reacting.
I think it’s worth noting that even if we are headed for a full-scale trade war, conventional estimates of the costs of such a war don’t come anywhere near to 10 percent of GDP, or even 6 percent. In fact, it’s one of the dirty little secrets of international economics that standard estimates of the cost of protectionism, while not trivial, aren’t usually earthshaking either. …
…Yet there is a reason why stock prices might overshoot the overall economic costs of a trade war. For a trade war that “deglobalized†the U.S. economy would require a big reallocation of resources, including capital. Yet you go to trade war with the capital you have, not the capital you’re eventually going to want – and stocks are claims on the capital we have now, not the capital we’ll need if America goes all in on Trumponomics.
Or to put it another way, a trade war would produce a lot of stranded assets.
Basically, we’re calibrated to be really good and efficient at producing X, and a trade war could push us into producing Y instead, which would require a lot of shifting and re-tooling and moving around of assets. We end up putting resources into producing things we used to be able to import at less cost, and that’s a drag on the economy overall. This also is a big hit on existing corporate assets. So, while a trade war might not bring on the Great Depression, if I had money in the stock market I might be thinking of pulling it out, too.
And then there’s this:
Trump, Navarro et al are showing that they really are as unhinged and irresponsible as they seem, and markets are taking notice. Imagine how these people would handle a financial crisis.
That might be the bigger factor here. The investor class has been happy with Trump, thinking he’d give them the tax cuts and deregulation they wanted. But now it may be dawning on them that they’ve been backing an angry, dimwitted child who has no clue what he’s doing.
This one isn’t the Orange Imbecile’s fault. McConnell said yesterday he wasn’t a fan of tariffs. Mitch could end it TODAY. All he needs to do is call a vote. Democrats don’t favor broad, unfocused tariffs. Neither do most Republicans. It is a bipartisan opportunity (yes, I know he hates those). He could get a vote of 90/10 and make the Senate look better and less inept to every American watching. Instead, he sits on his rump.
Yeah, Mitch could end the trade war today, but it’s pretty clear that he’s chosen to double down on Trumpism and isn’t going to do anything.
Let's face it, the best and brightest do not go into business or finance en masse. Some good (smart) people end up there, because taking money away from rubes is not exactly hard work, but by and large we get a self-selected group that are not the brightest candles on the cake, but rather people who are interested in easy money. Kind of like the police – more of the people that that job attracts, as compared with the totality of people in this country, are not the people rational folks would really want in that job.
/soapbox
If McConnell did something overwhelmingly bipartisan against a Trump policy, Trump would retaliate by Twitter to go after McConnell with his flying monkeys, the almost 90% of Republicans who suck up Trump's swill. This is bizarre and unprecedented.
It's also what Maha warned about years ago – that the dimwitted condition of the GOP after they executed all moderates opened the door for a charismatic populist that the hoards would follow. The GOP always thought the masses would accept whatever corporatist tool the machine promoted. They went rogue with somebody who would embrace the conspiracy theories that the GOP promoted. Now the bite marks are on the GOP's butt as the monster they created runs wild.
Doug,
The Tea Party was originally an astroturf group that broke free of its GOP roots. The problem with Trump is that he ACTS on all the fake news the GOP has promulgated over the years to attract the votes of the bottom quartile of the IQ curve. GOP leaders were never that dumb.
Hmmm. Germany, early 1930s. Except Hitler had a high IQ…
I don't know where this is going, but I'm pretty sure the Chinese aren't just going to lay down and roll over for Trump. And I don't think it's going to have as much to do about trade policies as it is about the way in which Trump is going about trying to achieve his objectives. Common sense dictates that you can only stuff something down someone's throat when they are totally disadvantaged and at your mercy. Trump's big bad ass negotiating style might work for stiffing Polish workers on work visas that are set to expire out of their just wages, but when you try the same tactic on a country like China who has the resources to counter his bullshit antics, it's not going to work out so well.
Look at the nonsense and stupidity where Trump tried to tell Mexico that they were going to pay for his wall..I mean really! Human nature dictates that something that stupid and arrogant is going to be met with natural response of… over my dead body.
Trump's tough guy act is wearing thin and people who have the means to resist, will. You catch more flies with honey that you do with vinegar?
P.S. Trump is a big bag of shit. I mean really!
Dan,
Here’s an article backing up what you said about the best and brightest not going into business or finance en masse.
https://www.washingtonpost.com/news/wonk/wp/2017/01/12/the-jobs-that-really-smart-people-avoid/?utm_term=.ee7477ae45c9
Stock Market jitters are exacerbated by fears that the bubble will burst. Market added almost 50% since 2016 election, which is absurd. Market boomed when Republicans swept 2016 elections based on expectations of lower taxes and a (temporary) Keynesian bulge, not on any rational re-evaluation of the long-term economic future.
"Buy on the rumor, Sell on the news": Market went up on rumor/expectation of lower taxes; once the Tax Bill passed, it became "news". (Will the Republicans propose MORE Tax Cuts for the Rich? not this year).
Keynesian economics tells us (accurately) that large governmental deficits heat up the economy. The Republicans in Congress pretended to be "deficit hawks" during the Obama years in order to squelch & prolong the recovery from the collapse of 2007; as soon as they got the White House back, it's peddle-to-the-metal – lower taxes, higher (military) spending, double the deficit. That was exactly how they caused bubbles under Reagan and (GW)Bush. Both those bubbles burst in the 7th year; but this time, they have control of all 3 branches of government, so the bubble inflated much faster.
Bottom line: Stock Market is a bubble waiting to burst. When it pops, it's gonna get messy.