Donald Trump is wrong about Jerome Powell

President Trump is calling for the firing of Federal Reserve Chairman, Jerome Powell.

Of course.

Mr. Powell had the nerve to suggest yesterday that the Federal Reserve Bank was in a difficult position with respect to interest rates this year.

That difficult position is because of Donald Trump's misguided policies on tariffs.  

Mr. Trump does not seem to understand that tariffs cause the input costs of production to increase for businesses in the United States and rising input costs causes our nations' aggregate supply curve to decrease.  When aggregate supply decreases, it causes BOTH higher rates of unemployment and a decrease in the GDP.  This is called stagflation and it is the worst thing that can happen to an economy.

Anyone over the age of 55 can recall the stagflationary period of the 1970's when declining labor productivity, heavy government regulations and rising oil prices caused the worst economic performance since the 1930's.

In the late 1970's and early 1980's, Fed Chairman Paul Volcker waged a war against the inflation part of stagflation by increasing interest rates so high (the prime rate eventually hit a staggering 21.5%) that aggregate demand fell sharply and with it, the rate of inflation.

Of course this meant Ronald Reagan had to deal with a massive recession in 1981 and most of 1982 but by November of 1982 inflation was a memory.   President Reagan helped keep inflation low the rest of the 1980's by cutting regulations and taxes.  This meant lower input costs, an increase in aggregate supply and the wonderful years of non-inflationary economic growth.

Now President Trump wants the opposite of what Paul Volcker did.

While the economy is on the brink of stagflation once again, he wants the Fed to actually CAUSE MORE INFLATION by lowering interest rates.   

If Mr. Powell does what Trump wants, it will lead to an increase in overall demand and rising prices.  I suppose Mr. Trump wants this because his trade war has caused consumer and business confidence to collapse, which forced aggregate demand down.  When aggregate demand AND aggregate supply decreases you get the worst of both worlds.  At least when we "only" have a recession things like gas and travel gets cheaper.  Under Trump's bizarro world economic policies we will likely get the recession but higher costs of living at the same time.

All Mr. Powell is doing is acting like an adult with an actual understanding of economics.

As a Libertarian/Austrian economist I am not a fan of the Federal Reserve Bank, but as long as we have one it needs to remain free of the bullying of Presidents who ruin economies while doing what it is supposed to do when inflation shows up.  

Trump's Trade War is a long-run win for China

 Lost in the delirious celebration by Trump supporters that the U.S. is on its way to being great again, is the fact that China is poised to be the 21st century's biggest winner once this irrational trade conflict subsides.

The way in which this will happen is straightforward for anyone who has ever made a passing grade in an economics class.

Let's look at it...

First, Canada and Mexico now hate us.  The same goes for the European Union, central and South America, Asia, Africa and those remote islands off the coast of Australia that got hit with tariffs even though their only occupants are penguins.

We have now slapped punitive tariffs on all of those regions while threatening to take Greenland and force Canada to become the 51st state.

So let's ponder for a moment what the best strategy for China is in all of this mess.   

Yep, it is to visit every country on Earth that thinks we are imbeciles and bullies, and offer those nations trade deals that come with no, or low, tariffs.   

China already has invested billions in infrastructure all over South America and Africa in exchange for favorable trade terms.   Now it can make similar deals in the EU, Canada, Mexico and other places where it has a smaller footprint.  Recently, China eliminated tariffs on the 43 least developed nations on Earth, including 33 in Africa.  This was not down out of love, but rather a superior understanding of Adam Smith.

With a GDP of around $20 trillion, China is the second largest economy in the world.  That puts them in prime position to catch the U.S. as our population ages, our economy weakens, and our standing in the global community collapses.

Our national debt is now 120% of our GDP, which brings us much closer to the final currency debasing days of the Roman Empire.

As the Wall Street Journal pointed out recently, we have a male labor force participation rate that is lower than ever.  Young men who Trump thinks would flock to newly built factories are instead living with their parents, playing video games, living off of social welfare payments and have no interest in the type of work men typically did decades ago.

Women in this country are high-earning college graduates with dim marriage prospects and no plans to have children.  This makes for an aging population that would be missing vital workers in Trump's delusional plans to take us back to 1956.

This is compounded by the fact that the only people you can find to actually work in back-breaking jobs - immigrants - are now being kicked out of a country filled with people who are too stupid to realize that their housing, food and health care bills are about to explode under the duel weight of deportations and dumb tariff policies.

China, with a far more educated, industrious and determined population, will very likely ride the next four years out while cozying up to the rest of the world seeking one adult in the room of international economics.

This may very well mean that as the U.S. continues to economically deteriorate, a new financial super power will emerge to take our place.   One can only imagine the scene, years down the road, of some other American president traveling, hat in hand, around the globe looking for trading partners, new workers and financial support only to have the planet tell him, or her, "Sorry, your arrogant nation blew it and you are now on your own."

Trade deficits do not matter

 Since the 1980's Donald Trump has tried to tell everyone that America is being ripped off by every nation we have a trade deficit with.  It is the foundation of his approach to tariff policy, international trade and economics.

And it is totally wrong.

Let's start with an example than any first grade public school student - or current member of Trump's administration - should be able to comprehend.

Suppose the United States buys $5 billion worth of bananas each year from Honduras.  Honduras, on the other hand, buys $1 billion worth of American apples.  In this example, we have a trade deficit with Honduras of $4 billion so they are ripping us off and we are stupid suckers.

So, we retaliate with a tariff that drives their exports of bananas down to $1 billion.  Now Honduras and the U.S. will be equal - $1 billion for $1 billion, right?

Wrong.  Honduras, a very poor nation that has far less purchasing power than the U.S. will now be poorer so their demand for American apples will fall.   Let's say it falls to $500 million.  We are back to a deficit, back to being ripped off, so we slap even more tariffs on them, making them even poorer, while American apple producers suffer along the way.

Second example:  I use Google every day.  Google charges me nothing. I  benefit immensely from this search engine while I never click on any ads Google provides.  According to Trump I am now ripping Google off because I am gaining information and Google gets no money.  There is a "trade deficit" between me and Google.

It should also be pointed out, which it rarely is, that since the U.S. is the richest country in the world it stands to reason that we would buy a great deal more from other nations than they can buy from us.  This makes much of the trade deficit a naturally occurring event.

It is also important to point out that the U.S. actually runs a trade surplus   in the services market.  Things like banking and communication services run perpetual surpluses with other nations.  Does that mean we are ripping them off?

Donald Trump - and the millions of economically ignorant supporters who back him - see the world as a zero-sum game.  If Honduras sells more bananas than they buy apples, Honduras wins and we lose.

That is not how trade works and it is not how the benefits of trade should be measured.

Honduras has a comparative advantage in bananas, just like China has an advantage in rare-earth minerals.  The U.S. has an advantage in energy equipment, movies and energy.

Trade means that sometimes a nation will have more categories of comparative advantages than another nation.  That means that they will sell more, in total dollars, to their partner than they will buy.  This trade deficit is natural and simply means that the U.S. will have cheaper bananas and rare earth minerals even if Honduras and China run surpluses with us.

Trade deficits are only bad if a nation's exports are falling in areas where it has a comparative advantage. 

Where China, or Japan, or any other nation truly shuts out U.S. goods that are superior, the Trump administration has a case for using tariffs until our products are allowed in.

But in the case of steel, aluminum and many other goods we have no argument and are inferior producers.

To prevent deficits the best course of action is to compete head to head and allow productive differences to reveal who is best.  

To do otherwise is to simply reward ineffective U.S. companies while crushing the productive ones with higher costs.  Ronald Reagan knew this all too well.

How this Trade War could lead to World War III

Today, China announced new 84% tariffs on American goods and other measures to retaliate against Donald Trumps' 104% tariff against China. The 104% came after China imposed new 34% tariffs on America which came after Donald Trump increased tariffs on China by 34%. 

 And so it goes. 

 What is lost on Trump zealots who want to see the U.S. flex its economic muscle against China and other nations is that their patriotism masks an appalling lack of knowledge concerning history, economics and human nature. 

 Specifically, in 1930 the Hoover Administration responded to the early stages of the Great Depression by passing the Smoot-Hawley Tariff Act. This Act drastically increased tariffs on virtually all U.S. trading partners despite letters from thousands of economists who begged President Hoover to not take this action. Not surprisingly, our trading partners retaliated and the global economy, already reeling from the vestiages of World War I, plunged deeper into what became a global depression.

 Most economists argue that the Smoot-Hawley Tariff Act ranks at or near the top of the list of causes of World War II. It is pretty simple. Historically when the flow of goods stops between nations, the flow of bullets and bombs begins. This is a fact that is lost on supporters of Donald Trump and his economically irrational and idiotic war against trade deficits we have with other nations. China has made it clear that it will "fight until the end" and is ready for a trade war or "any war".

 China has never been more prepared, militarily or economically, for a protracted war - of any kind - against the United States. Economic reasoning would suggest that China will not wage a military war against America. After all, we are China's biggest customer and we own them trillions of dollars. Why would China destroy the U.S. in a nuclear war when it would mean similar devasatation for them? It makes no economic sense to kill your biggest customer and lose out on all of the money that you are owed. 

 Yet, as economists have increasingly observed, sometimes human beings are capable of engaging in irrational behavior where we know the costs of some action will be greater than the benefits but do it anyway. Just how far will China allow itself to be bullied, harassed and threatened? How long will China be willing to endure the prideful and arrogant threats of an administration that is determined to end the era of globalization that has created enormous wealth for the United States and the world while preserving world peace for the past 80 years?

 As history has clearly taught us - at least those of us willing to be taught - sometimes the slightest miscommunications and human error can have fatal consequences. It is part of human nature to believe we can guide the future and know what our actions will create. This is pure folly and this type of hubris is what we are seeing now. 

 As Americans go about their normal routines today, it is very likely that few are even considering how perilously fragile our civilization is. This is not 1945 where the U.S. was, by far, the biggest military and economic power. In 2025 the planet is very small and the ramifications of human arrogance and error are greater than ever.

 My advice to those Trump supporters who are cheering him on would be to sit down tonight and watch the 1983 movie, "The Day After". This movie helped President Reagan (the last great Republican) become even more determined to work WITH the Soviet Union to avoid World War III. Now more than ever we need the same humilty, character and intelligence from the President of the United States - so that there will still be a United States.