Dem
47
GOP
53
Let's start with a pop quiz. Take a look at these two pictures:
One of these photos is of Donald Trump, and was taken this week during the speech where he bragged to the NRCC about his "war on the world." The other is of Andrew Jackson, taken just months before he died, by which point he was suffering from numerous chronic conditions, and had lost all his teeth. Can you tell which one is Trump and which one is Jackson? Not easy, is it?
The point here is that Donald Trump does not sound well these days, and he does not look well either. So, it's entirely possible there's some fundamental level of dysfunction that is playing a role in these bizarro, on-again, off-again trade wars. Congress thought it addressed this problem in 1967, with the Twenty-Fifth Amendment, but unwisely designed a system where people who are likely to be sycophants are the decision-makers. And no president, save perhaps Richard Nixon, has been better than Trump at surrounding himself with sycophantic lackeys. So, he could be really far gone, and still be in power.
As usual, it is Congress' fault. Here is Sec. 4 of the 25th Amendment.:
Whenever the Vice President and a majority of either the principal officers of the executive departments or of such other body as Congress may by law provide, transmit to the President pro tempore of the Senate and the Speaker of the House of Representatives their written declaration that the President is unable to discharge the powers and duties of his office, the Vice President shall immediately assume the powers and duties of the office as Acting President.
Congress could take the decision-making power away from the cabinet and assign it to the majority and minority leaders of the House and Senate. Just sayin'. If Congress were to do that, the U.S. would become more like a parliamentary system, where the prime minister serves at the pleasure of the parliament. It might be better than having the president's lackeys make the call (or not making it).
Anyhow, now that a bit of time has passed since Trump declared the latest trade war "armistice," we thought we'd do as best we can to make sense of everything. And we're going to do it by trying to answer three questions. Away we go:
1. What just happened?
Again, leaving open the possibility that there is some sort of dysfunction playing a role here, it appears that the 180 on the heavy-duty tariffs was prompted by developments in the bond market. We briefly noted this yesterday, but 24 hours later, it's clear there was definitely a big problem. Major holders of U.S. bonds were dumping their holdings, in huge quantities. And by "major holders," we don't mean, say, "Warren Buffett." We mean "Japan," which is the single-largest holder of U.S. bonds, and has been the single-largest seller since the new tariffs were announced.
When people—or countries—start dumping bonds, it has two effects, one abstract, one concrete. The abstract effect is that it signals a lack of confidence in the U.S. economy. The concrete effect is that it makes it harder for the U.S. government to sell new bonds. In response, the government has to increase the yield, which makes borrowing more expensive. Since much government spending is funded by borrowing, then more expensive borrowing means larger deficits, with all the deleterious effects that entails.
These two dynamics—reduced confidence in the U.S. economy, coupled with higher deficits—can push a flourishing economy into a recession, and can push an economy in recession into a depression. The latter outcome is, according to reporting yesterday from The Wall Street Journal, what really spooked the administration. Allegedly, Trump was willing to accept recession-level pain, but not depression-level pain. We don't know if we buy this, since we are very, very skeptical that Trump even knows what the difference between a recession and a depression is (other than knowing that one is worse than the other). But that's the reporting.
Incidentally, yesterday Trump had another one of those Cabinet meetings where everyone had to go around the table and shower him with praise telling him how amazing he is. This certainly does nothing to dissuade us from thinking that he is not mentally well right now.
2. What next?
Let us commence this section by making clear that, when we ask "What's next?", we are referring to the next 45 days or so.
Following the excellent day the stock market had on Wednesday, Trump actually had the (characteristic) temerity to claim credit for the dramatic rise in the Dow Jones Industrial Average. That is like him claiming credit for the Hands Off protests attracting so many people. And, in any case, the bounce-back did not actually recover all the ground that had been lost. Further, yesterday was another down day. The Dow Jones was down 1,014.79 points (2.50%), the S&P 500 was down 188.85 (3.46%), the Nasdaq was down 737.66 (4.31%). Overall, each of the three indices is down about 7% since the new wave of tariffs was announced.
While the markets responded joyously to the (temporary?) suspension of the crazypants tariffs, the euphoria eventually wore off, and cold, hard reality set back in. While the second-wave tariffs are not currently in effect, the first round most definitely is. That means that, unless there is yet another reversal from the White House, things are still going to get more expensive (and WAY more expensive if those goods happen to come from China). The Budget Lab at Yale has already crunched the numbers, and says that between tariffs and inflation, the average household is going to experience a decline of $4,689 in disposable income. And yesterday afternoon, as if to punctuate this point, the CPI released its monthly figures, and reported that the price of eggs has reached a record high—$6.27/dozen on average, nationwide. This despite the fact that, on Monday, Trump claimed that egg prices were down 79%. Either he's lying and he thinks the American people are stupid, or his mind is failing. We report, you decide.
Beyond the fact that the trade war is still on, and that inflation and a recession are still very probable, there's also the fact that the relationship between the U.S. and other nations is now badly damaged. Trump could announce tomorrow that he's thought better of his plans, and that all new tariffs are canceled, and it still wouldn't reset things to status quo ante tariffs, because America's trade partners are going to be less enthusiastic, and are going to be more aggressive about looking for new trade partners. To take but one example, new Canadian PM Mark Carney said: "The old relationship we had with the United States based on deepening integration of our economies and tight security and military cooperation is over. It's clear the U.S. is no longer a reliable partner." Carney is not bluffing, and he's not alone among national leaders in thinking in that way. There's no way for Trump (or his successors) to fix that anytime soon (if ever). And while Wall Street can't quite know what the impact will be, the uncertainty nonetheless has to be priced into future projections.
3. What is going to happen in 90 days?
It is hard to know what the hell Donald Trump is thinking. So, it's even harder to know what he will do in 90 days, when the current moratorium is supposed to end. That said, there are three possibilites that seem plausible to us.
Before we get to those three possibilities, let's start with what's NOT plausible. There is a fair bit of scuttlebutt that Trump trade advisor Peter Navarro is now on the outs, because he misrepresented or misunderstood what the response to the crazypants tariffs would be. His loss means that Secretary of the Treasury Scott Bessent's star is apparently on the rise, at least for now.
However, even with some greater amount of influence and authority, and even with a much better understanding of economics and markets than either Navarro OR Trump has, there is zero chance that Bessent can work out substantive new trade agreements with dozens of other nations in just 90 days. Recall that, for example, the United States-Mexico-Canada Trade Agreement (USMCTA) took eight rounds of negotiating and a year and a half to hammer out. And that agreement only involved three nations, and didn't actually change things very much. Just dealing with the E.U. is a challenge several orders of magnitude greater. And then, add to that all the other nations that Trump targeted. Heck, Bessent doesn't even speak Penguin.
So, what COULD happen? Trump clearly enjoys it when he snaps his fingers, and the world is plunged into turmoil. That means we could envision him re-implementing the tariffs again, and then suspending them again a day or two later. At this point, we do not believe he's willing or able to actually go through with the type of trade war he proposed last week. We don't really believe he's even willing to go through with the trade war as it currently stands. The U.S. vs. China stuff? Maybe, but he's just not willing to bear the economic and political costs of the rest.
The second outcome we can imagine, and it would unfold the same as the first, and could very well happen in harmony with the first, is that Trump re-implements the tariffs, the stock market plunges, he and/or his buddies snap up a bunch of stocks at reduced prices, and then he "suspends" the trade war yet again. We are not generally fans of conspiratorial thinking but, in this case, the conspiracy actually makes more sense than the public explanations being offered by the White House. Enough sense that many Democrats (and some economic analysts) are now wondering openly if this is just a big insider-trading scheme.
The third possibility is that at some point in the next [X] days, maybe before 90 days have elapsed, or maybe after Trump has granted himself an extension, some minor changes are made in the trade arrangements between the U.S. and other nations, Trump declares that he has secured a major victory, announces that his Nobel prizes for both Economics and Peace can be mailed to 1600 Pennsylvania Avenue in Washington, DC, and the trade war is over. This is pretty much what happened with the USMCTA, and we imagine it's the most likely outcome here. (Z)