Why did Trump, after insisting that the tariffs were here to say and rejecting any pause on their implementation, cave this morning and reverse himself, pausing them for 90 days? This caused the stock markets to shoot up today.
I said in an earlier post that my belief that Trump only cared about the stock market was proven wrong by the huge tariffs he imposed on pretty much every country, since he had to have known that such a move would tank the markets. Of course, it is always possible that he had the absurd idea that since he was imposing tariffs on goods imported to the US, the US stock market would remain stable and even rise while only those of other countries would fall. In a global economy, that would have been unrealistic since stocks tend to rise and fall together but we have to remember that we are dealing with an idiot and anything is possible when it comes to speculating about his thinking.
So why did he impose the tariffs in the first place?
Today’s events may suggest that Trump does care about stock prices after all and was taken aback by the steep drop and changed his mind because of it. But that may be too hasty a conclusion. Economics writer John Cassidy argues that what spooked Trump and caused him to reverse policy was not the stock market but the bond market, something that I understand even less than the stock market. Basically, all I know is that when bond prices fall, yields (i.e., interest rates) rise (and vice versa) but why bond prices rise and fall is largely a mystery to me. I know that when the Federal Reserve raises interest rates, it causes bond prices to fall (and vice versa) but that was not an issue this time.
Cassidy gives his reasoning (which I don’t understand) but I’ll pass it on for the benefit of those who know more.
The Administration tried to spin the midday move, which sent stocks rocketing upward, as an example of the President’s dealmaking prowess, claiming that the tariffs had inspired new trade deals with many countries. But the reality seems to be that Trump caved in the face of alarming disruptions in the huge market for U.S. Treasury bonds, which the American government uses to finance itself.
…What really spooked financial commentators—and Trump himself, as he conceded later on Wednesday, speaking outside the White House—was the turbulence in the bond market, where yields spiked on Monday and Tuesday.
A big sudden rise in bond yields equates to a big sudden fall in bond prices—which can be a sign that some financial institutions are in distress and being forced to sell at any price. On Tuesday, reports emerged that the source of this trouble might be the “basis trade,” a process in which hedge funds borrow gobs of money to profit on the tiny differences in price between Treasuries and derivative securities, contracts designed to replicate the performance of these same Treasuries. When bond prices move unexpectedly, basis traders can face big losses and be subjected to margin calls, forcing them to raise cash by selling some of their portfolio. And that selloff, in turn, forces prices even lower.
It’s not entirely clear that this was the actual cause of the rising yields in the bond market, but by this morning Lawrence Summers, a former Treasury Secretary, warned online that “developments in the last 24 hours suggest we may be headed for serious financial crisis wholly induced by US government tariff policy.”
Thee story being given by Trump is that the tariffs worked because it caused so many world leaders to ‘kiss his ass’ (the man has the mentality and speech of an obnoxious middle schooler), and that they had thus served their purposes. But since he does not have any actual deals in place to justify the reversal, it is clearly a face-saving device from someone who will never admit that he was wrong and had to capitulate. What incentive is there anyway for other countries to negotiate with the US since any deal with Trump is not worth the paper it is written on since he can change his mind on whim? The best bet for them is to disengage with the US as much as possible and shift trade to other countries. The US is a big economy but it is not indispensable.
On the BBC today, David Rennie, who writes for the Economist, said that he was in China just recently talking with officials and journalists there and that they all think in the long term and had made contingency plans for Trump’s re-election. Given their preference for stability, what they will do in the face of Trump’s see-sawing will be interesting to see, since he has increased the tariffs on China to 125% because they raised tariffs on the US and thus did not ‘kiss his ass’. It is possible that that explanation is also bogus but thrown in to justify his capitulation with other countries.
ain’t us treasury bonds so heavily invested in by other nations that they are essentially the crux on which the global economy turns? seeing the us edge toward “failed state” surely reduces their value regardless of tariffs, which means the whole world has some painful adjusting to do. extremely far from expert opinion.
The damage is done. After this shock businesses in the other 194 nations will strive to keep US companies out of the supply chain of future products whenever possible. If there is anything the market loathes it is the absence of predictability.
And USA no longer has a predictable trade policy.
Even if the Dems retake the presidency next time, there is no guarantee there will not be a Trump clone another four years down the road. Business works on a longer time horizon than that. It is like Britain after BoJo and Liz Truss, it will never regain the trust of the international market.
I think you overestimate Trump’s understanding of stocks, bonds, how government works…the list is endless. Past advisors of his have called him a cranky toddler.
Phil Moorhouse from Britain explains the mess in detail.
“Trump Chickens Out Again”
.https://youtube.com/watch?v=wUZaOEGDNDU
A related issue, how will USA get money?
Rachel Maddow:
‘It’s criminal’: IRS officials quit over sharing taxpayer info; Trump cuts worsen chrisis for IRS
.https://youtube.com/watch?v=j6czGFHaZng&si=GTkcY8UZ5D-jnmAo
So, if the Dems get the next presidency they have a year and a half to prosecute any flunkies who broke the law.
The Chinese are the second largest foreign holder of US Treasury bonds at $759 billion.
They are reportedly reducing their holdings of US Treasuries since they are now in a major trade war with the USA.
With less demand, the US has to offer higher interest rates to get anyone to buy their bonds. And they have to sell bonds because we run deficits every year and need to borrow money to finance the government.
Almost all governments run deficits every year, nothing new about that.
Me @ 5
My mistake, it is just a little over one month into the Trump presidency, so future prosecutors have less than 14 months to move after he leaves.
But it feels like he has been back a year or more.
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I forgot to bring up a detail; for US companies that sell a large part of their products to Europe and/or China it will pay to move their production to one of the countries that only suffers a 10% tariff when sending stuff to USA.
I think it’s clear that Trump was told that he had to reverse his position based on what the bond market was doing but that doesn’t mean it’s the real reason. I suspect that his advisors realized they had to reverse course because of what companies were telling them and what the stock markets were doing but bonds was an easy reason to feed Trump.
There was an interesting post a couple of days ago (so, pre-reversal) on Lawyers, Guns, & Money, regarding a meeting between Trump and Netanyahu:
Hooked on a feeling
Basically the theory here is that while, sure, Trump is going to try to use the tariffs as leverage to get people to negotiate with him (because he does that with everything, that’s the sort of person he is), that’s not actually the primary reason he did any of this: the primary reason is that he believes in his gut that the stupid idea about ‘trade deficits’ is how things actually work, and he doesn’t have the attention span to listen to any explanation of why it isn’t.
As I’ve been telling a number of folks lately, there’s an old statement which applies here: “For every complicated problem there is a solution which is simple, obvious, and wrong.”
The reason given doesn’t have to be sensible, true, or rational. It just has to be a pretext that will motivate Don. It might have to be a pretext that the tenth of one percent can ‘save face with’, too.
#7 birger
My work is customs-adjacent, and I have already been seeing queries from business wanting to move their production from China… to Australia, to take advantage of our ‘generous’ 10% tariff. Almost word for word, people are asking about the bare minimum modification a product needs once onshore in order to qualify for ‘made in Australia’ designation.
Very nice for us I suppose, but I note 1) the manufacturers still want production to remain in China, and 2) if the trade flow changes such that Australia’s (and other 10% nations) trade balance with USA changes, will Trump suddenly recalculate the tariffs to reflect this? The tariffs are already bad enough, the changes of mind with no advance notice compound this, but if the tariffs change to chase the flow of imports on top of it all… jesus fucking christ, the chaos will be shocking.
Which is, of course, exactly what any sane person should have expected, and why this sort of country-specific approach can’t possibly achieve the stated aims.
Big multinational corporations are never going to move their production to the US. These are companies that will completely redesign how they do things to save half a cent on a burger and spend millions fighting unionization efforts.
Trump and all his weirdo clowns are never going to solve that issue. To them, that’s just how they make money because they’re opposed to worker’s interests on those topics.
A long time ago I thought about trying to make tariffs based on the difference in worker pay. But even being ignorant of almost everything that would be involved, I still felt like I knew enough to think it would be complicated. Too complicated, and therefore prone to corruption.
But if Trump or anyone in his personal orbit had really wanted to help workers and give companies a reason to bring production back to the US, his tariffs could have been based on a percentage of comparative minimum wage or some similar idea that puts workers first.
But he was never going to do that. Even though that approach would have made more sense, been more stable, and therefore scared the markets less.
To be clear, it would still have failed -- I don’t know anywhere near enough to propose economic policy in any meaningful way. But it would have been a hell of a lot better than the senile, kneejerk clown show we’re getting.
This is relevant but I am not sure how it fits.
Companies like Google and Apple have, for at least 10 years, taken advantage of a lower corporate tax rate in Ireland. What they have done is reincorporate (alpha, apple holdings, etc) in Ireland and the old company is given the rights for its intellectual property, which it then licenses to its old self and its old self pays its new Irish self billions in fees, which then makes its old self barely profitable at all. The old company then pays little in taxes. The Irish company then pays much less taxes. I think this trick also allows the company to recapitalize and rebalance so, for example, an executive at the old self is given the opportunity to buy founders’ shares at the new company and now they are getting money that is outside the US’ reach for tax purposes. It seems to me that a threatened tariff might cause some companies to add another shell of companies to avoid being from the wrong place, and the whole game will chug along as usual. When you’re talking revenues such as google or apple or amazon, a small change in their taxes is worth the budget of a nation.
There’s another similar maneuver ongoing wherein most of the world’s supply of Viagra is made in Ireland under license from its US parent corp. And then you have ageing rockers selling the rights to their catalog against cash for its projected future revenues, during a time in which their official residence doesn’t assess tax on that type of transaction, essentially cashing out through a consortium of bankers that speculate on the rights -- $200 million in the hand is worth $400 million in the bush if you’re Neil Young…