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GELFAND’S WORLD - So Trump caved. Wimped out. The pussycat in chief. After a performance of chest pounding bravado broadcast to the entire world, he held out for less than a week and then announced his "90 day" postponement of the tariffs. Yes, there were some exceptions (China, China, China) and that pesky 10% tariff on everything left in place, but it was enough for the stock market to regain a part of what the past 5 days had lost.
Still, just one day later (the Thursday of this week and of this writing) the New York Stock Exchange has already lost almost everything it gained on Wednesday. It seems that it required a few hours of thought before stock traders recognized reality. And the reality is that Trump's machinations have already done serious damage to the economy and will continue to add damage.
And the market is, as of Thursday, reflecting that belief.
One of the functions of the stock market is to reflect all the beliefs and estimates about what the economic future has in store. At this moment, the question is what Donald Trump actually intends, since we know that what he says typically has nothing to do with what he really thinks, or what, if any, his plan is.
To an increasing number of Trump watchers, it appears that there is no plan. Paul Campos says exactly that:
"Once again for the people in the back: There is no plan, there is no secret underlying logic, there is no cost-benefit analysis, rudimentary or otherwise. There is nothing but his bottomless stupidity and impulsive narcissism."
That might be right. Trump decided long ago that tariffs are the way to cut income taxes and when he got the power, he found an excuse to declare the new tariff era. In keeping with the way Trump negotiates (and his lackeys represent his policies), every day since last Wednesday brought new boasts that the policy was permanent and would never go away.
Then suddenly, on the Wednesday exactly one week after "Liberation Day," Trump reversed himself. And all of a sudden the stock market was going up like crazy and Trump was telling reporters a different story than he had been telling just hours previously.
We are entitled to ask about the reason for this reversal and -- the critical question here -- is it permanent or just another random amble through the cluttered field that is Trump's brain and will be reversed on his next impulse?
But first, a short walk through the financial picture.
It turns out that it wasn't the stock market collapse that did Trump in. It was the bond market that was the precipitating cause of Trump's backing down, as you can read here. We'll leave the precise formulation to the economists, but basically it comes down to the fact that the U.S. economy makes use of debt to keep things going. This is not bad in and of itself; there are not a lot of people who can go buy a house with cash on hand, but lots of us make use of mortgages to buy on the installment plan. The U.S. economy (like so many others) does much the same thing on a bigger scale -- it's just that the debt is designed to be forever. If we pay the interest on the debt on time and it's not too big a slice of our economy, then we're OK. Start getting behind or let the payment on the debt be so big that it seriously interferes with savings and investment, and we're not so much OK.
You can read another account of the bond market crisis here. The weird behavior by Donald Trump and endorsed by his followers threatens to break the whole system. And it is a system that has worked to our benefit since the end of WWII.
It turns out that the U.S. has been allowed to use debt without negative consequences because we are considered a good credit risk. In fact, the world considered our treasury bills to be among the best forms of debt and therefore allowed us to sell them at a fairly modest interest rate. How do we know that the financial world felt this way? The clue was that U.S. treasury bills were bought and held by people and governments all over the world.
The clue that the world no longer trusts you is revealed by the necessity to offer higher and higher interest rates in order to sell your bonds. You will remember the term "junk bonds" that refers to the high cost of debt that falls on companies that are losing money and on governments that can no longer be trusted to maintain a stable currency.
Something worrisome started to happen to U.S. treasury bills the other day. It was revealed by what the financial world referred to as treasuries "spiking." The proximate cause was that Japan started to sell off its store of U.S. debt, a signal that the world was starting to lose trust in the U.S. economic system.
And why shouldn't it? Our behavior as a nation has been exactly the opposite of steady.
Here's one more clue about why the world is now responding this way: Has it really been only a week? The official tariff rates have gone up, gone down, have been said to be part of a negotiation, and have gone up again, and have then been postponed. China's tariff rate has gone up and up and up. That's Wednesday-to-Wednesday in Trumpland.
It was that signal from the bond market that finally forced this administration to call a time-out.The U.S. owes trillions of dollars of debt, and it would be disastrous for the world to call in that debt all at once. The world would be awash in treasury bills being sold at a discount, and the Unites States government would find itself unable to function in its usual way.
There are several places that hold a lot of U.S. debt.
Who are those countries? Here's your first clue. Just below Japan (which held a little over a trillion dollars worth) is China. What would happen to the U.S. economy if an irresponsible or vengeful China were to dump its dollar holdings? (In other words, if China were to base its policy on emotion and vengeance the way President Trump functions).
It's not a pretty picture. It doesn't seem like a good idea to poke that tiger, does it?
So far, the Chinese have been more mature than the Trump administration, merely responding with tit-for-tat (an expression I find myself using more often these past several days) as baby Donald treats international relations like a spat in the school yard.
(Bob Gelfand writes on science, culture, and politics for CityWatch. He can be reached at [email protected])
