Liberation day

Trump announced Liberation day on April 2nd - History would come back to see this as a self-inflicted crisis that exposed the sorry state of the unproductive US economy. 

 

Normally in a war the fighting armies try to kill people on the opposite side. But in a trade war, When the battle starts armed soldiers turn around and start shooting their own people. Winner of the war is decided by how much damage they do to their own people. It is very funny to see that when the United States announces tariff against Chinese goods the US markets goes down. When China announces retaliatory tariffs, the Chinese market goes down. So it is obvious In a trade war you only harm your own citizens. one thing to note is that China Tariff in the USA is paid by the US citizens and NOT the Chinese people. On the other hand the tariff announced by the Chinese Govt against the US Is essentially a tax on the Chinese people. It makes things costly for its citizens. A 100% tariff on $1000 imported iPhone., will make the price go up to $2000 right away. If you excuse the name tariff - it is new additional tax for the consumer. Saying it to be a Chinese tariff is just to feel good. Chinese people are not involved at all. 

 

The budget deficit and the trade deficit often referred to the twin deficit has been an often overlooked metrics in the economic discourse in the US. In fact these numbers were actually paid close attention to decades back. One of these caused the black Monday crash in the market in October of 1987. They fell out of the economic radar a long time ago. President Donald Trump is absolutely right about paying attention to the twin deficit. The budget deficit indicates that the US government is spending more than it takes on in tax payer dollars. The trade deficit on the other hand says imports exceeds the exports. In fact US having a big trade deficit and a huge budget deficit is a symptom of a problem - Conveys the lack of economic productivity of the US people.

 

After the Liberation Day the market became volatile. The equity Market had a huge fall, a scale witnessed only during a financial crisis or a pandemic like event. But this one was a US govt made crisis. US announced tariffs on all its trading partners overnight. China taking the largest of all. This created panic and uncertainty. White house sound of early strong stand on not going back - only made it worse. The equity market going down was expected because of the uncertainty what the us government did not expect was the volatility in the bond market and the us dollar market. Usually during a crisis there is a flight to the US dollar and the bond market rallies pushing the yields down . Even though it happened initially, after couple of days of panic, investors started selling the dollars. At one point the 10 year Treasury yield moved up from 3.87% to 4.51% in a matter of few hours and this scarred the White house. Moves like these are unprecedented. The US Treasury market - the so called safe-haven bond market was behaving like a developing country debt market.  President Trump didn't have an option - but to put a pause on the Tariffs for 90-days. The whole thing looked like a misadventure on the part of the US government. It had to save face by initially saying - it's to reduce the twin deficits, then to create American jobs, then to earn tariff income to balance the budget and finally to uniting the world against China with respect to world trade. Most likely the 90-day tariff suspension is gone forever and its almost certain that the 10% tariff on other countries is definitely not going to go up.

 

President Trump's should be appreciated for the effort to solve the long pending twin deficit problems. But the radical solution for it in imposing tariffs on foreign countries has really back-fired.

 

If the countries agrees on zero tariffs and practice free trade., the US doesn't have much to give to the world - this point is not discussed to the level it should be discussed. Rest of the world have a competitive advantage over the US in manufacturing goods. The world offers US manufactured goods, but the US has nothing to offer to the world. It has agriculture produce that it can give like corn and Florida Oranges. Believe me - the oranges and corns grown locally here in my place is lot sweeter than the ones from the US. There is no natural demand for them. One other thing the US can offer the world is energy - like oil and natural gas. But not at the current market price. Oil is trading around $60 now. US has lot of oil, but most of them are under water and within rocks - uses expensive technology called deep sea oil wells, fracking to take it out. Saudi Arabia on the other spends less than $6 to get a barrel of oil out of the ground. Oil extraction from fracking can cost as much as $70-$80 per barrel. So at its current price, US cannot export economically. US has bulk of AI products - those things are to be frank no one in the world needs. At least not at the price they are being sold. They may eventually become a need but definitely not at the moment.

 

Americans had been having a sweet deal all along. They got all they consumed from the rest of the world and stopped being productive a long time ago. Americans bought things that they don't need, they can't afford, overpriced and don't work, with the money they don't have, as George Carlin put it a long time ago. The post-pandemic era exposed a dysfunctional economy. During the Covid-19 lock downs, things didn't get produced and didn't get exported and the only way the US government could save the people was to send them checks which people spent to avoid their addiction of shopping. Because there were no house hold savings for the rainy day - the US government didn't have an option. They gave grants (funny they call it PPP loans) to business people so that they don't lay off people, they paused on student loan repayment, rent and mortgage repayment. Lot of student loans were then eventually written off. Meaning paid by the US government to those Universities and educational institutions. This caused huge budget deficits - record deficits that are completely unsustainable. The interest on the past debt burden of exceeding $36 trillion coming to 25% of tax income in the last year of Biden Presidency.

 

The April 2025 experience so far - has demonstrated how much the US is vulnerable economically. US needs the rest of the world more than the rest of the world need the US.

 

Since the 2000s - the US solved all its problems (including foreign wars) by creating huge trade and budget deficits - meaning it prints its way out of problems. The equity market rise is because of that. While it is possible to deal these problems with printing new money - with the US dollar being the world's reserve currency - they cannot solve bond market problems with the same technique. It's all about the credit worthiness of the nation. With close to 10 trillion dollars set to mature this year - the US needs someone to loan all that money. 

 

As an alternative - Instead of hitting other countries with tariffs, Trump should really make America more productive. It can be done by less spending from the Government, removing more regulations - make US population work harder and become productive. These are difficult things politically. Individuals can change fast, but the people of a country cannot radically change. But that is the only option. Peter Schiff says - not rising the debt ceiling any more is first step. I completely agree with it. Instead of threatening the world - US should work closely with them - and over time make things in America, create American jobs - being really productive. The $36 trillion debt is a huge obstacle in that way. At some point - the debt needs to be re-negotiated. It is mathematically not possible to pay them all in value dollars. Americans have to go through lot of pain to over come the twin deficit problems - they are entirely solvable. But how much economic pain is tolerated is the real question. As Trump says - the medicine is not pleasant but it needs to be taken sooner rather than later.