The US dollar is in the midst of its worst day since 2022 today and it’s not because today’s CPI report was a tad soft. The foundations of the US dollar’s global dominance are cracking.
The Trump administration reversed course on the worst of the ‘reciprocal’ tariffs but we’re still left with a 10% global rate and 145% on China, which is effectively an embargo.
Even looking at it on the surface, what are you going to do with a 10% tariff? You are going to sell less to America, which means you will receive fewer dollars.
Here is Milton Friedman talking about protectionism:
For the United States, the best approach would be to unilaterally eliminate its trade restrictions and say to the world: ‘Come and sell your goods here. We’re delighted to buy from you and sell to you.’
Of course, when you sell to us, you’ll receive dollars. What will you do with those dollars? You can’t eat them. If you’d like to stack them up and burn them, we’d be delighted—we could print all the paper you want. But nobody will do that.
If other countries sell things to us for dollars, they will inevitably spend those dollars back here. There’s no doubt about that.
For decades, they have been doing just that and it’s kept the dollar strong and at the center of the global financial system. China has bought Treasuries, Japan is the largest foreign investor in the US, massive amounts of money flows into the US equity market and American venture capital. The US has benefited tremendously.
Now the US administration seems to think it can re-write the rules of economics. Today we got yet-another sign that Congress doesn’t care about deficits with the House moving forward a Republican Senate bill that would increase the deficit to $3 trillion from $2 trillion by the end of the decade.
More importantly, the US appears to be adopting some kind of mercantilist system with a floor at 10% tariffs. After the U-turn yesterday on reciprocal tariffs, I highlighted that this was still a big question and today White House economic advisor Kevin Hassett indicated no one would rate a rate below that.
That’s a big problem.
There is also an over-ridding strategy that doesn’t appear to be about taking down global trade barriers but rather bringing back factories to the United States. First of all, the timeline to do it is way longer than markets or the economic can tolerate without a recession or very slow growth but there is a reason the factories left in the first place — they weren’t competitive. With US workers earning more than ever and 4% unemployment, that’s not going to change.
To look at it a different way: What have 30 years of globalization led to? The #1 thing in my mind is persistent disinflation in goods that’s led to persistently low borrowing rates. Reverse it and we will get persistent inflation in goods and high borrowing rates. Does that sound like a place you want to invest in?
The message is over-arching message from the market right now is that the policy mix isn’t going to work. It might lead to poor growth, perhaps to high inflation, probably to low productivity and maybe all of that.
