Any chance Trump could be trying to start a Global Depression?

 ?

Trumpian Mercantilism

A tariff is a tax on imports. The tax is paid by the importer, with the cost passed along to the customer.

Historically, if I have this right, less-developed nations (like the US in its first century) imposed tariffs to increase the cost of imports. That makes domestic products more competitive and helps the domestic economy grow. 

In Trump's case, I don't see how the US benefits by imposing tariffs -- other than revenue gain for the federal government. He doesn't seem to say. I don't imagine he thinks making imports more expensive will make anyone happy. The tariffs could eventually be good for domestic employment -- something I never hear on CNN -- but certainly not before a four-year term has expired. 

I cannot imagine that such a benefit would arise quickly. An improved employment picture will not begin to emerge until the effects of tariff policy become clear. So far, the only effect we've seen is a shocking increase in uncertainty.

As a general statement, my tidy observation is that tariff policy is mercantile economics, and certainly not modern economic thinking. That's the reason Trump's econ seem so strange, so alien to us today.

It has been said that Adam Smith and his 1776 book moved economic thought away from the mercantile focus on accumulating gold and silver -- which mercantilism tried to achieve by improving the balance of trade by means of tariffs -- and moved economic thought to a focus on wealth being the output produced and enjoyed by business activity and its customers. 

Where Trump is taking our economy remains to be seen.

Domestic inflation (for which labor unfailingly gets the blame) increases prices of US products at home and abroad. Inflation prices us out of foreign markets and is largely responsible for the US trade deficit. So if Trump wants to improve the balance of trade, he will want to keep domestic wage increases to a  minimum, to keep US product prices down in foreign markets.

Meanwhile, the Trump tariffs will increase the price of imports, and reduce the volume of imports that we in the US buy. 

I don't see how these policy outcomes will be beneficial to the US economy or to US labor. The effect on US business, it is too soon to say. And, again, the Trump tariffs will boost tax revenue to the federal government, at our expense.

 

The problem with the Trump plan is that it is at best only vaguely related to the central economic problem of our age which is, in the words of the American economist Vladimir Simkhovitch, labor cannot support life.

The trade deficit is certainly one problem. But it cannot be that excessively high wages caused the inflation that priced US output out of foreign markets. If wages were high enough to create our trade deficit, we would all be thrilled with our paychecks. But that is surely not the case.

I am not a fan of globalization. I believe we must learn to provide ourselves with full employment by our domestic policy. But tariffs on imports are not domestic policy. And the media is already talking "trade war".

As I understand Trump's economic thinking, using tariffs to boost the prices of imports will increase domestic purchases of domestic output. But to the extent that we have been buying imports for the cost savings, if the tariffs get us to buy American we will be paying higher prices anyway. Because of the tariffs. Yes, we'll be buying American, but at prices we avoided in pre-tariff days. Trump is not solving our economic problem.

If we are paying more, without more income, then we will have to be buying less, or saving less, or both. If we are buying less, demand is down and the economy gets a little slower and unemployment tends to go up. Not a good outcome.

Perhaps the tariff revenue will allow Trump to cut taxes on wages, and boost take-home pay. Perhaps this boost will be enough to offset the higher prices we are paying to buy domestic rather than imports. Perhaps it will be enough to prevent a slowdown of the US economy. Perhaps the shift toward more domestic purchasing will be enough to boost the growth of our economy -- which to me seems a central part of Trumpian economics. (But then, I always focus on growth. And really, I have no idea what Trump is thinking.) Eventually, perhaps, the resulting growth of domestic output will boost employment. Eventually, and perhaps.

Stagflation? Stagflation has been in the news lately. Stagflation is inflation in a stagnant economy: inflation and stagnation at the same time. Or, as the definitions describe it these days: high inflation and high unemployment, at the same time.

This surprises me. Granted, inflation doesn't want to come down to 2 percent. But it did stabilize at 3 percent, as of June 2023.  That's not good enough for the Federal Reserve. They want 2 percent. I think the economy changed during the Biden inflation, and the economy now wants 3 percent. And in a battle with the economy, I don't think the Fed can win. I've been concerned for a while now that by insisting on 2 percent, the Fed is slowing the economy enough to create a recession.

So yeah, I guess, inflation is too high and I worry about unemployment rising, so this sounds like stagflation. I don't see it as stagflation. I see it as bad policy. If inflation comes down rapidly to the 3 percent level and then stays there despite the Federal Reserve, I don't see that as high inflation. I see it as a change in the economy. And as I see things, it is the job of economists (and of hobbyists like me) to notice changes and try to understand them. Try to understand the cause of the change.

If the Fed wants to bring inflation down from a "natural" target of 3 percent to the Fed's target of 2 percent, the Fed needs first to understand the problem the economy has with 2 percent.

Far as I'm concerned, the Fed is scolding the economy for failing to behave as the Fed wants. I don't think the Fed can win that battle. I think the Fed should stop barreling forward, and start re-thinking its understanding of the economy. But hey, that's just me.

With a correct understanding of the economy, of the economic problem, the Federal Reserve, together with Congress and the President, could easily solve the economic problem. Easily. But I do not mean the inflation and unemployment problem. For the economy, inflation and unemployment are not problems. For the economy, they are solutions to the problem that disturbs our economy. 

Inflation and unemployment are problems for people. In order to solve these problems, we have to give the economy what it wants, so that it will stop creating inflation and unemployment.

But hey, that's just me.

 

Yes, stagflation has been in the news a lot, lately. I did a Google search for the word stagflation, set the "Tools: Any time" option to different time periods, and jotted down the estimated number of results:

Start Date	End Date	Results
Jan 1, 2022	Dec 31, 2022	53,300
Jan 1, 2023	Dec 31, 2023	58,600
Jan 1, 2024	Dec 31, 2024	289,300
Mar 31, 2024	Mar 31, 2025	1,710,300

The first three results are by year; the last is for the most recent 12-month period as of this writing.

Myself, I have not been predicting stagflation. I do see stagflation as a likely result of the Trump tariffs, but not from general economic conditions.

Yes, the tariffs. Tariffs increase prices. Without a corresponding increase in the quantity of money, and in wages, we will have to buy less simply because we don't have the money. Yes, we could all borrow more and spend the borrowed funds and then everything would be fine -- but not really. Private-sector debt is already so high that the economy struggles to achieve even the bare minimum of growth. Solving the tariff-cost problem by borrowing more is an unsatisfactory solution to a problem that should never have been created.

Too much of the money we spend goes to pay for the money we spend, instead of to pay for the products we buy. Excessive debt, excessive private-sector debt is the real, underlying problem. I think the Fed's inflation target, the 2 percent target that maybe should now be 3 percent, I think that purposefully shooting for an inflation rate above zero is the only thing that keeps our economy growing at all. And we need that extra money in the economy every year because interest and principal absorb so much of our disposable income.

Labor cannot afford to live because wages have not kept up with costs. How did this happen? It happened because our reliance on credit tends to increase until the economy gets in trouble. Interest, yeah, a problem. But interest rates go up and down. Debt goes up and up, and doesn't come down until it comes crashing down in a time of economic crisis, as it did in 2008 and for much of the next decade.

By the way, debt came down -- or actually, debt grew, but very slowly -- during the Savings and Loan crisis from the mid-1980s to the mid-1990s. Slow borrowing meant a slow increase in the Q of M, which would slow the economy. So the Fed permitted an unusually large increase in the quantity of M1 money, transaction money.

What happened was our reliance on interest-free money increased while our reliance on borrowed funds decreased. The net effect was a decrease in the cost of using money. And that difference was enough to allow excellent economic growth in the latter 1990s. It's simple. And as I said, it's easy. And by the way, in the latter 1990s the federal deficit was briefly reduced to nothing. We should do more of that, reducing our reliance on credit and replacing that costly money with cash. With greenbacks. With income. To make it happen, policies need to change.

Or, you know, we can opt for primitive, mercantile policies like tariffs and stir up trouble with neighboring nations. It's your call.

Deposits and reserves

I think I have this right.

Reserves are very much like deposits, except deposits are between a bank and its customers, and reserves are between the central bank and its customers. The Fed creates money from nothing, to lend to banks. Banks create money from nothing, to lend to their customers. Deposits are not loaned out; neither are reserves. Deposits stay in the banking system unless withdrawn as cash. So do reserves.

It's a two-tiered structure of banking. The structure is generally the same, but on two different levels. Looking at it this way, reserves make sense to me.

Before solving a problem, one must know what the problem is

"We are not doing well in the world of education," Trump says, as he guts the Department of Education.

That is one example out of hundreds, or thousands, of Trump pointing out a result of our long economic decline, and treating that result as a problem to be solved by reduction -- by reducing the size and cost of the department or shutting it down altogether -- when what we need is to turn the economy around.

Democrats, however, don't see it correctly either, so there is little or no chance that the root problem will be solved. 

What Musk will say when the Trump depression comes

An exercise

I just want to see a number. I want to see where the federal debt would be, if we make allowance for federal responses to the Savings and Loan Crisis, the Great Recession, and the pandemic.

The Savings and Loan Crisis (2.2% of 1989 GDP)

Wikipedia says

The savings and loan crisis ... was the failure of approximately a third of the savings and loan associations (S&Ls or thrifts) in the United States between 1986 and 1995... The total cost [to] taxpayers by the end of 1999 was $123.8 billion...

And the FDIC Banking Review Vol 13, No. 2 says

It has been more than a decade since enactment of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA), which began the taxpayers’ involvement in the cleanup of the savings and loan industry.

The Great Recession (5.7% of 2009 GDP)

Forbes of 17 Feb 2020 says

Exactly 11 years ago today, February 17, 2009, President Obama signed the American Recovery and Reinvestment Act of 2009 or the Recovery Act into law. The $831 billion in spending kicked off the longest period of economic growth and job creation in American history.

Heritage Foundation of 24 March 2020 says

In the wake of the housing meltdown and financial crisis, Congress passed the largest stimulus-spending package in American history... Vice President Joe Biden barnstormed around the country in 2010 promising a “Summer of Recovery” that never came.

He "barnstormed around"??

And of course Heritage, a nonpartisan, nonprofit charity, says

Keynesian stimulus almost always fails, and often makes the downturn worse and the eventual recovery weaker.

without any recognition of the financial roots of the 2009 recession or that "financial recessions are particularly problematic" -- as Google's AI Overview says:

Yes, financial recessions, stemming from issues in the financial markets, tend to be more severe and costly than those caused by other factors, often leading to significant economic downturns and lasting damage.

The Forbes article calls it the longest recovery. Heritage calls it the slowest. I love the irony.

The COVID-19 Pandemic (21.8% of 2020 GDP)

Investopedia says

According to official U.S. government tallies as of July 31, 2024, the U.S. had spent a total of $4.65 trillion on a variety of programs related to COVID-19 relief.

Adjusting the Federal Debt

I start with the FRED's FYGFD, an annual measure of the federal debt. To adjust for the Savings and Loan crisis I subtract $123.8 billion from the FYGFD number for 1989. This makes the federal debt falsely low for most of a decade. But it self-corrects by the end of 1999 because all that money was borrowed and spent by then. From 1999 to 2009, adjusted debt runs on the low side of the FRED data.

From the federal debt for 2009 I subtract the $831 Billion of the 2009 response to the Great Recession. Again, I let the passing years correct my lazy assumption that the whole 831 was spend in one year. After a decade, I figure, that money was all spent, and my number is a good estimate again.

And from the federal debt for 2020 I subtract the $4.65 Trillion COVID response. As that money was all spent by mid-2024, I figure my estimate is right by that date.

Without those three responses to economic crises, the federal debt would now be about
equal to GDP, some 20 percent of GDP less than it actually is. For what that's worth.

Yeah, I know: The graph ends in 2023. I know. But this is only an estimate, and now I have seen it.

I guess the government didn't "have to" rescue the economy those three times in the past 36 years. But if we did nothing, we might still today be in the middle of a Depression caused by the Savings and Loan mess.

That's okay. Trump is hard at work creating the next one.

He was right

"The authoritarian state systems of today seem to solve the problem of unemployment at the expense of efficiency and of freedom. It is certain that the world will not much longer tolerate the unemployment which, apart from brief intervals of excitement, is associated and in my opinion, inevitably associated with present-day capitalistic individualism."

Chapter 24