Yves here. Satyajit Das provides a high-level overview of Trump’s confused, often inconsistent, ideologically driven economic ideas. Like his “deals”, they are often shortened to “policies”. But it seems more likely that they will take us back to his beloved 1890s.
By Satyajit Das, former banker and author of many derivative technical works and several general titles: Traders, Guns & Money: Knowns and Unknowns in the Dazzling World of Derivatives (2006 and 2010), Extreme Money: The Masters of the Universe and the Cult of Risk (2011 and Anqunceet 6012 and Anqunces6012) 2021). His latest book, The Everything Bubble: A Guide to the New Age of Financial Speculation and Phantom Wealth,> will be released in 2027. He has also written on ecotourism – In Search of the Pangolin (2006) (with Jade Novakovic) and Wild Quests: Journeys into Ecotourism and the Future for Animals (2024). This is a longer version of the clip published in the print version of the New Indian Express.
Apologists for the US administration say they want to ‘disrupt’ the existing political and economic norms for good. Yet the past 17 months have made a convincing case for the nostalgic benefits of the status quo. To paraphrase Shakespeare’s Polonius, if the Trump administration’s methods are anything to go by, there is madness in it.
Management wants inflation to fall, but wars, tariffs, trade restrictions and sanctions drive up costs and increase price pressures. It wants lower electricity prices, but the start of the war in the Gulf, which reduced the supply of oil and gas, was of no help to that end. While the war is good for US energy exporters, it ignores that the US imports certain oil products. American prices have actually risen at a higher rate than in other countries because they have more flexibility to control the increase—for example, by lowering the tax on gasoline.
The Trump administration is talking about hopes of increasing US production by up to 3 million barrels per day. Despite Trump’s desire to lower prices to reverse sliding approval ratings and help Republicans in the upcoming mid-term elections, manufacturers have chosen not to invest and use limited profits to reduce their debt or reward shareholders.
At the same time, the US is pursuing a trade war with Mexico and Canada, its biggest sources of contaminated imports, ignoring that US refineries are set to process these grades and will need other suppliers or costly overhauls. The administration also wants to tighten sanctions on Russia that are suppressing prices.
Trump expects members of the Gulf Cooperation Council to invest in the US and finance his Peace Council. But the war and low oil prices, if they persist, are hurting their economy and reducing their surpluses. He wants Saudi Arabia to invest up to $1 trillion in the US. But Riyadh needs an oil price of $80 to $90 just to balance its budget and finance major projects designed to rebalance its economy away from fossil fuels.
The ‘build-in-America’ campaign seeks to replace cheap imports with expensive domestic production of a whole range of goods. Given the evolution of supply chains over decades, this cannot be done quickly. Deindustrialization in the US means a shortage of workers with the necessary skills. The effort to manufacture the chips offshore in Arizona saw long delays, cost overruns, exposed cultural and regulatory differences and ultimately required the use of Taiwanese labor. This plant will not produce high quality chips or use the latest technology. Higher taxes mean more resources are directed to the production of low-quality essential goods, which can be imported at cheap prices, reducing the available capacity for high-quality manufacturing labor leading to higher prices and disruption of supply chains.
Management’s actions in monetary and fiscal policy are revealing. The proposed tax cuts are an illusion as a continuation of the existing expiring scheme and will be offset by tax costs. Channeling Alice in Wonderland’s Humpty Dumpty saying “when I use the word … it means what I choose to say”, the White House spokesman pointed out that the tariffs are “not a tax cut for the American people” – something that was previously unknown from an economic perspective.
Taxes, even if implemented legally, will not help fix America’s chronic budget deficits and growth. The revenue from the fee cannot replace the $2 trillion in individual and corporate tax receipts. Given a base import value of $3.4 trillion, it would require a punitive tariff that if imposed would reduce imports by making it unreasonably expensive to limit revenue. During the first Trump administration 92 percent of the revenue from agricultural expenditures ended up in subsidies to unhappy affected farmers.
Instead, the planned extensions of tax cuts, eliminating taxes on social security, tips and overtime and reinstating state and local tax deductions would reduce revenue by about $900 billion a year. Over the next decade, the deficit is expected to increase from $2 trillion to $3.6 trillion mainly due to increased payments for social security, seniors and health care from the changing population. This will feed into the high cost of public debt and interest which at 4.7 % of GDP (the highest in the G20) is already the second largest budget cost after Social Security and greater than defense costs.
The administration wants, at the same time, to lower the value of the dollar, keep it strong and maintain its status as a reserve currency that leads to economic growth. It does not agree that tariffs create a strong currency because they encourage increased production and reduced trade deficits. A weaker dollar will also increase price pressures. In Trump’s first term, a higher dollar helped to dampen the effects of inflation.
A weak dollar will discourage foreign investment in the US that it needs. One measure being considered to devalue the dollar and address the unsustainable public debt of the US is to forcibly convert the US treasury into zero coupon 100 year (one hundred) bonds or perpetual securities (no maturity date). This can be automatic if done unilaterally. On a serious note, in order to protect savings, investors will sell their large US Treasury holdings resulting in a significant increase in interest rates.
The objective of low interest rates is not compatible with inflationary pressures on fruits, monetary easing, the depreciation of the dollar, and policies directed at foreign investors.
Immigration deportations, including deporting green card holders on flimsy pretexts, reduce the influx of skilled and cheap labor. It reduces tax revenue and demand while exacerbating labor shortages and wage pressures. Immigration helps to cope with an aging population. Where five workers financially supported every retiree, now there are three and soon there will be two.
A decline in education and research hurts workforce skills and productivity. The management of foreigners at the borders discourages tourism. Given that the sector accounts for about 11 percent of jobs and will contribute $2.36 trillion to the economy by 2024, it’s unclear how this will boost US economic activity — a temporary bump from the World Cup anyway.
Executives’ excessive use of executive power, arbitrary interpretation of laws, disregard for the law while professing to uphold it and willful disregard for judicial authority may cause constitutional problems. Erosion of legal rights and the withdrawal of treaties or trade deals will make foreigners wary about investing in or doing business with America.
MAGA risks MEEGA (Make Everyone Else Great Again). US actions perversely promote the independence of other countries that divide America. Europe’s efforts to rebuild defense capabilities and the outsourcing of US suppliers will hurt US arms exports. Over time, foreign competitors will improve capabilities and market share. The modest savings from canceling foreign aid and cultural programs will outweigh the large scale losses and provide opportunities for others to increase their power.
To use a football analogy, the policies of the American administration are your goals. Mark Twain wondered “whether the world is run by wise men who fool us or by really straight fools.” That question is one that can be asked about the Trump administration.
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