Fire and Ice – Fat Tail Daily | Australian Markets

Last week, the US started Crackpot Financial Experiment Number Two. CFEN2.

CFEN1 was the transfer, in 1971, to a ‘paper’ currency…with nothing to attach it to actual output. It enormously elevated the quantity of credit accessible, resulting in a long (however largely pretend) growth from 1982-2021 and to $37 trillion in authorities debt.

CFEN2 ought to have an virtually reverse impact. It discourages trade and ought to depress the world financial system.

Today, we take a guess about what occurs subsequent.

As we closed out the week, we received this. From Spencer Hakimian through X:

My pal is within the business of shopping for wholesale metal rebar, metal beams, metal sheets, and many others. from cheap abroad producers and then promoting it downstream to American homebuilders who construct funds properties.

He received an electronic mail from his customs broker this afternoon that their order from Hanoi, Vietnam might be subject to both 50%, 70%, 110%, or 135% tariff tomorrow.

50% penalty for overseas metal.

Another 20% penalty for Vietnam.

Another 40% transshipment penalty if U.S. customs believes the metal just isn’t actually Vietnamese.

And one other 25% fentanyl penalty if CBP thinks China is concerned with this metal in any approach by any means.

The customs broker instructed him to imagine he’s paying the total 135%, simply to be secure.

They received’t know for sure for a few months, and the penalties of being improper are too extreme.

Central planning is all the time a mistake, within the sense that it makes most people worse off. It just isn’t, nonetheless, a mistake for individuals who do the planning. The feds and their cronies get more money and more energy.

The latest trade offers are counted as a ‘win’ for Mr. Trump. They show he can get what he needs. He’s a deal maker par excellence, after all. And he can prevail in opposition to virtually the whole world. Against the English, the French, the Swiss, the Brazilians, South Koreans, Japanese…and many others. and many others. Didn’t he win all over the place…in opposition to everybody?

Maybe.

But in a trade dispute, the actual winner is often the loser — the one whose borders stay most open, not the one who has raised the drawbridge and closed his doorways.

Imagine that we dwell on reverse sides of a river. On our facet, we raise chickens. On your facet, you raise wheat. We trade. But then, we discover that we’re shopping for more of your wheat than you might be of our chickens.

“Unfair,” we shout. We impose a tariff of 30% on wheat imports.

“We won!” we are saying. ‘We won, too,’ you say, ‘cause it could have been worse.’

But on this world of winners, on our facet of the river we pay 30% more for bread. You might not pay more for the chickens, however now you may have much less money to buy them; your wheat now prices us more, so we will’t buy as a lot.

And you, with much less income out of your wheat gross sales, buy fewer chickens. We are each poorer.

But wait. There’s more to the story. On our facet of the river, our authorities collects the 30% tariff. It is the one actual winner…having taken its ‘tax’ out of the chicken/wheat trade.

As to what occurs subsequent, in in the present day’s real-world financial system, we had been put the query by a younger girl at a wedding ceremony reception. Over the noise of a blaring band, we answered as best we may:

“There are two possibilities — fire or ice…a whimper or a bang.

“The US stock market is now in a bubble. We’re talking 1929 or 1999 levels. Something is going to happen to bring those prices down and crash the whole bubble economy. Tariffs could do the job…just as the Smoot/Hawley tariffs sent the whole world into a depression in the ‘30s. Sharp price increases for consumer products, for example, might panic investors. Or, since none of these ‘deals’ is actually final…we could still see a trade war break out…which might cause a stampede out of stocks.

“Or, maybe there won’t be a panic. The economy will simply slow down as consumer prices rise. Some form of stagflation, in other words. Over a number of years, adjusted for inflation, real stock prices would go down, as they did in the 1970s. GDP would go down. People would earn less real money…and have less to spend. But it would be less obvious what was going on.

“Either the fragility and complexity of the tariff regime tip the economy into a major crisis. Or, economies adapt without fireworks, absorbing the tariffs as they would any other tax hike. The going rate for tariffs was less than 4%; now, it will be about 18%. One way or another, the economy must adjust to the much higher taxes.

“Was that helpful,” we requested?

She regarded uncertain.

All advice is normal advice and has not taken under consideration your personal circumstances.

Please search impartial financial advice relating to your own state of affairs, or if unsure in regards to the suitability of an investment.