An unraveling of the past 54 years
Several readers have emailed me asking for my thoughts about this tariff situation. Here are some of my ideas, based on my economics background.
I often refer my readers to the year 1971 as a watershed year in the development of the current global economy. Indeed, the global economy over the past 54 years can trace its roots back to that time.
The year 1971 was pivotal as the Nixon regime shut the international gold window and overtures were made to open up the Asian markets to manufacturing.
Shortly thereafter in the early seventies, we observe the OPEC oil crisis. This crisis helped grease the wheels for the US dollar to become the Global reserve and transaction currency. The United States government even forced oil producers to cap domestic oil wells, so it could speed up this globalization process.
After 1971, the US government, working with the Federal Reserve, began to make agreements with countries all around the world. Essentially, any country that was willing to accept the US dollar for payment would have their markets opened up with factories that would supply the United States with consumable goods.
The US dollar would be the currency of choice by the globalists to consolidate their wealth over the decades. In order to conceal this massive wave of wealth and power consolidation by the private banking families, the United States corporate private sector and the government would essentially export this monetary inflation, while concomitantly importing deflation from overseas manufacturers and suppliers.
Once the engineers of this globalized economy established this mechanism, it was vital that the nation states worked to lower trade barriers and remove tariffs. It worked very well for a long time and USA, inc. was able to run massive trade deficits for decades. In return, foreign manufacturers and suppliers eagerly accepted dollars for payment and plowed surplus greenbacks into huge infrastructure projects that built up their own Nations. The wealth was spread around the world while the United States and the West consumed. The surplus dollars were also plowed back into US Treasuries and other types of income generating assets.
The great unraveling
Enter Donald Trump and his proposed economic policies that include a massive regime of tariffs.
Domestic inflation
First, if this regime of tariffs is implemented, the US dollar will clearly be in the crosshairs, because foreign suppliers and manufacturers will be less likely to accept the dollar as payment. If they are less likely to accept the dollar in the future, they will increasingly find it disadvantageous to continue holding the ones they have. These dollars will have to flow somewhere and most likely, they will flow back to the States.
Second, in the short run, tariffs will drive up inflation domestically as there is little the United States economy can do to replace what has been manufactured and supplied cheaply from overseas.
Third, in the long run, the United States economy could be much better off as it will be less reliant on foreign sources for many of the items that it has become reliant upon. But even if the United States economy can adjust in the long run, it will still mean higher prices for everyone domestically, because the cost of doing business in the United States is much higher than in many of the lower cost producing countries.
Foreign deflation
Essentially, what these tariffs will achieve will be the great unwinding of the past 50 to 60 years. As the United States is forced to “reshore” or “nearshore” its productive capacity, the primary losers will be all of the lesser developed nations with lower costs of capital that have been supplying the United States and the rest of the West for decades.
The exporting countries will continue to experience ever larger amounts of excess capacity and their local residents will not be able to replace what is being lost.
We are already observing these results when we analyze the Chinese economy. The Chinese CCP was very much aware that this day would be coming and made it imperative for the Chinese residents to begin transforming the Chinese economy into a consumer type of economy.
But the results have been mixed. China right now is experiencing deflationary forces as the United States has been shifting its supply chain out of that country. The Chinese economy is having a difficult time replacing what is being lost and the Chinese consumer has not been able to fully pick up the slack.
I would imagine all of the export driven economies are going to suffer greatly as a result of these tariffs. These countries are going to have to deal with replacing all of this over capacity.
All good things must come to an end
I’m not placing a normative judgment on what Trump is attempting to accomplish. But it seems that Trump’s economic policy makers are attempting to reverse this global order of the past 54 years.
Yes, the United States trade deficit has ballooned to the point that it can no longer be maintained. The dollars had flowed all over the world, but it is becoming increasingly clear that the United States will no longer be able to maintain its dollar hegemony.
To wit, I observe Donald Trump’s overtures to secure the Western hemisphere as its power base as a result of this change. I suspect that the United States will eventually steer virtually all of its supply chains to domestic and Western hemispheric sources. I say this, because the US dollar has become the de facto transaction currency for the entire Western hemisphere.
The decision to pick Marco Rubio as the Secretary of State, for instance, makes a lot of sense in this regard as he is very knowledgeable with the affairs of Latin America and the rest of the Western hemisphere. He is also very fluent in Spanish. Many of the countries in Latin and South America already use the US dollar, especially when it comes to underwriting debt.
What about asset prices?
The results of these tariffs on asset prices should be fairly straightforward.
The main premise to take away from all this is that these tariffs will permanently drive up the cost of living, since domestic production will always cost more, and create economic distortions in the short and intermediate run, with higher levels of inflation over the long run as everything is resorted.
So, what does this mean for asset prices? The longer lasting effects will result in a higher cost of capital for everything. Gone are the days where we can have cheaper costs of capital and cheap debt.
I suspect that the costs of capital will revert back to the levels we experienced in the ’70s and ’80s. Back then mortgages were essentially in the high single digits and the discount rates for corporate projects were much higher than they have been for the past 20 or so years. Essentially, it’s going to cost corporations and consumers a lot more money to borrow. That’s just a fact.
Thus, all other things being equal, higher costs of capital will result in lower asset prices. But, higher levels of price inflation will also result in ever higher income streams that these assets generate, which will help to offset asset price losses. For instance, SFR investors may find borrowing more expensive, but rent rates may continue rising at a faster clip.
One caveat
However, and this is the fly in the ointment. If this great unwinding of the previous 54 years results in a loss of confidence by the world consumer and global investor, we could see higher asset prices alongside higher bond yields and costs of capital.
This loss of confidence would be the result of the Global investors losing confidence in the individual nation-state governments and their central banks.
The situation currently is very fluid and so I’m reluctant to make any broad-based conclusions. But I observe the unfolding tableau and do recognize that it is essentially a great unraveling.
This is graduate level macroeconomic and microeconomic theory. Microeconomic theory is involved here as we must contemplate the behavior modifications of those who hold the dollars overseas. We must consider the choices of the individual global investor in their aggregate.
These are the hardest-hit US trading partners under Trump’s tariffs
By Rachel Wilson, CNN
President Donald Trump unveiled sweeping 10% tariffs on all imports to the United States Wednesday. About 60 countries or trading blocs will see even higher rates in an escalating move that is poised to initiate a global trade war.
Many major US trading partners will be hit hard by Trump’s so-called reciprocal tariffs.
China is levied with a 34% rate, which is additional to the existing 20% duties on all Chinese imports to the United States, while the European Union gets 20%.
China and the EU accounted for around a quarter of US total imports in 2024 and are in the top three suppliers of US imports along with Mexico, according to US Census Bureau data.
Many Southeast Asian countries will also be heavily affected. Among them, Vietnam, Laos and Cambodia will see unprecedented rates of 46% to 49%. These are countries that Americans rely on for consumer goods, machinery and electrical goods and textiles.
Mexico and Canada are exempted from the list. But the existing 25% tariff on their exports to the US that don’t comply with the United States-Mexico-Canada Agreement remains in place, except for Canadian energy and potash, which is tariffed at 10%.
The additional country-specific reciprocal tariffs also won’t add on to product-specific tariffs that have been announced on steel, aluminum and autos.
Rates applied are not reciprocal and don’t account for actual tariff rates.
Trump pitched the tariff as “reciprocal,” where the rates would be based on the tariff rate that trading partners charge the United States when factoring in currency manipulation and other trade barriers. But that is not the case.
Instead the reciprocal rates follow a simple formula: the country’s trade deficit divided by its exports to the United States, then halved. The calculation was first suggested by journalist James Surowiecki in a post on X and backed up by Wall Street analysts.
For example, America’s trade deficit with China in 2024 was $295.4 billion, and the United States imported $439.9 billion worth of Chinese goods. That means China’s trade surplus with the United States was 67% of the value of its exports – a value the Trump administration labeled as “tariff charged to USA.”
Half of that 67% rate is the 34% reciprocal tariff rate set for China.
This means that tariffs from other countries were not really factored into the calculation. Instead, the measures target countries with large trade surpluses relative to their exports to the United States, noted Mike O’Rourke, chief marketing strategist at Jones Trading, in a note to investors Wednesday.
This is how Lesotho, a country with which the United States has a $234 million trade deficit – nowhere near its $295 billion deficit with China – ended up with the steepest 50% reciprocal rate.
The baseline 10% tariff will go into effect on Saturday, and any higher tariffs will go into effect on April 9.
CNN’s David Goldman, Elisabeth Buchwald and Bryan Mena contributed to this report.
U.S. Diesel, Gasoline Futures Plunge as Tariff Plan Hits — Market Talk
04/03/25 6:19 PM
U.S. gasoline and diesel futures sink along with crude oil as markets react to widespread U.S. tariffs that are seen hurting demand. The tariffs mean downside price risk for diesel prices, says Matt Muenster, chief economist at transport technology firm Breakthrough Fuel. “Most of this comes from economic uncertainty, particularly around near-term business investment and consumer price impacts that could limit year-over-year gains for purchases of building products and durable goods.” Diesel is down 5.8% at $2.1873 a gallon, and gasoline down 7.2% at $2.1637 a gallon. The declines “suggest energy market sentiment is strongly pointing toward weaker demand and a slower freight market,” Muenster adds. (anthony.harrup@wsj.com)
Oil prices are crashing after tariffs and OPEC deliver a double whammy to energy markets
•US oil prices tanked more than 7.5% on Thursday.
•Trump’s tariffs are battering energy markets as recession fears climb.
•A surprise decision by OPEC+ to boost oil output accelerated the decline.
The market meltdown is reaching beyond stocks, as the latest batch of US tariffs pummels crude prices to a seven-month low. A surprise decision from the Organization of Petroleum Exporting Countries is further bruising oil traders.
US crude tanked 7.63% around midday Thursday, hitting $66.25 per barrel. Brent crude, the international benchmark, plummeted 6.96%.
Investors are reacting to a double-whammy that began with a major escalation of President Donald Trump’s trade war. On Wednesday, the White House announced a slate of higher-then-expected tariffs on a list of world economies, amplifying growth fears.
Recession odds now stand as high as 53% on betting markets like Kalshi, and rate cut bets have jumped as traders see the Fed slashing borrowing costs to blunt the impact of a recession.
This anxiety has an indirect impact on oil products, according to David Morrison, senior market analyst at Trade Nation.
“Energy imports are largely unaffected tariff-wise. But investors were reacting to the estimated damage these tariffs could do to global trade, and therefore global economic growth.”
To make matters worse, OPEC+ announced that eight of its members would boost crude production by 411,000 barrels a day next month. Though the cartel was expected to end some of its production cuts, the increase is three times higher than previously indicated.
The group spent years holding back production in a failed effort to boost energy prices that support member economies. OPEC delegates told Bloomberg that the output boost is an effort to penalize other members who have not kept with agreed-upon quotas. In the past, this has included Kazakstan and Iran.
The action may be to Trump’s benefit, as the president has called on OPEC to help reduce crude pricing. However, it could reignite worry of a supply glut in the global market, especially if a recession weighs down on energy demand.
Makes sense. If the economy is going to do a slow grind, that would effect freight. So these futures may be telling us something.
Atlanta Fed GDP growth estimates are already showing a contraction.
Given that the US economy is going in the shitter, 10 year treasury yields of at least 4% indicates that something’s wrong with the fixed income market.
One positive outcome of the tariff program. Foreigners will find the US dollar less attractive.
At this point it’s still just an announcement, no tariffs have been implemented. Although businesses could use that annoucement to start raising prices tomorrow. I’ll bet there will be an “at the last minute” damage control statement sometime this week, like lowering the percentage of the tariffs. Interesting to see all the “what if” propaganda stories at play in the mainstream and alt media outlets.
The trade balance comes in right as expected, though it just below the all-time high set last month. Jobless claims come in a little bit better….
Trade Balance (Feb)
Act: -122.70B Cons: -122.50B Prev: -130.70B
Exports (Feb)
Act: 278.50B Cons: Prev: 269.80B
Imports (Feb)
Act: 401.10B Cons: Prev: 401.20B
Initial Jobless Claims
Act: 219K Cons: 225K Prev: 225K
Continuing Jobless Claims
Act: 1,903K Cons: 1,860K Prev: 1,847K
Jobless Claims 4-Week Avg.
Act: 223.00K Cons: Prev: 224.25K
PMI coming in largely as expected. ISM disappoints with prices paid higher.
S&P Global Composite PMI (Mar)
Act: 53.5 Cons: 53.5 Prev: 51.6
Services PMI (Mar)
Act: 54.4 Cons: 54.3 Prev: 51.0
ISM Non-Manufacturing Business Activity (Mar)
Act: 55.9 Cons: Prev: 54.4
ISM Non-Manufacturing Employment (Mar)
Act: 46.2 Cons: Prev: 53.9
ISM Non-Manufacturing New Orders (Mar)
Act: 50.4 Cons: Prev: 52.2
ISM Non-Manufacturing PMI (Mar)
Act: 50.8 Cons: 53.0 Prev: 53.5
ISM Non-Manufacturing Prices (Mar)
Act: 60.9 Cons: Prev: 62.6
Trump Tariffs Wipe Out Nearly $2 Trillion From US Stock Market
(Bloomberg) — Roughly $1.7 trillion was erased from the S&P 500 Index at the start of trading on Thursday amid worries that President Donald Trump’s sweeping new round of tariffs could plunge the economy into a recession.
The damage was heaviest in companies whose supply chains are most dependent on overseas manufacturing. Apple Inc., which makes the majority of its US-sold devices in China, was down about 8% after the open. Lululemon Athletica Inc. and Nike Inc., among companies with manufacturing ties to Vietnam, were down around 10%. Walmart Inc. and Dollar Tree Inc., retailers whose stores are filled with products sourced outside of the US, were trading lower by about 2% and around 11%, respectively.
Few stocks in the US were unscathed with the benchmark index on pace for its biggest decline since 2022. Roughly 70% of companies in the S&P 500 were trading lower at 9:35 a.m. in New York, with almost half of its 500 stocks down at least 2%.
“There’s really not anybody getting spared in absolute terms,” said Garrett Melson, a portfolio strategist at Natixis Investment Managers Solutions. “You’re just wrapped up, today at least, in a broad de-risking, and so it’s kind of just across the board taking chips off the table.”
The breadth and severity of the levies dwarfed those imposed by Trump during his first term, threatening to upend global supply chains, exacerbate an economic slowdown and boost inflation. It also left investors struggling to game out what levies would do to corporate profits.
If Apple, for example, were to absorb the jump in costs as a result of tariffs on China, the iPhone maker’s gross margin could take a hit of as much as 9%, said Citigroup analysts led by Atif Malik.
The plan is equivalent to the largest tax increase since 1968, JPMorgan economist Michael Feroli wrote in a note. It could add as much as 1.5% to prices this year, using the Federal Reserve’s preferred inflation gauge, while weighing on personal incomes and consumer spending.
“This impact alone could take the economy perilously close to slipping into recession,” Feroli wrote. “And this is before accounting for the additional hits to gross exports and to investment spending.”
US assets quickly emerged as the biggest losers after the announcement. The S&P 500 fell about 3%, and a gauge of the dollar slumped. The impact elsewhere was muted in comparison: A broad gauge of Asian stocks fell 0.7% and the Stoxx Europe 600 slid 2.6%, while the euro rose about 2% against the dollar.
Semiconductor and industrial companies also took a beating. The Philadelphia Semiconductor Index sank almost 6%, with Nvidia Corp., Broadcom Inc., and Micron Technology Inc. all down more than 5%. Caterpillar Inc. and Boeing Co., which get a big chunk of sales from China, dropped at least 5%.
Apple led declines among the Magnificent Seven stocks. The group, which also includes Tesla, Microsoft, Nvidia, Alphabet, Amazon.com, and Meta Platforms, has been responsible for much of the US stock market’s gains over the last two years.
“We see 5,300 as the near-term target for the S&P 500, but if tariff uncertainty persists or negotiations with trading partners don’t go well, risks of downside through 5,000 become real,” UBS Group AG’s Bhanu Baweja wrote in a note to clients. “The probability of US stocks entering bear market is going higher.”
©2025 Bloomberg L.P.
Looks like tech stocks are getting clobbered! So, is this the beginning of the end?
“Fear thou not; for I am with thee: be not dismayed; for I am thy YHVH: I will strengthen thee; yea, I will help thee; yea, I will uphold thee with the right hand of my righteousness.” – Isaiah 41:10
It would be funny if the market ends up today. We’ll see.
I would say, no one is laughing!
The market is down 4 percent and people are crying . Unbelievable.
The tariffs are reciprocal. Doesn’t this all go away if foreign nations remove their tariffs on US goods?
No. Part of the allure of producing overseas was the subsidies handed out by the nation state governments to encourage their export driven production.
If the ultimate goal is to reduce the size of the domestic trade deficit then the ultimate goal is to reduce goods demand from foreign sources.
The net result will be a much higher net increase in the level of us tariffs. In order to equalize the tariffs between trading partners, especially from those of the export driven producing nations, the United States must raise its tariff rates at a much higher rate, so it can equal those of its trading partners.
The “money lenders” are working out the timing and the cause and effect. It seems, as you have said, that dollars will begin to flow back to the USA. First a trickle then a flood! The system will break down while here in the states as with the rest of the world, prices will sky rocket as it says in Revelation 6.
Thanks as always for your analysis!
Trump and the people controlling him realize the current system of the last 50 years is no longer sustainable. Deficits can only be run up to a point and only so many dollars can be accepted by the world before saturation. I think we have reached that point and Trump realizes it. It will be interesting how this plays out. This might be a good time to invest in USA companies.
It’s not Trump who realizes it. It’s his handlers who realize it. He’s sent in to do the dirty work and politicize it.
Bingo!! Trump is the carnival barker!
Trump will be regarded as Herbert Hoover passing the Smoot-Hawley Act in 1930. According to the international banking cartel, tariffs are the most evil programs.