Tariffs, Saving, and Investment
grumpy-economist.com
grumpy-economist.com
> Higher interest rates encourage domestic spending,
Shouldn't that be higher rates encourage domestic saving? Low rates encourage debt-driven spending, high rates put a higher premium on deferring consumption and saving instead. Other than that everything in this article is directionally correct.
Coda: https://www.worldgovernmentbonds.com/spread/greece-10-years-...
Just now, Greek bonds are deemed a lower risk investment than US government bonds, because the tariff announcement has spooked the market.
The Republicans are not going to cut the debt: https://www.bbc.co.uk/news/articles/c7vnnv6n29no they're going to do deficit funded tax cuts again. The tried and tested Liz Truss budget.
In context - going from reading the sentence to the entire paragraph - I think the proper interpretation is that spending will be redirected from buying foreign goods to buying domestic goods. So to synthesise the perspectives, the budget deficits and therefore total spending decline but that is nonetheless coupled with an increase in local spending because foreigners refuse to be involved.
High inflation encourages spending (... Before consumer goods become more expensive)
Well, they are also massively cutting state worker jobs. Plus the tariffs will bring in tax money as well. I'm not sure what the net effect will be of these together with the tax cuts.
The last Republican president that managed to cut annual spending was Eisenhower. (Obama and Biden both pulled it off twice though.)
Yes, those government workers cost money, but no, cutting them will not improve the fiscal situation in the USA. The jobs are not being cut in anything even close to a thoughtful or intelligent way.
Even putting aside the obviously moronic ones like getting rid of IRS staff who bring in truckloads of money for pennies of spending, most of these cuts are just going to cause more chaos and inefficiencies than they prevent. E.g. USAID may seem like 'waste' to sociopathic creitns, but it also serves a very deliberate purpose in furthering the USA'S interests abroad and keeping the international community aligned with the USA and open to US businesses
Supreme court of India stayed earlier decision of another authority to impose cap of interest rate at 36% saying free market.
This might be true for institutions and governments but many people dont decide to save if interest goes from 8 to 8.5%
"Chinese savers did not want even more Chinese factories. One of many reasons for this saving (more later, but it helps to make the story) is that China is aging and has little safety net, so its middle age workers want to put money aside, to withdraw when they get old. So, those savers chose to invest in the US."
"From the US side, we are investing more than we are saving. China, in effect, wants to send us factories. But China doesn’t make portable factories. It’s great at making consumer goods. So China sends us consumer goods so that we can build our own factories without lowering consumption."
First, I'm finding it hard to believe that Chinese "middle age workers" are driving a significant portion of the investment in the US. Is this possibly true? Maybe he means that they put their yuan-denominated savings in local banks, and then the banks convert this to invest in US securities?
And I thought that economists usually distinguished between "saving" (capital preservation) and "investing" (capital growth) but at least in the first quote he seems to be using them as synonyms. But in the first sentence of the second quote, he is definitely distinguishing the two.
But what does "China, in effect, wants to send us factories" mean? Is he equating buying US stocks with "send us factories"? This would be a strange usage if the majority of the investment is in big existing tech companies selling software and services. Or is this just a confusing and complicated way of saying they "want" a strong dollar?
Can anyone help me parse these passages as they were intended?
I guess the answer is to diversify away from the USA trade? But then to what?
If does not sound like you are an active investor?
For "paper assets" I apply, and would recommend, lifetime investment in a global, well diversified portfolio. Ie. I adjust my risk tolerance with leverage and not by picking positions. There is no reason why commodities, metals, crypto should not be a part of your "paper asset" portfolio. (I call it paper assets as "stocks" seems to mean ownership in companies, which is a bit too narrow - there are ETFs for most of this stuff)
Housing is a personal question. As an investment it usually does not pay off and compares to stock picking / active trading.
... Did they? Which countries? What made you think that?
S&P500 is down about 9% YTD. FTSE250 (UK) down about 8% (but that's in pounds, and the pound is up 5% on the dollar). Shanghai Composite Index(China) is down 2.5%. Stoxx 600 (Eurozone, broadly) is down 1.5% YTD. The only big one where what you say _appears_ to be the case is the Nikkei 225 (Japan), which is down 15%... but remember that it's denominated in yen, and the dollar's down over 8% vs yen in the same time.
As far as I can see, the only way you could even pretend this was the case would be by ignoring the decline of the dollar, and even _if_ you ignore the decline of the dollar that only really works for Japan, not Europe or China.
Even if you make a good trade and your hedge protects you from a downturn, you've "broken the seal" on trading. Amateur traders almost always lose money in the long run, and once you make a bunch of money on your first trade it's hard to stop. Like the curse of beginners luck on slot machines.
Personally, I view my market investments as already fixed. I'd like a non-correlated asset, which means I'm looking at real estate. In my case, this goal isn't growth, inasmuch as defensive capital, or forced savings. I have the exposures you do, but added several, multi currency risks.
But that said, I don't think (again, sort of definitionally) there is a "best strategic hedge" in the face of a trade war. In trade wars everyone loses. You can't meaningfully bet against a shrinkage of the global economy in aggregate.
Well there are many ways to default, and many shades of default.
I can very well see the current administration argue that China, for whatever reason, owes the US, and thus should be compensated by confiscating bonds.
Gold is up 36%. Not that much.
Bitcoin is up 29%. Also not that much.
Is the uncertainty not yet priced in?
STOXX Europe 600 is down 2%. Shouldn't it increase in value? European companies will earn less in a recession, but I would think investors do not want to invest solely in bonds, gold and bitcoin. So I would expect a shift of a lot of capital into European equities once investors fully digest the new uncertainty in the US.
Is there any potential upside to US equities I am missing?
That's how inflation works.
If there is so much new potential downside and no upside - shouldn't equities trade at least 50% lower?
But in 2008 we saw the S&P-500 decline 50%. And the Nasdaq-100 30%.
In 2000 the S&P-500 and the Nasdaq-100 both declined 80%.
In dollar terms.
To me it seems that the 2000 dotcom decline and the 2008 financial crisis were once in a decade events and now we are witnessing a once in a lifetime event.
I definitely see where you're coming from expecting a bigger drop, I guess the key thing is that nobody yet is sure what the future of the latest pretty major anouncements looks like, we're currently just seeing bets.
It's possible that tariffs stay high, and US companies like Apple and Nike that depend on global supply chains either relocate, or become outcompeted by foreign companies. In that scenario, I think we'd see a major drop in indexes like the S&P-500, probably out doing the financial crisis in 2008.
It's also possible that the tariffs end up being an overblown bargaining chip, or get walked back as the current US administration realises they are unpopular and loses interest in them. In that case, you'd probably see the S&P take a hit because of the uncertainty, but it's not the same as US companies all finding their supply chains are unworkable.
So I guess the tldr is, shrug, who knows? We're just seeing the market guessing at the moment, the actual economic damage will happen over the next year as things progress more clearly.
This is not true unless you define 2008 as including 2007 and 2009 as well.
quantity has a quality of its own. Systems react to large changes. 30% drop without good reason for the drop, just because of a political will of small group (as even the wide field of the Trump supporters seem to be surprised by the scale of the action), is large. And given how fast it happened, the system is only starting to react. Even some Republicans started to move about stripping tariff power from President. The Republicans are going to be judged on the tariff effect in 1.5 years - too little time for any good, if any at all supposed to come, effects, more than enough for the bad ones. And Trump is wiggling and backtracking too. People have always been saying that the Big Money rule the politics. We seem to be testing that theory right now as the Big Money got seriously hit, and we're going to see how much power they have.
I also think that the uncertainty hasn’t been fully priced in yet. I think that traders are hoping that this all blows over.
There’s a bunch of locked in shares and some of the high holding investment companies don’t give a crap as long as their AUM rank stays the same. They make money on fees still.
On top of that to sell you need buyers. That is not a problem for low volume traders but big holders won’t be able to shift lots. So the big ETFs, while the market position would be better to sell now, they can’t.
Gold isn’t a good bet either. What’s the betting when people ask for it, the answer is no.
There is no upside, just a slow deflation which isn’t as bad as some sensationalists expect. That isn’t a reason to crow about the current state. It’s like saying you’re cured because the first round of chemo was successful.
There are certainly indications that the economy will contract (but by low single digits at worst.) 30% swings in stocks represent either highly inflated valuations before, or radically different outlooks after. That may be true for a stock here or there, but not the market as a whole.
The US bond market is a more interesting signal. That will affect future-debt cost, and that significantly moves the needle.
Frankly there's not much gleaned from stock prices over a short term
Put another way, your strategy completely works because stocks (as a market) trend upward. You'd want to better define "above" and "below" (because, transaction costs) and you'd also want to consider the period (100 days).
It is so frustrating explaining to people that for the ordinary folks who only own one home or even a dozen homes, it is NOT a good thing that home values are reliably trending up over time.
If you own thousands, sure. But everybody needs somewhere to live do if you own one home, you don't really come up on top.
Versus paying someone rent your whole life? You absolutely do.
We can't have both:
1. Cheap, affordable housing for everyone
2. Housing as a stable investment that keeps going up in value forever
One of these two has to give.
https://www.quickenloans.com/learn/homestead-exemption
Another problem is everyone wants to live in the same few places. Missouri's average house costs around $250, which is pretty reasonable, it's just a lot of people don't want to live in Missouri.
https://www.zillow.com/home-values/32/mo/
The housing market in Detroit is even cheaper: $76K for an average home, what a steal!
https://www.zillow.com/home-values/17762/detroit-mi/
If you think you're going to get cheap home prices in places Silicon Valley or NYC, it's just not going to happen because everyone wants to live there.
House prices being higher are good if you are planning to downgrade when the children leave the nest though. Or I guess if you reverse-mortgage it when you retire.
Most people spend the money they have in their bank account, which is terrible for their later years.
The key here is "in dollar terms". EURxUSD is up 10% year to date.
If you were a European investor buying the SP500, you would have lost 10% more on FX rate on top of your SP500 loss.
The uncertainty is in the global reserve currency that is used to price every transaction and structure terms of every contract.
The tariff panic is the straw that broke the back of an already over stressed, over leveraged system.
If equities are doing 'well' it's because some of the really strong companies may be able to persevere through all the chaos. I don't think most people will be able to predict which companies those will be.
With money itself broken I wouldn't want to hold onto too much physical cash or bonds. There will be many sovereign defaults (or money printing - which is just as much of a default). Gold and bitcoin will still exist after we get through this chaotic period and therefore many people are rotating into those assets.
The US is not Greece. Greece doesn’t control its own currency. The US does. It can always meet its debt requirements. It will never default.
Inflation is not a concern. Any kind of spending is inflationary.
> It will never default
It doesn't have to default, but there have been several near misses vs Republicans who want to deliberately default because they don't understand the implications.
Just as it's okay to print money corresponding to central bank gold reserves, so too it's okay to print money to pay for the construction of the gold mine. Either way currency holders have real gold on the other side of the ledger.
Taking this one step further, it should be okay to print money to fund any enterprise whose output can be traded into gold. For example if we printed money to build a silver mine then the silver could be traded for gold at some ratio, so the currency holders would be in a protected position.
In fact whether the enterprise produces silver, timber, cars or software doesn't really matter as long the output is tradable for gold; and produces enough "gold value" to justify the newly printed currency.
I think the economics on this actually checks out. Although politicians in the real world would realistically use money printing for consumption rather than production.
Any spending can be inflationary if it’s perceived to not be productive.
How that spending is financed is a footnote. Domestic debt works, foreign debt works, but the central bank can also purchase bonds and that works too (and is not inflationary). This is what Japan has been doing for decades to great success.
Not to say that the transition is easy, and if too much of the USs debt is owned by 3rd parties that means that there will be currency value shocks that have to be mitigated.
It does not mean that there will be a crash, or a recession, or a default.
Any money spent by the government in an economy is going to cause a redirection of resources from other actors to its own spending. In an economy running below its normal potential it makes it easy to justify because not much is getting done anyway, but if everyone is already doing a lot of stuff and there's not much spare capacity, then the government is effectively overriding the preferences of private citizens to its own ends to a much greater degree.
There's other arguments as well as to how efficiently the government tends to be at actually getting productive things done with its spending.
It's up to you whether this is good or not, but I'd argue it should not be our default position.
Is there a link/etc to the long form of his argument?
The mostly likely place is probably his autobiography “My Life and Work” where he talks about business/economic ideas quite a bit. Although it could also have been a newspaper article he wrote.
FWIW beware there’s a lot of serious antisemitism in that book. Which is a shame because it stains an otherwise fascinating book about early cars and 20th century business.
Also, other countries that printed away their debt hyperinflated their currencies, which is just as bad. Even the US can only sustain its level of anti-debt-printing because it's the global reserve currency, and to be the global reserve currency, it needs to have massive trade deficits. Do you see an incompatibility with the way the current regime thinks?
The whole issue is basically that, there's no guarantee the political will to never default currently exists, a classic confidence crisis is brewing.
If the US deliberately print money, it will immidiately realize kn the bond market and manifest as higher interest rates.
That is literally what the article explains.
At lest your misconception took a base less than a hundred words long
Every dollar printed is a dollar stolen from the collective citizenry of the USA. Of course it makes sense to add money supply commensurate with increased productivity, so that money doesn't deflate, but go beyond that and that is what your are doing.
Either way, someone has to pay the debt, even if you repudiate it.
"Do your homework" is not a useful comment, b/c you can easily find eco-chambers re-enforce any point you want on the internet. Instead of trying to engage in conversation, you're just pushing them further into their own ecochamber.
There’s no economic argument to be had with someone that says monetary policy is theft.
I'm not making a value statement as to whether this is good or bad, particularly at low levels, but the fact of the matter is that if you pay for debt with money printing your are in practice taking that value from people who hold cash-denominated (ie. cash, debt etc) non-inflation-protected assets.
The #1 difference, which at the very least has to be explained if you don’t even consider it relevant, is that Greece couldn’t print Euros whereas the U.S. does print dollars.
The fact that they could write the entire article without even mentioning this difference frankly makes it suspect to say the least.
But there are so many other issues.
- The author keeps treating currency as debt. And while it’s true at some level, currency is not debt. Because currency can be created. Borrowing in your own currency means you can simply print more currency if you need to.
This isn’t a good thing, because your currency would plummet in value and you wouldn’t be able to buy anything from abroad, but that’s what these tariffs are trying to do anyways! The tariffs are realizing the possible but not likely worst case scenario from the future now, in the most obnoxious way that alienates allies and makes the country immediately poorer for no good reason.
- China is buying assets. Trillions of dollars worth. And yet we don’t see those trillions of dollars worth of property and U.S. assets owned by the Chinese government? Why is that? Where is the massive purchase of U.S. assets by foreign governments the author threatens will happen?
There isn’t any such thing because the assets the Chinese are buying is the US dollar. This is where reserve currency status comes in. The author links to an article about the reserve currency supposedly not being all it’s cracked up to be (and one can have that discussion), but never even addresses what it means to be the reserve currency.
What it means is that perceived U.S. governmental and financial stability and the belief that the U.S. would honor its debts, makes the U.S. dollar valuable in and of itself.
China and India, under normal circumstances, are much more likely to trade with each other in USD than they are either in Rupees or Yuan. That’s what it means to be the reserve currency.
But neither of them can print USD so they have to buy USD, which has an intrinsic utility value in itself. This is what funds American “consumption” (we will get back to this as well). The assets China is buying is quite literally the U.S. dollar and not a future promise to buy assets in the future.
The problem, however, is that recent U.S. govt actions are destroying that trust and stability underlying the intrinsic value of the USD, at which point it will indeed become an IOU. But that is a decision the current U.S. government is making that no other country wants them to make. Destroying this will lead to a real destruction of trillions of dollars worth of actual U.S. assets, because that trust has real value.
- The author insists the U.S. is using the products flowing into it for “consumption” not “investment”. And yet the U.S. GDP, which represents productive output, keeps increasing faster than most other western and developed nations. How is all this consumption translating into actual productive growth? US productivity growth has also far outpaced other similar nations, even those that we supposedly consider “investment” nations such as Germany.
The reality is that the U.S. is just “consuming” is romantic nonsense which somehow ignores non physical production (ie services) even though arguably this is even more important today. Think about the latest exemption that the U.S. just applied on electronics. That’s over 20% of Chinese exports to the U.S. It basically falls under “consumption”, but smartphones and laptops are the basis of trillions of dollars of productive output. Without this “consumption” the US would have a GDP that would be a fraction of the size it is today.
But we can go even further. How about household appliances? The fact that nearly every US home has a dishwasher and washing machine and dryer means far more Americans are able to work further increasing productive US output than without this “consumption”.
The idea that “investment” is somehow superior to “consumption” is suspect to say the least. Both investment and consumption can be bad. The famous Alaskan “bridge to nowhere” was investment, but it was worth far less than a parent buying a cheap Chinese produced toy for their child, and the positive impact that had on the parents and kids.
The whole point of free market capitalism is that individuals can usually make better choices than an overbearing government for what is and isn’t a better use of their money.
This can be corrupted. So Americans spend way too much money on eating junk food, meat, dairy, consuming drugs, etc. but all of those are largely homegrown goods and a result of “investment” creating huge industries pushing these products on Americans.
There is bad consumption and bad investment and good consumption and good investment (defined purely in terms of productivity).
I can go on with other issues with the article, but this is already way too long, and I actually don’t disagree with the end. The U.S. government needs to reduce its massive deficits not because it means it will have to sell assets in the future. Unless this administration completely destroys the U.S. governments credibility this won’t be a problem. No, the problem is the distortionary effects of that deficit domestically. And we can see that with the concentration of wealth it’s leading to causing American industries to compete not by selling better products or being more productive, but by buying the U.S. government to cut their taxes, to redirect government spending towards themselves, and to keep out competitors.
Fortunately solving this problem will help with the deficit as well. Go back to the tax levels before the trillion dollar tax cuts on the wealthiest and to reduce the deficit with barely any impact on actual productive activity.
"But we can go even further. How about household appliances? The fact that nearly every US home has a dishwasher and washing machine and dryer means far more Americans are able to work further increasing productive US output than without this “consumption”."
So what is the US currently producing? Software yes... and then?*
I know you produce other things as well, but from a growth perspective.. Whats driving your GDP?
It seems to me like being the country that everyone else relies on to facilitate trade is an incredible thing that you'd never want to give up. And yet that's where we are, and what the disagreement is about. In the past few years there's been a lot of talk about BRICS and how it might undermine the reserve status of USD. Other countries appear to envy this position.
I've read some of the Hudson Bay Capital piece[0] on this, the article linked in the post describing why reserve status isn't great, I guess I'm just going to have to read it in full to get a better understanding of the other side.
[0]: https://www.hudsonbaycapital.com/documents/FG/hudsonbay/rese...