Tag Archives: economics

Bargaining Chips

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The People’s Republic of China is avidly intent on keeping its bargaining chips, of which two truly important ones are its TikTok app and its port businesses at each end of the Panama Canal.

What gets lost, even ignored, in this, though, is that bargaining chips have only the value the bargainee assigns to them, not what the holder of the chips claims to be their value. Not a red sou more than that.

TikTok, for instance, can be viewed as utterly without value as a chip to be played: current US law requires it to be shut down entirely and banned from the US unless and until it is sold in toto to an entity not under the control of the PRC. The only thing standing in the way of that way is the law’s provision that the deadline for sale can be moved back if our Federal government deems negotiations for the sale to be making sufficient progress. That’s where things stand under President Donald Trump, and that confers exactly zero value to the app as a PRC chip.

So it is, nearly, with those PRC businesses that are Panama Canal bookends. A BlackRock-led group has concluded a deal to purchase those two port businesses along with a number of others around the world from CK Hutchison Holdings, a PRC-domiciled (Hong Kong) company. The PRC is actively interfering to delay and potentially prevent that deal from coming to fruition. The appropriate response here is for the US to restrict, even block as far as may be, the ability of those two ports to get any business from the US or any other nations. That would deny those ports any value as PRC chips.

A Thought on Trade Deficits

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Set off by a post on Shrewd’m, which contains a plethora of useful discussion boards, including mechanical investing conversations.

Americans benefit from importing cheaper and/or better goods, which enhance our quality of life in myriad ways. Moreover, trade is part of a circular movement not only of goods but also of money. The US trade deficit of $918.4 billion last year was the mirror image of a $918.4 billion capital surplus, or infusion from overseas.
Sooner or later, all of the net $918.4 billion that Americans spent on foreign goods was invested in American capital assets such as stocks, real estate, bonds, or short-term assets such as Treasury bills.

That’s one of the problems with running a trade deficit, or “investment surplus,” which the poster suggested as an alternative term. It’s certainly true that in Ricardian fashion, truly free trade makes everyone financially more prosperous by letting those nations that do a few things better than others get the production trade and sell their goods to other nations in return for money or products that those other nations do better than anyone else. Financial prosperity is very good for all of us.

However, that sword has another edge, too. [A]ll of the net $918.4 billion that Americans spent…was invested in American capital assets such as stocks, real estate, bonds, or short-term assets such as Treasury bills. Not on manufacturing or on producing and processing the raw materials necessary for manufacturing in general. Especially not on manufacturing or on producing and processing the raw materials each category of which is a Critical Item for our defense establishment, our national security—our ability to secure ourselves from being dictated to by militarily superior enemies.

There were massive job losses in those manufacturing and raw materials production and processing industries, too, and those people are worse off for it, regardless of the injunction from some that these folks should learn to code.

Worse, those hard goods/raw materials producing companies have been closed long enough that we’ve lost the factories, mining, and personnel expertise central to those Items. Now, we’re dependent on other nations—including enemy nations—for raw materials like the rare earths that are specific Critical Items for our computers, communications, and weapons systems we need to maintain our freedom of action. We’re dependent on other nations—including enemy nations—for processing those rare earths and other materials (like graphite, another Critical Item) that we already produce some of for ourselves.

Our dependency on enemy nations is demonstrated by the People’s Republic of China’s restricting shipping to us rare earths and processed rare earths, both of which the PRC produces in ample quantities in response to the tariffs President Donald Trump (R) has applied to the PRC. Had we been producing and processing our own—and which we have ample quantities domestically but have chosen to leave them unmined and so have no processing capability, also—the PRC’s move would have been toothless. I’ve written about a similar situation a while ago.

Now a regionally militarily superior PRC is pressing its threats against the Republic of China and is in a position to cut the sea lines of commerce on which the Republic of Korea and Japan are utterly dependent and through which trillions of dollars of trade pass enroute to our own west coast. And we’ll soon—that cutoff of militarily critical rare earths—be helpless to stop them.

Fiscal prosperity is a Critical Item for our nation, and Ricardo was right on how to achieve that. Trade deficits, per se, are nothing about which to worry. But more so is military capability, without which we have no freedom of action and so no prosperity or even freedom. We need to redevelop our own manufacturing and raw material production and processing capability, even if we continue to source much of those outputs from overseas, and even if it’s more expensive to do so than getting them all from overseas.

The higher cost for such a domestic core production capability is part of the cost of our national freedom, and it’s far less than the cost of having our activities dictated to us by militarily superior enemies.

This would be a Mistake

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President Donald Trump (R) laid significant tariffs and tariff rates on the People’s Republic of China. The PRC’s President Xi Jinping responded with matching tariff rates, but with escalatory moves added:

…restricted exports of certain rare-earth minerals, added US companies to trade blacklists, and aimed an antitrust probe at the China operations of US chemicals and materials company DuPont.

Then the WSJ‘s news writer posited this:

What lies ahead is likely to be a cycle of tit-for-tat retaliation, making it hard to even start negotiations in the near term.

If the Trump’s purpose with the tariffs is to (re)balance trade with the PRC’s tariffs, that would be one thing—his reciprocal tariff regime. However, if his purpose is to persuade the PRC to change its overall international trade behavior, particular vis-à-vis the US, then tit-for-tat would be a foolish mistake.

Tit-for-tat only gives the other side time to adapt and maintain. What’s necessary, if Trump’s move is persuasion rather than rebalancing, is to escalate tariffs (and other economic moves) higher and faster than the PRC can respond, and that’s what Xi will attempt as demonstrated by his opening response. Simply matching Xi—as tit-for-tat does generally—is surrender to Xi the initiative in this extension of the PRC’s long-running trade war, with its cyber aspects as well, against us.

The Market Lost Money

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Really? How much did “the market” lose, really? Economics news writers, who really should know better, claim

The stock market went off a cliff last week after President Trump announced the highest tariffs in more than a century, vaporizing more than $6 trillion of wealth in two days.

No, $6 trillion in wealth was not vaporized, not even lost. These are purely paper losses, not real losses, and the only ones who were hurt financially by the decline in monopoly money value are those who bought stocks on margin—borrowed money from their brokers to buy stock shares. Those folks are subject to margin calls and must reimburse their brokers with real dollars, or with remaining stock shares which the broker will sell for real money, even at the currently depressed rates.

No one has lost real money in the precipitous drop unless they sold shares for actual money in the throes of last week’s hard drop. These are, to be sure, emotionally trying times, and real losses can still occur, but so far only for those who use their stock shares as collateral for this or that purpose.

Later on, were the economy to start behaving in the same way as the market and itself start to stutter, real losses can occur, but from the market’s perspective, the losses will be from “forced” sale of some fraction of an individual’s remaining stock shares at depressed prices in order to raise real cash with which to make good on real obligations like rent/mortgage, food, energy, and so on.

In that regard, it’s important to keep in mind that the market leads, predicts the future of, the real economy—where real gains and losses of real, spendable money occur—by highly variable amounts ranging from a few months to lots of months into a couple of years, and occasionally the market is plain wrong. The latest example of this occurred early in ex-President Joe Biden’s (D) term when the market priced in a coming recession. That recession never occurred.

Today’s underlying economy remains strong, albeit the figures are prior to the new tariff regime, which won’t be fully laid on for another week or two. The economics news writers do recognize this much.

Whether the real economy will follow is impossible to know. But the risks are tilting in that direction.

The risks are real, but the economy so far has this:

The available evidence suggests US economic fundamentals remained strong through March. Job growth accelerated, with nonfarm payrolls rising 228,000, unemployment low at 4.2%, wages rising at a healthy clip, and layoffs rare.

Couple things on that. It’s private—real—economy layoffs that are rare. Layoffs from Federal government employment are rising, as are the numbers of those employees who are accepting the enormously generous buyout/severance packages in return for their resignations. But reducing the physical size of the Federal government is on the whole good for our economy.

The other is that the tariffs may well lead to restructuring of our economy with associated job losses and alternative job creations, but those effects will take months to begin to have effect and more months to work through.

What’s happening currently is the development of a buying opportunity, and a recession only broadens that buying opportunity. The economics news writers cited a JPMorgan research piece titled There Will Be Blood which raised JPMorgan’s assessment of a global recession to 60%. That’s simply a repeat of Baron Nathan Rothschild’s advice to buy when there’s blood in the streets, even if the blood is your own.

Or the disruption might cause permanent losses. That’s the real risk, not a risk of a recession, which is a fact of free market economies.

Free market economies have long periods of prosperity and boom interspersed with recessions which do not fully undo the prosperity, so the economy trends upward over the longer run. The alternative of a government directed economy, though, is permanent recession relative to free markets.

In the end, tariffs don’t undermine free market economies so much as they undermine a globalized “free market” by segmenting the globe back into national (or regional) markets. Whether that’s a good or bad outcome is for a separate discussion.

A Cost of the Left’s Obstructionism

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This one is our national debt and the interest due on it.

• the average interest rate on debt will exceed the economic growth rate by 2045, sparking the beginning of a debt spiral
• Federal debt held by the public will rise from 100% of GDP in FY2025 to 156% of GDP by 2055
• annual deficits will grow from 6.2% of GDP in 2025 to 7.3% of GDP by 2055

The obstructionism of the Left and their Progressive-Democratic Party isn’t even centered on principle, only on anti-Trumpism and anti-Republicanism and anti-Conservatism.

Potentiating the economic disaster that our debt and associated interest payments portend, those things would accumulate into the loss of the US dollar as the world’s reserve currency. That, in turn, would feed back negatively into our economy, forcing it onto the vagaries of foreign currencies and currency exchange rates.

This is why the DOGE-led spending cuts must be enacted into law by Congress. This is what the Left’s and their Progressive-Democratic Party’s obstructionism will cost us.