Tariffs As Bargaining Chips

McAlvany Weekly Commentary

Trump Is Not In Yet & He's Already Being Blamed Pre-Election October Deficit Largest Ever Ukraine Strikes Into Russia With U.S. Approval & Hardware "I think without tariffs as negotiated and leveraged on other items we lose the power to encourage energy imports from the US. It's the art of the deal. Economists may worry about the inflationary impacts of tariffs, and to the degree that we see it—see that inflation—I think it's going to indicate that Trump didn't get what he wanted. What he really wants is to address the balance of payments deficits via exports, not via penalizing imports." —David McAlvany Kevin: Welcome to the McAlvany Weekly Commentary. I'm Kevin Orrick, along with David McAlvany. David, I did something sort of strange this weekend. I really focused on a year, 1818, because I had heard about the second US central bank tightening credit when inflation was running away. The American economy was booming at the time. People were taking huge debts and buying land, and they were exporting produce to Europe, which was war-torn because of the Napoleonic Wars. So America was booming, but the problem was the debt was creating a lot of growth that wasn't real, that could not be sustained, and it was creating inflation, to be honest with you. And so the head of the second US central bank—we've had three tries at the Federal Reserve in one way or another—went in and just basically tightened credit, and he said, "No more loans." And he called his debts in, and it created what I had not really paid much attention to. It created what they call the Panic of 1819, and a very, very severe depression after that. So we went from, it was called the Era of Good Feelings at the time, to actually one of the worst depressions America's ever been through. And I'm thinking right now, you had a call this morning with an international client who said, "You guys actually are looking like you have a pretty strong economy." But is that being run by a basis of something that can be sustained or is it just purely debt, Dave? David: Well, that's the key. I think when you look at GDP growth, the Atlanta Fed puts their GDPNow number together. It's been coming down a little bit, but it's still, say 2.5%, and the larger figure compiled is 2.8%. So GDP growth just shy of 3%. Now the question is, what would that number look like if you sucked out $2 trillion in deficit spending? Because government spending is a factor in GDP, and there's no distinguishing between debt spending—deficit spending—and just regular old spending. It's economic activity. So it does look pretty good. It reminds me of many years ago. I lived in Los Angeles, and I tell you what, at least 50% of the people who owned BMWs and Mercedes lived in really cheap apartments. They could not afford those cars, but it was what they had to impress the ladies, and they lived on a larger scale with perhaps an ulterior motive. They needed to prove something. And so you live beyond your means so that you can make an impression. Kevin: Well, and a lot of times you can afford something you can't afford for a little while just based on monthly payments. William McChesney Martin, who basically said it's okay to pull the punch bowl back before the party gets out of hand, and we really have left the punch bowl out continually, haven't we? David: Yeah, absolutely. So you've got today the run-up to unsustainable valuations in the stock market. These valuations, it's pretty easy to ignore them because mainly people are making money and they're playing the momentum game, which packs a lot of euphoria into a little bit of time. And we share a good deal in common with the late '20s euphoria, with the year 2000 as well, what you described—was that 1818, in the era of happy feelings? Kevin: Oh yeah, yeah, good feelings. David: Good feelings. Kevin: The Era of Good Feelings, but boy, you take the punch bowl away. But this is why what you brought up last week was so...