About That “Low Interest Man” in the White House…

By David Stockman  |  March 14, 2019

The kind of man who wants the government to adopt and enforce his ideas is always the kind of man whose ideas are idiotic.

– H.L. Mencken, Minority Report (1956)

The Donald is being taken to the cleaners by his top staffers – again. And, in his own blissfully ignorant way, he’s urging them on…

We’re talking today about the fake trade deal with China coming down the pike. This entire episode is already a comedy of errors and contradictions. But the heart of the matter is that the Great Disruptor does care about the real problem.

That’s America’s $400 billion trade deficit with China.

But his advisors don’t care about it. The “free traders” have their heads buried in the sand of abstract theory. The protectionists have their hands out to K Street’s lobbyists and carry water for Corporate America’s crybabies.

Let’s untangle this latest Trumpian Gong Show; let’s recall the shocking magnitude of the U.S.-China trade gap and how it developed.

Between 1993 and 2017, U.S. imports from China grew from $20 billion to $530 billion.

Bar graph showing both China imports from U.S. and U.S. imports from China from 1993-2017 in USD billions.

Nothing grows by 27 times in barely two decades in the natural order of markets. And it certainly doesn’t happen in a context in which the U.S. export side of the equation stands at a tiny 25% of imports.

There can be large trade imbalances between countries. “Comparative advantage” explains some, “specialization” explains others, and mercantilist trade practices explain still more such disparities.

But imbalances this freakishly large and persistent aren’t about economics and/or protectionism.

It’s not the product of bad trade deals. It’s not the result of some nefarious doings of the Chi-coms. It’s not the invisible hand of the free market.

It is the bastard stepchild of bad money.

The Federal Reserve’s pro-inflation policies are at the root of the Donald’s misbegotten Trade War, whether he knows it or not.

Here’s how it breaks down…

Fully loaded manufacturing wage costs (including payroll taxes, health insurance, pensions and other fringes) were about $12 per hour back in 1989. They exceed $30 per hour now.

Chinese manufacturing wages in U.S. dollar equivalents have risen from under $1 per hour to around $5 per hour during the same 30-year period.

So, the absolute gap has widened, from $10 per hour in the early 1990s to $25 or more today. This widening of the U.S. dollar cost gap accounts for our massive trade deficit with China.

Fed-sponsored inflation of domestic wages did exactly nothing for American workers.

Since 1979, when the U.S. trade balance plunged into persistent and growing deficit, average hourly wages of production workers have risen 275% in nominal terms.

But inflation-adjusted wages are 5% below where they were 40 years ago.

Line graph of Median usual weekly real earnings vs. average hourly earnings.

[Click to Enlarge]

Under a regime of sound money, the gap you see in the chart above would never have happened. Faced with ballooning trade deficits after the late 1980s, when the wage gap was $12 versus $1 per hour, the U.S. price level would have deflated.

That’s because there would have been a drain on gold and/or other foreign reserves. That, in turn, would have triggered credit contraction. And, then, we’d have seen a downward adjustment of domestic prices, costs, and wages.

We would have seen a narrowing of the U.S.-China wage gap during the last 30 years, not a destructive explosion of it…

The deflationary path not taken explains how U.S. imports from China grew from $20 billion in 1993 to $530 billion.

But the “low interest man” in the White House tweet-bullies the Eccles Building for more easy money. And he’s bamboozled by Swamp creature after Swamp creature…

He’s embraced a made-in-Imperial-Washington Trade Nanny solution. It won’t remotely close the trade gap. But it will open an unending managed Trade War with the Middle Kingdom and countless others.

It’s Time to Get Real

Desperate times call for… “common sense” measures.

And these are desperate times… Markets are corrupted by monetary central planning. They’re confused. And the road back is going to be treacherous.

We’re looking at a major re-pricing for all financial assets. And thousand-point intraday or day-to-day swings are part of that equation. Those can be frightening… for “buy and hold” investors.

I have a different approach, one that combines strategy and tactics into a plan flexible enough for you to survive and thrive amid the coming chaos. It’s called “The Stockman Model.”

All we’re after is a little stability, perhaps a chance to pocket a windfall when opportunity presents…

To common sense,

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David Stockman

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David Stockman

David Stockman is the ultimate Washington insider turned iconoclast. He began his career in Washington as a young man and quickly rose through the ranks of the Republican Party to become the Director of the Office of Management and Budget under President Ronald Reagan. After leaving the White House, Stockman had a 20-year career on Wall Street.MORE FROM AUTHOR