Investments

Trade Wars, Border Wars, and Other Distractions

By David Stockman  |  July 9, 2018

Just then they came in sight of thirty or forty windmills that rise from that plain. And no sooner did Don Quixote see them that he said to his squire, “Fortune is guiding our affairs better than we ourselves could have wished. Do you see over yonder, friend Sancho, thirty or forty hulking giants? I intend to do battle with them and slay them. With their spoils we shall begin to be rich for this is a righteous war and the removal of so foul a brood from off the face of the earth is a service God will bless.”

“What giants?” asked Sancho Panza.

“Those you see over there,” replied his master, “with their long arms. Some of them have arms well nigh two leagues in length.”

“Take care, sir,” cried Sancho. “Those over there are not giants but windmills. Those things that seem to be their arms are sails which, when they are whirled around by the wind, turn the millstone.”

– Miguel de Cervantes, Don Quixote, Part 1, Chapter VIII, “Of the valourous Don Quixote’s success in the dreadful and never before imagined Adventure of the Windmills, with other events worthy of happy record”

 

Here are the major factors that will cause the next crisis:

  • The Federal Reserve and monetary central planning
  • Exploding debt and perpetual deficits
  • The end of an old and weak recovery

Here are minor factors, which, in combination, will actually make the damage done to Main Street by the coming “yield shock” a lot worse:

  • An incipient trade war
  • A fetishistic border war

The more we talk about the major points, the better it is for Main Street.

The more we talk about the minor points, the better it is for Wall Street… and Imperial Washington… and the Warfare State… and the Welfare State.

For all his gifts of disruption, the Donald has latched onto simple-minded ideas about trade and immigration.

They’re both dead wrong.

His bluster here will, ultimately, do more harm than good to the very people who put the Donald in the White House.

They need him to train a tweetstorm or two on the Deep State.

In most of the world, tariffs aren’t even part of the conversation.

That’s because they average less than 4% of the value of goods traded globally.

And the outliers are about domestic politics.

The U.S. auto industry, for example, will defend its government’s 25% tariff on trucks as ferociously as Canada’s dairy industry defends its government’s 270% tariff on milk.

That’s even truer of the “non-tariff barriers” that form the real obstacles to global trade.

Every single country has its own “Buy America”-style preferences for government purchases and other large-scale procurement programs.

And local health and safety rules and regulations are often (heavily) biased against foreign suppliers.

Domestic cartels and interest groups will likely revert to virulent nationalism in response to “art of the deal” tactics they’ll inevitably see as provocations.

And they’re more likely to force their politicians into tit-for-tat escalation.

You don’t just start with a high number.

You can’t just claim the high ground.

You won’t just get a “win” by making your counterpart – whose exports at risk are much bigger than yours – meet you more than halfway.

In short, it’s far from a simple matter.

Meanwhile, the border between the U.S. and Mexico is not overrun by criminal hordes.

Rather than blight our horizons, immigrant populations light the beacon of future economic growth.

Indeed, we’re going to need all the help we can get to shoulder the massive Welfare State burden of 78 million Baby Boomers.

Yes, drug-runners and cartel operatives are coming across the southern border.

They’re part of a plague made in Imperial Washington.

Prohibition has done what it does: inflate prices; create massive cash flows; and finance violent, underground distribution systems.

We compound the problem by burning billions of dollars each year in a futile effort to cut off supply.

The fact is, immigrants as a group commit far lower rates of crime than do native-born Americans.

And the incarceration rate among “prime age” men is dramatically lower for immigrants than it is for native-born Americans.

That’s despite the fact that law enforcement focuses disproportionately on the former because of their lower social-economic status.

So, this border war is likely to destroy an actual positive.

History and data show that at least 50% of gross domestic product (GDP) growth is a function of increased labor hours.

The native-born U.S. labor force has peaked. And it will be shrinking for decades to come.

Without robust economic growth, the U.S. has no prayer of getting back to fiscal solvency.

Without a rapid increase in the immigrant labor force, even modest economic growth can’t happen.

That’s the sheer supply-side math of it.

Foreign trade and border security are problems.

A hollowed-out economy, a $20 trillion federal debt, and the Fed’s epochal pivot to “quantitative tightening” mark something bigger.

Indeed, the “yield shock” is a catastrophe.

The Donald is tilting at the wrong windmills.

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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.MORE FROM AUTHOR