Conspicuous Consumption

The term "conspicuous consumption" was coined by sociologist Thorstein Veblen in his 1899 book, "The Theory of the Leisure Class".  Veblen used the concept to describe the practice of purchasing and displaying expensive goods and services primarily to signal one's wealth and social status; rather than for their practical utility.

Consumer spending accounts for roughly 68-70% of the U.S. Gross Domestic Product (GDP). This means that consumer spending is the largest component of the U.S. economy, and a major driver of economic growth.  This is known as personal consumption expenditures (PCE).  Specifically, services make up roughly two-thirds of PCE making them the primary contributor to consumer spending.  While the exact percentage changes from year-to-year - as the largest share of consumer spending this has not changed.  As for the rest of GDP, manufacturing, agriculture, government spending, net exports and investment account for the balance.

Consumption has begun to slow this year.  Adjusted for inflation in 2024 consumer spending grew almost 3%.  That fell to 1.4% in the second quarter of this year and is expected to remain tepid.  Time will tell. 

If you're wondering where I'm going with this, according to Moody's the top 10% of earners now account for about half of consumer spending.  That happens to be up from 36% three decades ago.  This is rather rarified atmosphere as these are consumers with household incomes north of $250,000 a year.  They're doing just fine.   

The bottom 80 percent of earners have maxed-out their consumption with their spending; now basically tracking with inflation. 

This may have implications for both the near and long-term domestic economy, social policy and a whole lot more.  Exactly how; we'll have to wait, see and ponder.  For all the chatter about import taxes (tariffs) and their outsized impact (positive and negative) on manufacturing, that sector of the economy is playing second fiddle.  I'm not saying it's unimportant; it is significant as it creates $2.69 of economic activity for every $1.00 spent within that sector.  But it's direct contribution to GDP is only 11%.

(Source: The Washington Post/Moody’s Analytics).

Looking at the graph, on the chance you are unfamiliar with the term; here's the definition of Revenge Spending.       

Fun Fact:  Import duties (the Trump tariffs) apply only to imported goods; not services. Outsourced services do not cross borders in a shipping container or face customs inspections.  So, whether you're tapping into global talent for customer experience or partnering with an expert team for end-to-end loan servicing; no import tax.

The Math Doesn't Work

 We're going to make a lot of money and we're going to cut taxes for the people of this country.  It will take a little while before we do that, but we're going to be cutting taxes and it's possible we'll do a complete tax cut because I think the tariffs will be enough to cut all of the income tax. 

- President Trump, April 27, 2025  

The line from the White House Information Minister, various Cabinet Secretaries and the President himself is that we are awash in tariff revenue wealth.  Millions, billions and trillions of dollars; all willingly paid by other countries.  The president has even floated the notion about creating an External Revenue Service to collect the tariffs and replacing the Internal Revenue Service in collecting income taxes.

We were at our richest from 1870 to 1913.  That's when we were a tariff country.  Perhaps the president has drawn his inspiration from 19th century America immediately before the establishment of the federal income tax.

Of course if you know your American history when tariffs were the primary source of federal revenue government was much smaller; federal spending was barely two percent of Gross Domestic Product (GDP).   Nowadays, federal spending is north of 23% of GDP.  It would be impossible to rely on tariffs to meet current spending levels.  Heck, we're already running ginormous annual deficits that are slated to increase further with the passage of recent legislation. 

Tariffs (sometimes called a duty) are a tax imposed on imported goods and services.  The tariff is not paid by other countries; the US import company is required to pay the tax.  This makes imported goods more expensive to US companies and consumers. Consequently, domestic producers may benefit from reduced competition potentially protecting domestic jobs and industries.  Decreased competition may also result in domestic producers raising their prices as we have seen in the steel industry. 

In 2024 individual income taxes generated roughly $2.4 trillion in revenue to the government representing nearly half of all federal revenue.  Because tariffs apply to the narrow sector of imported goods they would likely generate only a fraction of that amount resulting in ballooning deficits.

Furthermore, because tariffs apply to imports (as opposed to broad-based income) this would result in a disproportionate economic impacts with industries relying on imported materials or components being hit the hardest.  

Tariffs also increase costs to domestic companies and consumers. 

Conversely, if tariffs replaced the income tax your wages/salary would theoretically become tax-free.  This shift would allow you to keep more of what you make.  Sound appealing?  As a trade policy tool tariffs are probably more effective than as a revenue generator.  

The economic reality is the challenge of replacing income tax revenues with tariffs would require import taxes on a scale of enormity so high as to become disruptive to consumers, business, supply chains, trade relationships and the US dollar.  They won't fix our country's  persistent problem with annual deficits or balance the budget.  The notion of issuing everyone a government check and calling it a tariff rebate is absurd.  Tax the citizenry with import duties and then return a small piece and call it a tariff dividend?  PT Barnum had a term for this so if you have a rational explanation I want to hear it.

Meanwhile, the best summation of this challenge can be found over here at the Tax Foundation.  It's a short read of only a few minutes and worth your while.  

Finally, revenues from import taxes have been growing for months, and the latest data shows that the U.S. has collected $130 billion from them as of August 15.  That is $73.8 billion, or 131.2% more, than the same time last year. But that’s still far short of the $2.4 trillion federal income taxes brought in last year.  The running totals are updated daily and can be found here at the Trump Tariff Income Tracker.  You might want to bookmark this web page so you can follow along.

Bottom line?  The math doesn't work.....

 

Tariff Impacts Auto Industry

Import duties subtracted $800 million from Ford’s profit in the second quarter, leading to a slight loss for the period. For the whole year, Ford estimated that tariffs would cost the company $2 billion.

General Motors, the largest U.S. carmaker, said last month that tariffs would cost the company as much as $5 billion for the full year, although it hoped to offset about a third of that amount by cutting costs and moving some manufacturing to the United States. Still, the company expects retail prices to rise 1 percent or less this year, Paul Jacobson, the chief financial officer of G.M., told investors last month.

Toyota, which makes many cars in the United States but also imports them from Japan, Mexico and Canada, said on Thursday that tariffs would cost it $9.5 billion. A day earlier, Honda pegged its tariff cost at $3 billion.

No one has adequately explained why the tariff tax policy is even minimally beneficial or necessary in replacing the proven track record of free trade of the last 75 years. 

Anyway, import taxes are causing billions of dollars of losses.  According to Cox Automotive, as of mid-July carmakers had 82 days of supply in the United States, roughly enough to last until the beginning of October. That gives you a rough idea of how long they can avoid raising prices. 

You can read more about this here - no paywall either.  You're welcome..... 

 

Picking Winners and Losers - Part 2

Who’s winning?

Domestic US automobile manufacturers are subject to a 50% tariff on steel - resulting in the highest steel prices on the planet, a 25% tariff on parts imported from Mexico and Canada along with a 65%+ tariff on Chinese LCDs and electronics. 

The European Union can manufacture cars with zero steel tariffs, 4% Chinese tariffs, and zero tariffs on imports from Mexico and Canada. 

EU auto exports to the US are subject to a 15% tariff.

The Art of the Deal.......

Picking Winners and Losers

I'm feeling pretty good about front-running the most serious impact of tariffs on our household economics.   New appliances, vehicles, water heater, laptop, tablet, iPhone, including locking-down the pricing of a steel roof on the house eighteen months ago.  

I know I sound like a broken record but contrary to what White House Press Secretary Karoline Leavitt or Commerce Secretary Howard Lutnick will tell you about other countries paying the tariffs they're not playing it straight.  Tariffs (sometimes called a duty) are a tax on imports.  Tariffs are not paid by the other countries.  They are paid by the US importer.  The importer might "eat" some of the tax but because they have to turn a profit they generally pass it on to the purchaser of the imported goods.  

Tariffs are a tax (just like a sales tax) paid by US companies and consumers. 

Which leads me to this tidbit.

American-made steel is now the most expensive steel on the planet.

Only about twenty percent of the steel sold domestically is imported.  The steel tariffs, previously at 25%, were raised last month to 50%.  Consequently, steel imports became more expensive.  Naturally, imported steel has declined in volume allowing American companies to increase their market share and raise prices to match that of imported steel.

Domestic trade policy has created an opportunistic landscape that allows domestic producers to simply charge more.  Why, you ask?  

Because they can.  

Scott Lincicome, vice president for trade policy at the Cato Institute said it well - It's just pure protectionism and cronyism. 

Heretofore, president Trump has not imposed tariffs on imports of raw materials such as iron ore, pig iron and other products that are precursors to steel production.  Nevertheless, that could change if he imposes a threatened fifty percent tariff on all imports from Brazil.

In a fit of pique Trump has accused Brazilian leadership of conducting a witch hunt against his pal former far-right President Jair Bolsonaro; menacing the South American country with a retaliatory tariff over internal politics.  This personal retribution against Brazil means American consumers would pay more for coffee, orange juice, paper and pulp and steel precursors sold to American mills. 

White House trade policy is bananas.  Does any of this come as a surprise to you?

This is called picking winners and losers.  And it seems like all of my previously, self-identified libertarian friends have gone silent.

Meanwhile, I'm having a tough time figuring-out how any of this improves your and my prosperity and general lot in life.  And maybe make the world a safer place.

Chart Of The Day

Inflation accelerated in June as President Trump’s tariffs started to leave a bigger imprint on the economy, keeping the Federal Reserve on track to hold interest rates steady when policymakers next meet this month.

The Consumer Price Index rose 2.7 percent from a year ago, the swiftest pace since February, data released by the Bureau of Labor Statistics today. That is slightly higher than expected and is up from an annual pace of 2.4 percent in May.

“Core” inflation, which strips out volatile food and energy prices and is seen as a reliable gauge for underlying price pressures, also shifted higher. Those prices were up 2.9 percent from the same time last year.

Over the course of the month, prices rose 0.3 percent, a notable pickup from a 0.1 percent increase in May. Core prices rose 0.2 percent.

The absence of tariff-related inflation has been a point of pride for the White House and has provided cover for Trump’s critique of Fed Chairman Powell’s approach to monetary policy. If June’s CPI contains evidence that prices are in fact climbing due to import duties, it would weaken the case Trump and his allies have been building against Powell and his wait-and-see approach.

Most economists still expect inflation to rise over the course of the summer.  And with a barrage of new, so-called reciprocal levies and an eye-popping 50 percent tariff on copper set to take effect on August 1, any hint of tariff-related inflation could portend additional price surges later this year. The Yale Budget Lab on Monday estimated that consumers face an overall effective tariff rate of 20.6 percent — the highest since 1910.  In dollar terms this is the equivalent of an average per household income loss of $2,800.

“This tariff policy is going to result in higher prices and fewer goods available for people to buy,” said Norbert Michel, the vice president and director of the Cato Institute’s Center for Monetary and Financial Alternatives.  “That's a supply shock. It’s not a win. And it's not something that monetary policy is any good at dealing with.”
 

Practical Considerations Of Trade Taxes - Updated With New Developments

I've been casting-about for someone; anyone, who can explain to me how the taxation of imported goods will improve your and my prosperity and general lot in life.  If the world becomes a safer place, bonus.  So, if you're reading this and have a simple elucidation that connects the economic dots you know where to find me.  Meanwhile, while the president has promised trillions of dollars of foreign investment in the US I haven't seen anything in particular happening in Wisconsin.  

February of this year Apple announced a $500 billion effort to build a new factory in Texas and expand manufacturing in several other states.  But according to the Wall Street Journal that plan has been in the works since the Biden era.

Pharmaceutical giant - Roche - pledged $50 billion in domestic expansion; then walked-back the pledge following the president's executive order limiting drug prices.  

BMW announced that it was considering additional shifts for US factories.  Honda announced they were considering shifting Ontario production of their popular CRV to Indiana.  Last month, Stellantis commenced a planned retooling of a previously mothballed plant in Illinois; the earliest opening date is the end of 2027.  It takes awhile people.

Sure, the Trump Administration is rather loosey-goosey in claiming credit for stuff that has been in the pipeline for years, conflated or planned changes regardless of tariff policy.  I don't have a problem with that.  Politicians predictably claim credit for unearned stuff all day long.  The reality is that reshoring of manufacturing and assembly operations along with their complex supply lines takes 3 to 6 years to bring to fruition; about the time Trump is preparing to leave office in his Qatari airplane and long after the mid-term elections.  I wish I could be a fly on the wall of America's corporate boardrooms.  Do you suppose I'd be witness to talk about waiting this guy out?  I wonder.

The practical effect of the on-again, off-again, inconsistent tariff and trade policy along with a global trade war has been a freezing of business investment activity.  Last Tuesday I listened to Wisconsin Senator Ron Johnson on the Julie Mason Sirius XM POTUS channel as he shared his misgivings over trade taxes and impacts on Wisconsin business.  Coming from a private-sector guy his musings over business investment grinding to a halt carry some weight.  Business wants and needs predictability and certainty before making outsized investment commitments.  Complicating this are recent retailer announcements of price increases as Trump's taxes erode already slim profit margins.

Some have speculated that a case that heard oral arguments just last week in the US Court of International Trade could end all of this nonsense if this obscure federal court grants small business plaintiffs' request for an emergency injunction upending Trump's policy ambitions.  Who knows where this shall go.  Time will tell. 

So, we'll have to wait this out and see what develops.  We're already half-way into a 90 day pause with many trade taxes already in place and in full force and effect.  What happens after the 90 day pause expires?  

Your guess is as good as mine. 

What I know for sure is that corporate America is taking a long pause to assess the matter and during this period of wait and see not much is happening.  And who can blame them.  Last week the president got up on the wrong side of the bed and in a fit of pique threatened the European Union with a 50% tax on their exports to the US.  And In a new first; he petulantly singled-out  specific companies (Apple and Samsung) with an import tax of 25% if they didn't begin moving their assembly operations to the US before the end of June. This is absolute bananas.  

I predict a summer of interesting economic outcomes.  And maybe a surprise or two*.

Meanwhile, unlike deep pocket Apple and Samsung, small business owners are taking it on the chin.  Beth Benike, an Army vet and owner of the Minnesota based company Busy Baby is just one of the millions of small business owners being impacted by President Trump’s up-and-down, back-and-forth, red light-green light and increasingly petty and impulsive import and curiously personal tax policies. Like I said - bananas.

Small businesses must now contend with the weight of burdensome new costs. “I don’t know how to operate in this new world,” Benike says. Even Trump’s lowered China tariff of “30% is still a lot.” What’s more, she says, “we don’t know what happens after 90 days” when Trump’s pause expires. In this uncertain landscape, Benike asks, “how do you plan anything as a business?”

 

 

*Kentucky Senator Rand Paul had an interesting take on all of this.  In a recent radio interview he scornfully suggested that Trump will ultimately cave and allow an automobile to be classified as "assembled in America" when it's brought here to have the wheels bolted-on.  

 

True Story.

 

Stay-tuned....... 

Edit to add:  Yesterday the US Court of International Trade ruled that Trump does not have the authority to impose sweeping tariffs under 1970s-era emergency legislation.  In fact, the judges said an injunction wasn't enough they issued a summary judgement invalidating and blocking almost all of Trump's trade levies to date.  Of course, the White House announced today they will appeal the judgement so we're back to more chaos.

 

Initial thoughts include the following:  Heretofore, Trump has only cut one deal so far - with the United Kingdom.  How does this complicate ongoing negotiations with anyone else going forward?  Does this offer Trump an off ramp for what many consider an ill-advised and poorly executed trade policy?  If things go sideways on appeal for Trump will SCOTUS agree to hear the case?  What if  SCOTUS does not and allows an adverse Trump ruling stand?

 

Stay-tuned.....  

Trade Tax Increases In The News

Following the announcement of price increases from Walmart over the weekend tariffs are, at least for the moment, back in the news.

President Trump says cars made in the U.S. will face “absolutely no tariff,” but it’s not so simple. No car is built from 100% U.S. parts—not even the U.S.-built Ford F-150 pickup truck. Major components of the car are from Mexico, Canada and South Korea, which could all be a part of the auto tariffs.

Wall Street Journal takes a look inside a Ford F-150 to better understand Trump’s slew of new tariffs and why automakers are warning it could backfire.

Clueless and Feckless

The U.S. trade deficit widened to a record $140.5 billion in March as exports edged up slightly while imports surged by $17.8 billion. This was much larger than the consensus expected $137.2 billion.  

Just as in January, the jump in imports was driven by businesses rushing to front-run President Trump’s new tariffs. Pharmaceuticals led the way soaring $20.9 billion in a single month. 

Because imports subtract from GDP in the calculation process this surge became a major drag on growth. Net trade alone shaved roughly five percentage points off Q1’s growth rate, pulling real GDP down at a 0.3% annualized pace. With tariff pre-buying likely peaking in March, imports should slow and become a positive for real GDP in Q2.  These numbers are all subject to revision and perhaps the surge in imports was a one-off event.  Time will tell.

Meanwhile and on a related note, we're well-aware that the president's Big Beautiful Bill will include large tax cuts. Large enough so as to add as much a $7 trillion to our burgeoning national debt over the next decade.

Ouch.

Trade deficits and budget deficits frequently move in the same direction.  Consequently, as the president disrupts and breaks the global economy with his feckless trade taxes on imports the Big Beautiful Bill may very well compound it.

As a general rule a growing budget deficit will result in our government borrowing more money.  Which can drive-up interest rates. Naturally, higher interest rates result in a stronger dollar.  A stronger dollar makes our exports more expensive to overseas consumers.  Of course, a strong dollar makes our travel abroad more affordable and other country's stuff more affordable to us; but there's no getting around the matter of that the stuff we make here and sell abroad may become costlier in the the global marketplace.

Presently our our deficit and debt are growing as fast and as high as a wartime economy.  And in case you missed it we're not at war.  And while Elon Musk's DOGE has promised us $2 trillion dollars in savings; after all of the sound and fury DOGE suggests the savings are likely around $160 billion.  Even if that figure is close to correct, it hasn't resulting in any meaningful decline in government spending.  

Double ouch.

So here we are.  We have a president somehow fixated-upon trade deficits when in-fact trade deficits in and of themselves are not necessarily a bad thing.  Who cares if we have a trade deficit with a poor island nation like Madagascar.  We purchase their vanilla beans because we have a sweet tooth and they earn dollars to make ends meet. They're unlikely to ever become large buyers of Boeing aircraft or Ford F-150 pick-up trucks. They are not picking on us; who gives a rip?

Perhaps all of our trade deficits will go away, tariff revenue will make us wealthy beyond our means, the looming threat of recession will dissipate overnight and inflation will magically evaporate.  Ask your own financial advisor what they think.

Meanwhile, I think that President Trump is clueless as to how trade deficits operate.  The application of across the board tariffs as a solution is feckless.  Someone might want to whisper in POTUS' ear that his approach might just become another unforced error.  

Recession warnings are everywhere, except in the data.  Are we headed for a recession?  Economists are looking everywhere for signs. 

Only time will tell how this all plays-out.  Speaking for myself, and in my own enlightened self-interests, I sure hope for a soft landing, no further self-inflicted economic damage and no recession.....

Port of Vancouver

 

Recession Watch

On Wednesday we learned that in the first quarter of 2025 the U.S. economy contracted by 0.3% on an annualized basis marking the first decline in nearly three years.

 

This downturn was primarily driven by a record trade deficit, as businesses front loaded imports ahead of new tariffs implemented by President Trump, which subtracted 4.8 percentage points from GDP. Consumer spending slowed to a 1.8% increase, influenced by factors such as harsh winter weather and post-holiday spending lulls.

 

While business investment remained strong due to pre-tariff stockpiling, government spending declined amid federal budget cuts and layoffs. Inflation rose to 3.6%, raising concerns about potential stagflation.

 

The Federal Reserve is expected to hold interest rates steady to balance inflation control with slowing growth. Analysts warn of a higher risk of recession if trade policies remain unchanged and domestic activity weakens.

 

A few thoughts:

• There will be revisions to the GDP numbers.

• The US economy is both dynamic and resilient.  Universally-accepted evidence of a recession is two consecutive quarters of negative growth.

• We have yet to feel the full impact of the White House tax increases on trade.

This graph is a screenshot from a Wednesday morning podcast. The precipitous drop in container traffic implies we’ll feel supply chain disruptions beginning sometime in June.

 

 

Traffic Jam Follow-up

Here's a follow-up on yesterday morning's post on the impact of White House trade taxes on the North American trucking sector.

Unsatisfied with disrupting and breaking the over the road freight business President Donald Trump signed an executive order Monday requiring truck drivers to pass English literacy tests as a "non-negotiable safety requirement" amid mounting communication problems between truckers and federal and local officials.

I'm sure this tough, new, executive order has been lauded in Trump World; except for the fact that federal regulations already require fluency in English to drive a commercial motor vehicle (CMV) in the United States.

According to 49 CFR § 391.11(b)(2) from the Federal Motor Carrier Safety Regulations (FMCSR), a driver must:

“Be able to read and speak the English language sufficiently to converse with the general public, to understand highway traffic signs and signals in the English language, to respond to official inquiries, and to make entries on reports and records.”

If I had to hazard a guess the White House is looking for a reason to stop and interrogate brown skinned truckers who also happen to speak Spanish.

Nah.  Too conspiratorial.  They'd never do that.  Would they? 

 

Traffic Jam

I don't drive the I-43 corridor between home and southeast Wisconsin as much as I used to before retirement; nevertheless, when I've previously made a trip down and back It's not at all unusual to note a significant volume of Canadian truck traffic - particularly on the down-bound southern route.  I actually made it practice to keep an eye peeled for rigs sporting the Bison Transport logo and their distinctive Manitoba tags.  

photo credit Land Line Magazine

Unsurprising, the primary Canadian port of entry in the Upper Peninsula of Michigan is the Sault Ste. Marie International Bridge connecting Sault Ste. Marie, Michigan with Sault Ste. Marie, Ontario.  There is also my favorite border crossing; the Grand Portage-Pigeon River port of entry connecting Grand Portage, Minnesota, with Neebing, Ontario and Thunder Bay. It's a major route between Duluth, Minnesota, and Thunder Bay, Ontario.

No wonder a significant portion of Canadian freight found its way to Interstate 43.

As the chaos and confusion, Red Light, Green Light, moving of the goal posts of the White House's tariff policies roil the global economy it turns-out that the trucking industry is emerging as another victim of these tax increases on international commerce.

To be clear, truckers are not a direct object of Trump's levy wrath; nevertheless, this sector is feeling unwelcome pressures and upheavals because lots of stuff moves across North America by truck. 

How much stuff you ask?  Consider this -  The North American trucking industry is a massive sector, generating significant revenue and employing millions of people.  In 2022, the US trucking industry alone generated $940.8 billion in gross freight revenue and had 3.54 million truck drivers.  The entire North American trucking industry (including Canada and Mexico) is even larger, with over 12.7 million truck entries combined on the Canadian and Mexican borders in 2022, and the value of goods traveling via truck across the borders jumped to over $947 billion in 2022.

Impacts are not isolated to freight companies and drivers; last week Mack Truck and Volvo announced the layoff of hundreds of workers as a consequence of falling demand due to tariff troubles and market uncertainties.  It hasn't taken very long for negative impacts to ripple across the entire industry.  

It is clear that this meaningful player with our largest trading partners has been seriously disrupted.  But we all know that Donald Trump thrives on disruption and breaking things.  Pure speculation on my part; but I don't think he thought this thru sufficiently to understand how broken this is becoming.  But that's how Trump rolls (pun intended).

Anyway, follow this link for a higher-level analysis of how the president's taxes on trade have disordered and begun to seriously dislocate a previously well-oiled engine of supply chain logistics.  It's a short read and worth it.  Trust me.  Further evidence of the Law Of Unintended Consequences.

Meanwhile, If I'm driving to the Naked City for any reason I'm gonna keep an eye peeled for any Canadian transports. 

An Unforced Error?

Last week I was listening to a radio guest on the Sirius POTUS station speak on the subject of the president's fixation with trade balances instead of trade barriers; both of which occur in the world of international trade.   As I explained a week ago they are quite different from one another - and the president has fixated-upon the former instead of the latter.  Trade barriers are bad because currency manipulation, digital services taxes, value-added taxes and actual tariffs are obstacles to free trade.  Traded imbalances happen all day long in the normal course of commerce.  I spend money weekly at my chosen grocer who has never purchased anything from me.  We have a trade imbalance.  

This blog post was composed last Friday, April 12, 2025 and was in the can for publication at 6:30 PM today.  And then this fell into my in-box early yesterday morning.   Somewhat perfect timing by Peter Zeihan yet technically a week late as I'm not a paid subscriber.  But I digress.  

Anyway, getting back to the satellite radio broadcast the guest shared with the program host that what the president was exhibiting in his policy of reciprocal tariffs is known in economic circles as a Fallacy of Composition.

Whoa!  I'm no economist but as a recovering financial guy I happen to have a deeper  understanding of economic principles than the average bear.  I suspect I've never heard this precise terminology before; and if I had learned about it in an earlier life it has been long forgotten as a consequence of disuse.  

Anyway, it is during difficult economic times that economists actually talk about the Fallacy of Composition; a concept that is a principle of logic.  So I looked it up and it goes something like this.

The Fallacy of Composition is committed when someone concludes that what is true of the parts of a whole must apply to the entirety of the whole without there being adequate justification for the claim in the first place.

For instance, in mathematics one and three are odd numbers; consequently four is an odd number because 1 + 3 = 4.  Naturally, this is untrue because four is an even number.

In the economic realm the fallacy occurs when the economy is treated as if it were a family or a business.  Namely, that a policy that will work for a business will work for the economy as a whole.  When someone concludes that what is good for a family or a business is good for something as large as a nation's economy then the fallacy of composition has occurred.  

This is because a theory that might apply to family finances or a business may not be relevant to an economy as complicated as that of the United States.  Economies play by rules that are far more dynamic than rules that apply to a business.  When a decision-maker concludes that a country is being raped and ripped-off as a consequence of a trade imbalances then the outcome for the entirety of the economy may be completely other than intended.  Such as a soft 3-year treasury note auction or currency markets that punish the US dollar as a consequence of a lack of confidence in the United States.  The fallacy becomes worse than simple irrelevance when the world begins to lose faith in your country's diminishing reservoir of economic goodwill.  There can be serious consequences.  

The application of tariffs on a selective basis can reduce imports thereby providing protection for a specific economic sector; which is a good thing.  Conversely, if all nations impose trade barriers in a global trade war then world trade will decline resulting in everyone being worse-off.  

Similarly, if everyone stopped spending during a recession in order to be thrifty and to save money then aggregate demand may fall and aggravate the downturn.  In this example thrift may very well be good for an individual situation; yet if extended to an entire economy it may lead to a reversal of economic growth.  Thus the fallacy of composition.  

So, just like when you are at a Packer game and stand-up it is a fact that you can better see the play unfold; until everyone else stands to do the same.  Decisions based-upon the fallacy of composition can lead to bad policy recommendations, flawed economic predictions and ineffective solutions.  Understanding this is crucial to avoiding errors of logic in economic reasoning and avoiding faulty outcomes.

Now that the president has paused many of the reciprocal tariffs originally proposed on Liberation Day there is less uncertainty and cratering investment markets have paused as well.  The administration has since exempted smartphones, computers and additional electronic devices from these tariffs providing relief to tech manufacturers; allowing business to catch their breath.  Nevertheless, the messaging coming from White House spokesmen on Sunday was inconsistent.  The game of Red Light, Green Light with on-again, off-again tariffs continues.  Are they permanent or temporary?  Is the White House going to continue to proffer carve-outs for specific products and industries?  Wisconsin CEO Peter Ensch of SaniMatic said it best:  Initiating a trade war with our closest allies and business partners is simply bad business.  

Inconsistency and moving of goal posts continues to raise doubts in American boardrooms and in the minds of American investors and retirees; all of whom could use a measured dose of predictability and policy certitude.

I'm not seeing much yet that will improve your and my prosperity and general lot in life.  And maybe make the world a safer place.  But I'm a patient sort.  Time will tell.....

Tariffs and Logic

One of the countries who got caught up in the 'Liberation Day' crossfire was Vietnam. Through an arbitrary and poorly informed process, Vietnam was slapped with a 46% tariff.

According to Zeihan, Trump's team is filled with loyalists that lack any semblance of expertise in their designated areas, so these inflated tariffs are more about pleasing Trump than logic. Which doesn't make for great economic policy in case you were wondering.

Vietnam has been a key ally in reducing US dependence on China, but since Vietnam doesn't import enough from the US due to the income disparity, Trump and his lackeys sniffed a trade deficit and abracadabra; punitive tariffs.

Be sure to check-in tomorrow for a deeper dive into the illogical nature of this pseudo-policy....

The President Gets a Mulligan

President Trump's reciprocal tariffs are calculated by a simple formula boiled-down to dividing the trade deficit the US runs with a given country divided by the value of US imports, divided by half, with a minimum tariff of 10%.  That’s long division, folks.

As I waxed both philosophically and technically yesterday, it s a hopelessly flawed calculation that doesn't account for specific trade barriers such as actual tariffs, digital services taxes, value-added taxes or monetary policy.  Furthermore, the value of services are omitted from the Trump calculation.  Only the trade deficit in goods is measured.  Avocados are quantified while the intellectual capital and contributions of a software engineer is not.  Financial services, tourism, education and such count for nothing.  Considering that our GDP (total economy) is 68 to 70 percent services this omission has left the economic community scratching their collective heads.

This formula concludes that until imports and exports between the US and every country balance out, all of the countries with whom we trade will face tariffs.  The president completely ignores the idea that some countries are the only place a specific commodity can be obtained or that other countries might actually be better at manufacturing specific things or that importing certain products simply benefits Americans and improves our standard of living.

This afternoon the President blinked. I suppose more sober advisors finally got thru to Trump and convinced him of the folly of this economic shit show and how it might self-immolate the economy, benefit Communist Red China, vaporize everyone's retirement plans and make the citizenry sufficiently grumpy they would take out their collective ire on the GOP beginning with the midterm elections.   

And just like Khrushchev; Trump blinked.  The president reversed course on his tariffs and with the exception of China most of our trading partners would see relief.  Canada and Mexico?  We're waiting on clarification. 

Of course, it's only for 90 days so who knows what happens before or after.  That's anybody's guess when the master of chaos is calling the shots.

Diane Swonk, the chief economist at KPMG and one of the many business economists who spent many hours calculating the impact of Trump’s maximalist tariff plan that went into effect at midnight only to have the 90-day pause on them announced today, didn’t mince words voicing her frustration.

This is nuts. Damage done. Market relief is a head fake, unless the administration makes a major course correction.  Uncertainty is its own tax on the economy.

Time will tell..... 

The Golden Age

The president celebrated Liberation Day by announcing an avalanche of tariffs on dozens and dozens of countries.  His plan has evolved.  Tariffs to stem the flow of fentanyl across the border, tariffs to return all manufacturing to the US, tariffs to punish our adversaries, tariffs to punish our friends, tariffs to make us rich and prosperous and to return America to the late 1800s; a time when tariffs financed the government.  

JP Morgan Wealth Management analyst Michael Cembalest had this to say - This borders on twilight zone territory. 

To be clear, a tariff is a tax paid by an importer on a product or service originating overseas.  It is a barrier to trade and a useful tool if applied selectively.  A trade deficit occurs when a country imports more goods and services than it exports.  In other words, the value of what the country buys from other countries is greater than the value of what it sells to them.

                                            If imports > exports, it's a trade deficit

                                            If exports > imports, it's a trade surplus

Is a trade deficit bad?  It depends.  Trade deficits in and of themselves are neither good or bad; its impact depends on what is causing it and what else is happening in the economy.  If you are like me you likely have a trade deficit with your favorite grocery.  Foreign trade frequently works the same way.

The administration's calculation of 'reciprocal tariffs' is flawed because it is not based-upon tariffs (a trade barrier) but on trade deficits (balance of trade).  The calculation goes like this:  The 'tariff rate' for each trading partner is a function of trade aggregates - specifically, the deficit divided by US imports, then divided by one-half, with a minimum of 10%.  

Remarkably, no allowance anywhere is made for specific barriers such as actual tariffs, digital services taxes, value-added taxes or monetary policy.  Furthermore, the value of services are omitted from the Trump calculation.  Only the trade deficit in goods is measured.  Avocados are quantified and the intellectual capital and contributions of a software engineer are not.  Considering that our GDP (total economy) is 68 to 70 percent services this omission has left the economic community scratching their collective heads.

For example, Singapore is a relatively free-trade-oriented country, while Brazil makes considerably more use of tariffs and other trade manipulations.  However, both end up with the 10 percent rate because of their goods trade balances with the US.  By contrast, Vietnam, which exports a great deal to the US  yet has worked to make its policies amenable to the US gets no credit for the effort.  Trump announced a 46 percent tax on all Vietnamese imports.

In a recent piece published by Axios, flaws of this calculation reach all the way to Madagascar; a small, poor country with an abundance of vanilla.  The US is a large and wealthy country with a sweet tooth; consequently, there is a natural trade to be made.  They send us their precious vanilla pods, we send them dollars they need for day-to-day necessities.

By the logic of the Trump administration's reciprocal tariffs that's not a natural trade at all. To quote Commerce secretary Howard Lutnick on CNBC this is evidence of tiny Madagascar picking on us.  Because it runs a trade surplus with the United States, Madagascar is being hit with a 47% tariff, not only on vanilla but also on everything else it exports to us. 

Given that Madagascar has precious little need for US exports, that means in practice that the tariff has to be big enough to bring that trade deficit down to zero and stop Americans from consuming more than a thousand tons of vanilla every year.  Or switch to domestically produced artificially-flavored vanilla. 

So let's be truthful; a tariff is a tax on consumers.  And while this tax won't be a problem for a billionaire it will be a costly annoyance to the middle class.  It will be a burden to the aspiring middle class and devastating to everyone else.

Former Treasury Secretary Lawrence Summers said it best - It’s now clear that the Administration computed reciprocal tariffs without using tariff data. This is to economics what creationism is to biology, astrology is to astronomy, or "RFK thought" is to vaccine science. The Trump tariff policy makes little sense EVEN if you believe in protectionist mercantilist economics.

 

Liberation Day

According to the interweb April 2 is National Ferret Day - a day to celebrate these lively and intelligent companion animals.  President Trump has declared that today is Liberation Day - and is kicking-off a Rose Garden celebration later today with a fresh round of tariffs on global trade.

It is no secret that the president and his minions have clashed with mainstream economists for just about forever over the merits of what White House economic advisor Peter Navarro has described as the largest peacetime tax increase in American history.  Beginning today I suppose we'll learn who's right as global reciprocal tariffs are announced; including a whopping 25% tariff imposed on big ticket items such as imported vehicles and overseas parts used in the assembly of automobiles. The president has promised these tariffs are permanent.

The president is insistent that tariffs will have the straightforward effect that manufacturers will move factories and assembly operations to the US thereby creating more American jobs and universal prosperity.  Of course, the president has not addressed the billions upon billions of dollars associated with re-shoring overseas manufacturing and supply lines that have evolved over decades.  Or the exceedingly long timeline associated with this.  A timeline long enough that he won't be president when American companies even get close to making it happen.

For those eggheads in the economic community the impact of tariffs is anything but simple.  Over the long run they might encourage domestic automobile production; yet in the short term they might also cause substantial collateral damage to jobs growth and the economy writ large.

Logically, the impact of tariffs will raise the price of imported goods discouraging the purchase of automobiles, damaging supply chains, reducing US car production and slowing the economy.  Stagflation - an economic portmanteau of slow economic growth combined with rising unemployment and persistent inflation would be an unwelcome ghost of Christmas Past; both here and abroad.

Earlier last month the President convened the CEOs of the country's largest automakers where he warned them: They better not  raise car prices because of tariffs. 

I suppose in the weeks and months ahead we'll learn whether (or not) retribution will be visited-upon automobile companies or their executives face punishment if they increase prices.

For the present, dealers have stockpiled a two to three month inventory of vehicles meaning that the impact of tariffs will not be manifest until late spring.  At that point, Morgan Stanley analysts have suggested that vehicle prices could rise 11% to 12% to offset the tax increase.

Meanwhile, I'm going to pay close attention to the market's response to this.  And while doing so I'll be pondering policy under this administration and whether (or not) it will improve your and my prosperity and general lot in life.  And maybe make the world a safer place.  Time will tell.....