trump’s tariffs are 4 D chess the supporters of
the US president’s policies have been saying but uh even these supporters have had a hard time
explaining policies like uh putting tariffs on islands inhabited only by penguins but what if I
told you that there is a method to Trump’s madness and that everything could be going according to
the plan believe it or not but there actually is a plan and it was first proposed in November last
year today we’re going to reveal the details of Trump’s economic plans including who put them
together what comes next and how it could all affect the markets my name is Nick and this is
a video you do not want to miss in November 2024 economist and former investment strategist Steven
Moran published a paper titled quote “A users’s guide to restructuring the global trading system
the paper explains how different tactics including tariffs can be used to rebalance global trade and
bring manufacturing back to the US.” Moran was subsequently nominated by Trump to be the chairman
of the Council for Economic Advisers a US agency that advises the president on economic policy
moran was approved by the Senate in mid-March and in the weeks that followed Trump doubled down on
his tariff policies not surprisingly many market analysts and media outlets have declared that
Trump’s policies have their roots in Moran’s paper from November 2024 and some have even gone as far
as to argue that the paper is a stepbystep guide for Trump’s policies which is understandable
as the title starts with a users’s guide however in a recent interview Moran stressed that
the paper from November 2024 was not a guide but just a quote recipe book of policies that Trump
could use as part of his goal to rebalance global trade and bring manufacturing back to the US
notably he said which policies are actually used is up to Trump and that’s why it’s surprising
that some market analysts and media outlets have not only continued to argue that Moran’s paper
is a stepbystep guide for Trump’s policies but that the goal is to weaken the US dollar as part
of a so-called Mara Lago accord even though Moran says the opposite in the paper for context
Moraago is a club in Florida that’s owned and operated by Trump that became famous during his
previous presidency because he would meet other world leaders there what’s fascinating though
is that the original owner of Mara Lago donated the property to the US government in the 1970s
hoping that it would be used as a quote winter White House which is basically what it has become
as for the accord part that’s a reference to the Plaza Accord which was an agreement between the
United States and other countries to weaken the US dollar to rebalance global trade in the
1980s this agreement took place in the Plaza Hotel in New York City which Trump acquired a few
years later it’s assumed that Trump will enact a similar accord at Mara Lago in the coming months
for the same reason there are just two problems with this assumption the first is that the Plaza
Accord took place between the US and countries it was allied with including Japan now for reference
Japan was essentially the equivalent of what China is now a rapidly growing economy that was seen as
competition to the US in case you haven’t noticed the US and China aren’t very friendly these days
so the chances of President Xi flying to Florida to meet with Trump anytime soon are objectively
low and this is a problem because the trade imbalance that the US has is primarily with China
uh so China would also need to be part of any sort of Mara Lago accord the second problem ties into
something that Moran mentioned in his paper and that’s that the US dollar would need to strengthen
first so that the US has lots of negotiating power for these Mara Lago talks notably Moran sees
tariffs as a means of strengthening the US dollar for this purpose in case you haven’t noticed the
US dollar has been falling fast and this gives the US less negotiating power and effectively makes
a Mara Lago accord unnecessary because the US dollar has already weakened significantly and
this begs the question of what’s going on with Trump’s policies and what comes next before we dig
into the answers smash that like button if you’re Trump’s policies and what comes next we first need
to understand why Trump is doing what he’s doing let’s start with the awkward stuff and that’s the
seemingly irrational decisions being made like uh putting tariffs on penguins as you’ve probably
heard Trump has been getting input from a lot of different people behind the scenes some of
whom are more competent than others to put it mildly it seems that the rational decisions
are coming from the adults in the room whereas the irrational decisions are coming from the non
adults obviously Steven Moran was asked about the now infamous formula used to calculate the
liberation day tariffs in his recent interview he revealed that the formula was proposed by someone
without naming names and Trump went with it uh the way Moran answered it made it sound like he was
against the idea and this is expected given that he had previously warned that if Trump started off
with high tariffs it could create uncertainty in the markets and could cause economic weakness
moran said this in an interview shortly after the 2024 paper was released and advised gradual
increases in tariffs instead and this is where things get interesting many have speculated
that Trump started off with high tariffs to intentionally crash the markets and incentivize
investors to allocate to US bonds thereby lowering their yields now for those unfamiliar the Trump
administration is explicitly trying to lower bond yields because the US government needs to
refinance $9 trillion of debt and thus needs to lower yields if it can of course this speculation
completely disappeared after US bonds started selling off causing yields to rise instead of fall
it’s still not entirely clear whether the sell-off was due to foreigners selling US bonds in protest
of Trump or hedge funds being forced to sell bonds because of a basis trade it was probably a bit of
both in any case the fact that US bonds eventually fell along with the stock market made Trump’s
tariff decisions look more like a bad coin toss than a 4D chess however it’s still possible that
the goal of the tariff shock was to do the other thing that Moran warned would happen as a result
weaken the economy and this sounds crazy until you consider the effects that tariffs have on
inflation which has been another major concern according to Moran the inflationary effects
around tariffs are unjustified because history shows that most of the inflationary effects are
offset by a depreciation in the other count’s currencies the Coin Bureau deals page it won’t
make you stronger but it will make you better overall tariff rate on China was around 17% in
theory this would have resulted in prices rising by 17% in the US in practice however the Chinese
yuan devalued by 15.5% offsetting almost all of the inflationary effects the remaining 1.5% was
apparently swallowed by the US companies importing these Chinese goods the catch is that this time
the Trump administration wants the overall tariff rates on China to be much higher probably not
the 145% that was recently announced but also probably not the 17% from before it’s safe to
say that China will not devalue its currency to offset the finalized tariff amount which will
likely be very high for instance suppose that the final tariff rates on China are 40% china might be
willing to devalue the yuan by 10% maybe even 20% but there’s no chance that it will devalue its
currency by 40% and that’s just because Chinese citizens losing 40% of their purchasing power
would likely result in a lot of domestic strife come to think of it this could be the reason
why tariff negotiations with China are going so poorly regardless this means that the remaining
20 to 30% would be passed on to US consumers it goes without saying that this would not be
ideal because it would likely create lots of social unrest in the US it would also force
the Fed to keep interest rates high and more importantly this inflation would cause a sell-off
in US bonds but what if it’s not possible for US companies to pass these costs on to US consumers
because of say economic weakness in this scenario companies would be forced to swallow most of
the costs of the tariffs in practical terms this would mean higher expenses and lower profits
for corporations at first glance you’d think well uh this would be bad for the stock market lower
profits means lower stock prices upon closer inspection however you realize that the major
stock market indices such as the S&P 500 consist largely of tech stocks that are mostly immune
to Trump’s tariffs because they don’t deal very much with physical goods being imported from China
the few that do such as Apple have record levels of cash on their balance sheets meaning they could
easily offset the costs by adjusting supply chains or otherwise never mind the uh tariff exemptions
that were recently announced for phones laptops and microchips in some then Trump’s wild tariffs
are likely to result in economic weakness which will make it very difficult for corporations to
pass on the costs of these tariffs to consumers this means that corporations will have to swallow
these costs which would have the practical effect of protecting both the US consumer and the US
government from inflation with minimal impact on the stock market due to how indices are structured
make no mistake there’s no way of knowing that this was the intention behind Trump’s policies but
for the time being it looks like this will be the outcome whatever the case this only answers the
question of why Trump started off with high levels of tariffs it doesn’t answer the question of why
he wants tariffs to begin with and this is where Steven Moran’s 2024 paper comes in it reminds us
that tariffs are just one of the many tools that could be used to achieve Trump’s goals which
you’ll recall are rebalancing global trade and bringing back manufacturing to the US as such the
real question is why these things need to change moran provides a perfect answer in his paper
quote “As global GDP grows it becomes increasingly burdensome for the United States to finance
the provision of reserve assets and the defense umbrella as the manufacturing and tradable sectors
bear the brunt of the costs in other words being the issuer of the world’s reserve currencies
creates issues and imbalances in the US economy i’ll explain exactly how with an example suppose
you’re China and you want to buy oil from Saudi Arabia you’ll need US dollars to buy this oil
because it’s priced in US dollars at least for now there are only two ways you can get US dollars to
buy the oil you need and that’s to sell something internationally for US dollars or to borrow US
dollars from someone else suppose you decide to sell something internationally like a bunch of EVs
thanks to the US military protecting trade routes you’re able to seamlessly sell these EVs around
the world now you have a bunch of US dollars to buy oil but let’s suppose that you end up with way
more dollars than you actually need what do you do with them you can’t put them in a bank account
especially since FDI insurance only covers up to the first $250,000 of deposits you’ve got billions
of extra dollars and the only place you can keep them is in US bonds and that’s because US bonds
can be easily converted to US dollars and they also earn a yield just like a savings account now
bond yields are determined by price with a higher price meaning a lower yield and vice versa in turn
the price of bonds is determined by supply and demand suppose you’re buying billions of dollars
of US bonds this causes the price of US bonds to rise and their yields to fall the consequence
of this is that interest rates in the US fall uh because bond yields are used as a reference
rate as the baseline for interest rates on other kinds of debt in the economy a fall in US interest
rates results in more borrowing by US consumers US corporations and the US government this results
in US consumers purchasing more stuff from China giving China more US dollars which it then invests
in US bonds it also results in US corporations moving their operations overseas because they
can see that they can make a bigger profit margin selling EVs made in China than EVs made in America
as for the government it spends more than it can possibly afford flooding the domestic and global
economy with trillions of extra dollars like China all the recipients of these dollars need a place
to keep their cash some will buy bonds but most will invest into US assets because they yield
higher returns and this pushes the valuation of US assets higher and higher eventually
financializing the entire US economy the result is that only wealthy investors corporations
and those closest to the US government benefit and everyone else suffers because the real economy is
slowly but surely being hollowed out eventually this becomes a problem because the US needs to
be making some of its own things as a matter of national security such as weapons and medicine
but almost all of these things are made elsewhere the good news is that the US being the issuer of
the world’s reserve currency the provider of the world’s reserve assets namely US bonds and the
policeman of the planet are all things that can be monetized the crux of Moran’s paper is simple
and that’s to make countries pay for all these perks in a way that changes the trade and capital
flows we just described and finances the revival of the US economy with this perspective in mind
Trump’s tariffs start to make a lot more sense and if you read the end of Moran’s 2024 paper
he literally tells the reader quote “A second Trump term is likely to be even more forceful
than the first when it comes to reconfiguring international trading and financial systems
and that quote volatility risks are material which is precisely what we’ve seen.” Moran also
specifically states that quote tariffs are a tool for negotiating leverage as much as they are
for revenue and fairness tariffs will likely precede any shift to soft dollar policy that
requires cooperation from trade partners for implementation since the terms of any agreement
will be more beneficial if the United States has more negotiating leverage which you’ll remember
is what we discussed earlier the caveat is another thing we discussed earlier and that’s that the
tariff strategy doesn’t seem to be working as it was intended the US dollar has been weakening
not strengthening the bad news is that this will make it harder for the US to get what it wants
from the tariff negotiations uh the good news is that a weaker dollar was still technically the
end game because a weaker US dollar is good for Trump’s goals fortunately or unfortunately tariffs
aren’t the only tools available the US could back out of military organizations like NATO unless
other countries pay more which is arguably what we’re seeing right now the US could also refuse to
secure key shipping routes unless it’s paid to do so which is also what we’re starting to see happen
specifically in the Red Sea where the Houthi rebels in Yemen are disrupting trade to Europe
as you might have heard paying for such military security could involve forcing counterparty
countries to swap their short-term US bonds for long-term US bonds to bring down long-term
interest rates the Fed would then create a special facility to minimize bond market volatility
by making it possible for these countries to borrow US dollars against these long-term bonds
instead of having to sell them that though would require the Federal Reserve Board being on board
with Trump’s tariff plans and could be part of why Trump may want to get rid of Fed Chairman
Jerome Pal more about that in this video over here alternatively the US government could start
taxing inflows of foreign capital into US assets but such measures would be even more extreme than
forcing other countries to buy long-term US bonds as we’ve also noted in other videos the fact that
the US economy is so financialized means that its markets need to stay relatively robust during this
transition period otherwise the US could lose its remaining leverage this is presumably why Trump
has walked back many of his initial tariff threats over the last few weeks despite not receiving many
concessions from other countries per Moran’s 2024 paper quote President Trump has shown repeated
concern for the health of the financial markets throughout his administration that concern is
fundamental to his view of economic policy and success of his presidency and this brings me back
to the big question and that’s what comes next in Trump’s economic playbook the short answer
is that it depends on what Trump’s advisers propose and who he decides to listen to nobody
knows that except Trump and members of his inner circle most of whom also seem to be in the dark
as brilliant as his plan is Moran is just one of the many people in this circle although Moran has
been tight lipped about the details of what’s been going on within this circle there is one thing he
highlighted in a recent interview that everyone seems to have missed and that’s deregulation to
recap it’s possible that the reason why Trump’s liberation day tariffs were so over-the-top was
to create enough economic weakness so that it’s not possible for most corporations to pass on
the costs of tariffs to consumers even if this was some 4D chess plan though it probably won’t
be enough by itself and that’s why Moran has been underscoring deregulation as one factor that
could cause inflation to drop even if tariffs are implemented he even argued that deregulation is
the main deflationary force economists are missing and that’s because the effects of deregulation
are impossible to model by this logic it would be hard for Moran to argue in good faith that
deregulation will be as deflationary as he seems to believe but there definitely seems to
be something to it and that’s because Treasury Secretary Scott Bessant has also been pounding
the table about deregulation in recent interviews while markets were falling and bond yields were
rising Bessant was shrugging it off saying he’s not really involved in the tariffs and that he’s
been focused on deregulation and this suggests that if there’s a consensus about any economic
policies in Trump’s inner circle that’s that deregulation needs to happen ASAP come to think of
it this could be because deregulation is what the Trump administration is promising corporations
in exchange for swallowing any costs related to the tariffs that could be offset by currency
depreciation it could be something along the lines of uh tariffs will increase your expenses
by 20% but we will cut enough regulations to lower your other expenses so that the total cost to you
is minimal or zero again it’s not entirely clear if this will be enough because it’s impossible
to model per Moran’s own admission even so we reckon it’s clear that Trump’s inner circle sees
deregulation as the solution to the inflationary side effects of the tariffs and it is therefore
the next economic policy to watch very closely but a word of warning if these deregulation
plans fail then the US economy could end up with stagflation that is weak economic growth and
inflation because of these tariffs the stakes are high and you can find out what that would mean
for the US economy by watching our video on it right over here and if you’re not subscribed to
the channel yet you can do that right over here that’s me for now thank you guys very much
for watching and I’ll see you again soon
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