Trump waves off market turmoil and rising recession risk as part of master plan

(Originally published March 10 in “What in the World“) “America first?” When it comes to stocks, it’s more like “America worst.”

Schizophrenic policies have raised the prospects of stagflation and have turned the benchmark S&P 500 into a laggard in global equities. The S&P500 fell 3.1% last week, its worst week since September. While it has dropped almost 5% in the past month, Germany’s Dax has climbed 5% and Hong Kong’s China-heavy Hang Seng Index has soared almost 13%.

Why? U.S. President Donald Trump’s schizophrenic policies on trade and tariffs, immigration, and slashing payrolls at the nation’s largest employer—the federal government. U.S. Federal Reserve Chair Jerome Powell on Friday said the U.S. economy faces a potential slowdown because of the “heightened uncertainty about the economic outlook.” Economists at JPMorgan Chase give the U.S. economy a 40% chance of slipping into recession this year.

Even Trump won’t rule out a recession, calling the latest market turmoil “a detox period.” Speaking with Fox News Sunday, Trump was asked whether he expected one. “I hate to predict things like that,” he responded. “There is a period of transition, because what we’re doing is very big. We’re bringing wealth back to America. That’s a big thing, and there are always periods of, it takes a little time. It takes a little time, but I think it should be great for us.”

Trump is still operating under the delusion that he can use tariffs to force U.S. trading partners into some kind of grand new currency arrangement, one in which they stop allowing their currencies to rise alongside their trade surpluses—a deal proponents have dubbed a “Mar-a-Lago accord.” The entire scheme was laid out last November by Stephen Miran, senior strategist at Hudson Bay Capital Management and Trump’s nominee for chairman of his Council of Economic Advisers.

The plan is shot with holes. First is that, as it admits, the countries with the largest trade surpluses and thus the highest dollar reserves are unlikely to submit to it. Part of the plan involves using punitive tariffs to force China and other mercantilist trading partners to allow their currencies to appreciate, reducing the amount of U.S. dollar reserves they amass from trade surpluses. Because that would tend to push up U.S. borrowing costs, it suggests obliging these trading partners to roll their remaining reserves into longer-term, even perpetual U.S. Treasury bonds.

And because no central banker in their right mind would want to increase their liquidity risk by doing that, the plan suggests offering them swap lines from the Federal Reserve that guarantee dollar liquidity in the event of a balance-of-payments crisis. In other words, the plan suggests that Washington force its trading partners into relinquishing their monetary independence to the White House.

To compel them, the plan suggests the White House use the Carter-era International Emergency Economic Powers Act to simply block payments out of the U.S. to countries that refuse to play ball. But this, it stresses, isn’t a “capital control,” since it would only apply to government transfers, not those to the private sector.

Those are just some of the many technical fantasies in the plan, which relies on erecting a Byzantine financial structure for dictating the terms of trade. Its other fallacies are more fundamental: first, the assumption that trade imbalances are zero-sum and that the development and growth they fund in U.S. trading partners comes at the direct expense of U.S. wealth. It also perpetuates the misconception that, if only the U.S. could weaken the dollar, that manufacturing investment would return to the U.S., American factory jobs would be magically restored, and that doing so would be a good thing. It wouldn’t, they wouldn’t, and it wouldn’t.

Who would work in these factories if they re-appeared anyway? Americans won’t take on “dirty” jobs, leaving them to undocumented immigrants Trump now aims to deport. Fears of deportation are already causing labor pains for U.S. homebuilders, hotels, farms, and senior-care facilities.

Ultimately, Trump’s policies are likely to accelerate deglobalization and an unwinding of international trade and finance, hastening the autarky Trump truly desires.