Thursday, April 10, 2025
Political Mayhem Thursday: Two steady truths in a time of economic mayhem
Markets are in tumult as the Trump administration seemingly comes up with a new and zany tariff regime every few days. After a couple days of "huge tariffs on everyone (except Russia)!" now they have flipped to "even huger tariffs on China, a pause for everyone else!"
Here are two central economic truths that may shape the outcome of all this over the long term.
1). Businesses can handle almost every challenge if they can know what that challenge will be over the next several months or years. They build tariffs, for example, into their cost estimates and make adjustments over time. What business does NOT deal with well is rapid and unpredictable change-- and that is exactly what they are being given. This tumult may freeze both investment and credit, and that is going to be very bad for the economy.
2). China has been hit hard by the tariffs, and now is singled out. The problem is that their economy is huge-- the second-largest in the world, and about 2/3rds the size of the US economy. That means that they can react to this by shifting to new markets and building new alliances, including (and probably especially) to economies in Asia and Europe that have historically looked to the US to take the lead on trade. In other words, China connecting to Europe and basically ignoring us won't be a good thing for us in the long term-- we are going to lose markets in both places. Also, the severing of an economic relationship with China is going to really hurt agricultural exports and create inflation in the US, since all that cheap stuff you get at Amazon and Walmart comes from super-efficient manufacturers in China.
It may be tough to look at your 401k right now-- but the true cost of all this may come due in several years, where we find ourselves looking around at world that is working around us rather than with us.
