By Tumbul Trawally, Seattle, U.S.A.
Economics, not politics, will determine the direction of President Trump’s Tariff Regime. That has and will always be true. After imposing high tariffs on almost every country on planet earth, he backtracked and said there would be a ninety-day pause. After singling out China as the recipient of the highest tariffs, he backtracked and offered a reprieve on computers, semi-conductor chips, and laptops. Few days ago, he offered a reprieve to the automobile industry. Despite his bluster, the Chinese have not come to the bargaining table. He is, in reality, negotiating with himself! These walk backs have nothing to do with magnanimity, but rather they have everything to do with the realities of the economics of international trade. Trump’s brinkmanship is as clear as daylight to the entire world.
It was especially the movement and rise in the interest rate of the 10-year bond that forced him to capitulate. The 10-year bond interest rate is the benchmark of all interest rates in a liberal economy. As it started inching upwards, all other interest rates followed suit. Reducing interest rates was what he campaigned on, not increasing them. The reason behind the rise in the interest rate of the 10-year bond was the fall in the value or price of the bond. The bond value fell because investors started selling their bond holdings. In Economics 101, the price of a product or commodity falls if the supply increases. The interest rate or yield of a bond moves in opposite direction to the price of the bond. That was why bond yields or interest rates increased as the bond prices fell.
The most important variable in the President’s victory last November was the inflation or rise in prices. While he and his supporters can spin the news of the ‘on and off’ of the tariffs war, they cannot spin what the bond traders feel about the value of their bond portfolios or the future of the economy. If you think the average daily worldwide trading of stocks/shares of 620 billion US dollars is huge—the average daily worldwide trading of bonds is about 2.35 trillion US dollars. That is the reason it is impossible to ignore what takes place in the bond market. The president has found himself in a situation similar to that of former Vice President Kamala Harris during the last campaign. While she and the Biden Administration were touting the good economy and the downward trend in the inflation rate, shoppers did not feel it when they went to the supermarkets to buy eggs or milk. This was one of the main reasons she lost the election.
Bond prices are based on future expectations. Another factor for the increase in the interest rate of the 10-year bond was the US Debt to GDP ratio, which is 122%. In the context of a family, it is similar to daddy and mommy bringing home $100, but spending $122 per month. In that scenario, daddy and mommy have to increase their income or reduce their expenditure, for the family budget to balance. Something has to give! Until then, daddy and mommy will pay a higher interest rate on their credit cards, car loans, or mortgages to compensate their lenders for the higher risk of lending them money. Similarly, bondholders demanded a higher interest rate for holding the 10-year bond. Again, as the bondholders demand a higher interest rate or risk premium on their bonds, the bond prices fall. Interest rate of the bond and its price move in opposite directions.
The US government debt (bonds) is currently about $36.22 trillion dollars. An increase of even a 0.1% of the interest rate of the debt (bonds) results in millions of dollars of interest payment on the debt (bonds). Consequently, the US dollar exchange rate depreciated against major currencies like the Swiss Franc and Japanese Yen. A depreciated exchange rate of the US dollar means Americans will pay more for foreign goods or services. Again, that reality is contrary to what President Trump ran on during the last election—to reduce prices. The rhetoric and the reality are not on the same page! In the end, the reality rules the day. The stocks market shedding trillions of dollars in the value of individual retirement accounts, and rising inflation have grabbed the attention of Republican politicians, who have his ears. That is what democracy is—voters expressing their dissatisfaction through their representatives in the Congress or Senate. Another group of people who have the president’s ears are the Tech Billionaires, who became nervous as their investment portfolio values shrank.
These are the reasons for the ‘on and off’ of the tariffs war of the president. Well—too bad! Mere mortals like you and me do not have the president’s ears, otherwise, we would have ruptured his ear drums. Most economists, besides those on the president’s payroll, believe that higher tariffs will result in higher inflation and slower economic growth. This sentiment was echoed by the Federal Reserve Bank Chairman Jerome Powell, who heads an independent Agency. World Trade has never, in human history, been so globalized. Picking up a trade war with the rest of the world, especially your biggest trading partners, is not a prudent economic policy. The Sad part to this saga is that it is self-inflicted and could have been avoided!
