The last few hours show that the world is going around a bend and refusing to take its foot off the gas. The financial markets are going through wild turbulence, the US indices literally collapsed at the beginning of the week, only to rise again just as furiously in the last few hours - but still their overall trend remains downwards. And instead of everyone concerned calming their passions and trying to use rationality and reason, more and more emotions are taking over. People like things black or white. They like personalities good or bad. They find it very difficult to understand that one person (political party, country...) can be positive in some ways and negative in others. It is more bearable for people if they can idolize someone or make them
the devil incarnate. And that is why they are so groping at the moment, how to look at the situation in the USA and Donald Trump's economic and political actions.
Trump has been very successful in partially shutting down the ESG ideology that was destroying the US economy and society and is still destroying it in the EU. That is his unquestionable merit. That is why many people have come to admire him uncritically. Unfortunately, that is not all. Alongside this, Trump has also made a huge mistake in economic policy. And because of that, many people have come to hate him uncritically. And now those who admire Trump are trying to defend the indefensible and explain his economic policy mistakes with all sorts of contorted theories.
But unfortunately, if we get away from the ideological perception of the world, these mistakes have indeed happened and are fundamental. What is at stake now is nothing less than whether the American anti-ESG revolution will end because of economic and political mistakes before it has begun. Because that would be the worst conceivable scenario. Let us now set aside the merits of torpedoing ESG ideology, which I do not question in any way. What is Trump's mistake that could jeopardize the well-started economic changes?
According to available indications, the Trump administration does not seem to understand that the trade deficit is not an economic problem. I repeat: not a problem. The US has a huge advantage, namely the fact that the dollar is the world's reserve currency. Therefore, capital flows into the US, which buys US Treasury bonds and shares and keeps US interest rates low, at which the US state borrows money to run itself. The result is a strong dollar. A strong dollar gives Americans the power to buy cheap goods from China and other parts of the world.
The surplus on the capital account of the trade balance (inflows) is offset by a deficit on the current account of the trade balance (trade in goods). The result is a balance and prosperity for the American people, due in no small part to the fact that the dollar is the world's reserve currency. Trump has imposed such tariffs on China, for example, that it makes it virtually impossible to trade with each other. Or it destroys the international division of labor and comparative advantage - the source and very essence of wealth creation. But somehow Donald Trump and the rest of his administration have come to the view, which has no economic justification, that the trade deficit is wrong.
Apparently they don't understand that the trade deficit is just a mirror of the capital surplus that helps Americans to prosper. They began to think about how to get rid of the trade deficit and came to the conclusion that the deficit was the result of trade barriers imposed on America by the rest of the world. And that's where the bizarreness begins. The Trump administration does not seem to understand the difference between tariffs, VAT and the trade deficit. For a long time, economists have puzzled over how Trump came up with his claim of what tariffs are supposedly being applied against the US. Until they figured out that they appear to be a hausnumber determined by the size of the balance of trade with each country. Or Trump claims that the world is applying tariffs against the US that are much larger than what it is actually applying. That's why Trump's "reciprocal" tariffs are so insanely high.
There was a theory that tried to "explain" Trump's actions by saying that Trump just wants to blow a stock market bubble through tariffs and redirect capital flows into US bonds to make it even cheaper to finance the over-indebted US. A good attempt at an explanation, but more likely Trump just doesn't understand the economic context and doesn't appreciate what he is doing. In fact, the consequences of his actions are exactly the opposite of what this theory predicted: That is, US funding is actually getting more expensive. How is this possible?
First, China has sensibly pulled the handbrake and started selling mainly short-term US bonds. That's not the worst of it. Worse is that many funds expected US bond prices to rise (yields to fall) after Trump came in and were overbought. When these funds realized that Trump had made a fundamental mistake, they started selling long-term bonds. Their prices began to fall (as did stock prices) and yields began to rise. This, of course, will make it more expensive to finance the US.
If Trump does not get out of the tariffs quickly, the result must be a recession, and quite possibly an economic depression in the US. Stocks may currently be jumping here and there depending on what Trump tweets at the moment, but their long-term trend must be down if the tariffs are maintained, and the bottom may be a long way off.
This could really turn into a long-term stock problem. At the same time, however, tariffs destroy international trade, i.e. they destroy the demand for dollars, i.e. they destroy the US capital surplus, i.e. they increase US bond yields, i.e. they make it more expensive to finance an over-indebted America! And you really don't want that in a recession. Trump thinks he will increase budget revenues through tariffs - but that is unlikely as he paralyses foreign trade. Finally, the dollar has greatly accelerated its retreat from its reserve currency position. There's not much the Fed central bank can do about it, because if it raised interest rates it would melt under the cauldron of panic; if it lowered them, the financial world would realize it was really bad and panic too.
So the Fed is likely to subtly proceed to print money, i.e. to redistribute even more and base it on future inflation. Ironically, the problem with ESG (the something that makes ESG bad) is progressivist-motivated big interventions in the economy. Now Trump may have torpedoed ESG, but he has started doing the same thing - drastically intervening in the economy, only in reverse, from a conservative position.
Markéta Šichtařová
company director
Next Finance s.r.o.
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