- April 2 — either Liberation Day or Doomsday…
- Are tariffs really inflationary?…
- Tax season is getting late. Have you learned about one key loophole in the tax code that can LEGALLY save you thousands in taxes this year?
Dear Reader,
Tomorrow — April 2 — the president’s “reciprocal” tariffs enter effect.
Thus April 2 will enter the annals as either:
A): Liberation Day, as the president styles it… or
B): Doomsday, about which free traders wring their trembling hands.
Which will it prove?
I hazard the answer is neither.
I do not believe April 2 will prove a day of liberation. Nor do I believe April 2 will portend economic apocalypse.
I admit the possibility of some short-term unpleasantness.
Yet I believe instead the world will peg along largely along its customary tracks.
Some will win, comparably. Some will lose, comparably.
Yet I hazard the wins and losses will largely wash themselves out.
Reflexively Against Tariffs
I concede that I am a faithful devotee of free market capitalism.
I have read my Milton Friedman. Daily do I kneel before the shrine of Mr. Adam Smith.
Thus I have regarded tariffs with reflexive hostility.
That is because tariffs are creatures of government. Tariffs are taxes. And tariffs often injure those they are intended to aid.
And so I lean yet in the free trader’s direction.
Yet I concede that free trade doctrine — as preached in the capitalist catechism — may be more theological than actual.
Free trade is a lovely theory.
Yet human equality is a lovely theory. Democracy is a lovely theory. My universal appeal to the fairer sex… in my telling at least… is a lovely theory.
Yet do they find home in the world as it exists?
The Real World Is Much More Complicated
Freedom Financial News contributor Jim Rickards:
- Most of us have been taught that free trade is good and that tariffs are bad.
- And on the surface it certainly seems true. The theory of free trade based on comparative advantage was advocated by British economist David Ricardo in the early 19th century.
- Ricardo’s theory said that trading nations are endowed with attributes that give them a relative advantage in producing certain goods versus others…
- Countries should specialize in what they do best, and let others also specialize in what they do best. Then countries could simply trade the goods they make for the goods made by others.
- All sides would be better off because prices would be lower as a result of specialization in those goods where you have a natural advantage…
- For example, if the U.K. had an advantage in textile production and Portugal had an advantage in wine production, then the U.K. and Portugal should trade wool for wine.
And yet:
- If the theory of comparative advantage were true, Japan would still be exporting tuna fish instead of cars, computers, TVs, steel and much more…
- The problem with this theory of comparative advantage is that the factors of production are not permanent and they are not immobile.
- If labor moves from the countryside to the city in China, then suddenly China has a comparative advantage in cheap labor. If finance capital moves from New York banks to direct foreign investment in Chinese factories, then China has the comparative advantage in capital also…
- In reality, [free trade] causes lost jobs, lost competitiveness and lower wages, especially for Americans. U.S. industry was stripped bare and U.S. jobs were lost by the millions, with China being the main beneficiary.
Americans Have Become Suspicious of Free Trade
Millions and millions and millions of Americans agree with Mr. Rickards, evidently.
They elected a man — resoundingly — who was not coy about his trade policy.
He did not keep it dark.
What word did candidate Trump label “the most beautiful word” in the English tongue?
The answer is tariffs.
We are told that tariffs will fan the inflationary fires already blazing.
Mr. Powell — for example — warned recently that tariffs would merely empty kerosene upon them.
And that tariffs will hinder the Federal Reserve’s firefighting operations:
- A good part of it is coming from tariffs. I do think with the arrival of the tariff inflation, further progress may be delayed.
The chairman is by no means alone. His is the consensus opinion of the economics profession, such as it is.
“Tariffs are simply inflationary, despite what [President] Donald Trump may tell people,” argues a certain Bradley Saunders of Capital Economics.
“The short-term effect of any tariff clearly is inflation,” adds Mr. Charles van der Steene of shipping behemoth Maersk, concluding:
“It’s inflationary in its essence.”
Just so. Yet is it? Are tariffs truly inflation-kindlers?
I am not half so convinced.
What IS Inflation?
We must initiate our inquiry with a true definition of inflation.
Many equate increasing prices with inflation.
Milk fetches $3 the gallon. Last year it sold at $2.50 the gallon. We have suffered inflation, runs the common argument.
Yet assume a constant money stock.
If Sally Housewife must reach deeper into her purse for milk… she must also reach shallower into her purse for garments and other goods.
We have, then, not a general elevation of prices. We have instead a specific elevation of milk prices.
That specific price elevation must be washed away by price decreases in other goods — assuming, again, a constant money stock.
Only if the money stock increases can prices increase generally.
What Inflation Isn’t
“Austrian” economist Frank Shostak:
- The essence of inflation is not a general rise in prices but an increase in the supply of money, which in turns sets in motion a general increase in the prices of goods and services.
- Consider the case of a fixed money supply. Whenever people increase their demand for some goods and services, money will be allocated toward other goods. Thus, the prices of some goods will increase — i.e., more money will be spent on them — while the prices of other goods will fall — i.e., less money will be spent on them…
- In order for an economy to experience a general rise in prices, there must be an increase in the money stock. With more money and no change in money demand, people can now allocate a greater amount of money for all goods and services.
- From this we can conclude that inflation is a general increase in the money supply.
Can tariffs then strike the inflationary match? In a world of fixed money they cannot.
Affirms economist Daniel Lacalle:
Tariffs do not cause inflation, as they do not generate an increase in the quantity of currency or the velocity of money.
Keeping an Open Mind
Do I here lift my sword from its sheath… and mount a thunderous defense of tariffs?
I do not.
In the ideal world I believe they would enjoy little to no existence.
Yet the sorrowful world we inhabit is not the ideal world. And tariffs do exist.
I merely concede the possibility that tariffs — assuming they are not extravagant and are applied intelligently — may not necessarily lead to rack and ruin.
I am willing to maintain, as the phrase runs and to the extent possible, an open mind.
I will of course close it once again if circumstances dictate.
Yet I expect neither liberation nor destruction tomorrow.
Of course… I have been wrong before.
Brian Maher
for Freedom Financial News
