Peter Orszag on Trump Tariffs

iluvatar5150 said:

Opinion | Trump’s Tariffs, Market Panic and What Comes Next

Peter R. Orszag, the C.E.O. of Lazard, discusses how markets are reacting to the uncertainty of Trump’s tariffs.

www.nytimes.com

EK interviews Peter Orszag, Lazard CEO and former OMB Director about Trump’s trade policy. I thought this was an interesting episode for a number of reasons, but what popped out for me the most was their discussion of the work of chairman of the Council of Economic Advisors, Stephen Miran. Before entering the Trump administration, Miran wrote a paper about the United States’ role as the global economic safe harbor and (as I understood their telling of it) how to back out of that responsibility.

Here’s a link to that paper (which I have not read):

https://www.hudsonbaycapital.com/documents/FG/hudsonbay/research/638199_A_Users_Guide_to_Restructuring_the_Global_Trading_System.pdf

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I liked both the interview and the Miran paper, so thanks for sharing this. I did a quick read and thought it was quite sophisticated and articulate. I try to summarize part of it here, though my paraphrasing will be far from perfect. Basically the Lazard executive Orszag reviews the Miran paper and what it can mean. It has much of Wall Street wondering if this really could be part of the Trump plan and what its implications are. The Miran paper is more sophisticated with details of how tariffs and currency valuations go hand-in-hand, especially in regards to the US dollar which has a special status as the world's reserve currency.

Marin suggest that the Trump administration could pull back on the USA dollar for being the world's reserve currency. The argument is that the USA has to run trade deficits because the dollar is in such demand by other nations. If we reduce dependence on the US dollar, it will allow the dollar to depreciate and improve US exports. On the other hand, the seigniorage or benefit from the free loan that the USA gets as others hold dollars will disappear and interest rates will be higher. This however is noted that as somewhat untested because the USA has been the only reserve currency, so this is somewhat theoretical, yet something that can be tried.

Miran too talks about introducing a surcharge (user fee) to avoid being in treaty violations of capital controls. This charge of 1 or 2 percent would be on the interest of US debt held by foreign central banks as a reserve. This would wean them off the dollar and onto?? This is scary because you are dealing with lots of things simultaneously that have uncertain consequences. The hedge for Americans would be hard assets.

It seems easy enough to devalue the currency if the USA wants but tariffs seem to be the first to move according to Miran, rather than just move the currency. Still, the move to manufacture in the USA will takes years not months. Completing this if even possible won't be easy for for what is just one term left for Trump, or any GOP candidate that spikes inflation or has a lasting recession. Miran talks about how to make this gradual on the currency side and how tariffs make more sense because they raise revenue whereas currency devaluation does not.

My own counterpoints would be why not establish a common currency with Mexico and Canada, keep trade more local and the currency effects would no longer matter within the NAFTA region. Secondly, if the NAFTA region went to a common market, with labor mobility, the economic boom would be huge. Suppliers would find a shift far more palatable to move operations back to the NAFTA region. Take China out of normal trade relations as Miran does imply and Trump basically is doing with high tariff rates. This combination would help solve lots of USA problems and reduce our dependency on just about everything outside of NAFTA since China and Mexico would be dealt with. (Two of the top 3 nations that push the USA into large trade deficits.)
I am thinking that there must be other possibilities too such as trying to raise US productivity. That too would initially help the trade deficit though if you stick to Miran's theoretical position it would seem to only increase the value of the dollar at a later time. So his paper based on Triffin's ideas is pretty fascinating if you like econ stuff.
Another thought is if the USA relinquishes the US dollar's prominence, what will happen when there is an international financial crisis? The new currency even if it is multilateral like the Special Drawing right of the IMF, may not have the will to commit the hundreds of billions to avoid a meltdown. (The US Federal Reserve did commit loans via swaps to foreign central banks in 2008).

Richard T said:

My own counterpoints would be why not establish a common currency with Mexico and Canada, keep trade more local and the currency effects would no longer matter within the NAFTA region.

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I like your counterpoint, and I think we do need to create a Belt and Road initiative in our hemisphere. Sadly, China is everywhere in our hemisphere. You guys should see if there are any openings for economic advisers.

Richard T said:

Marin suggest that the Trump administration could pull back on the USA dollar for being the world's reserve currency.

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I don't ever see this happening because we'll lose control of nations through sanctions, which I feel we use our currency as a weapon, and the reason for BRICS. We could devalue our currency like we did in the 80s.

I am starting to believe tariffs are a waste of time and will cause unnecessary hardship, and because of politics, people vote short-term and with their pocketbooks, and all this will probably be reversed with the new administration. But the idea is good in the long run for Americans. I believe with manufacturing, we'll have increased workers' wages and less inequality.

Trump is already postponing the tariffs because the economy is signaling recession.

Laodicean60 said:

I like your counterpoint, and I think we do need to create a Belt and Road initiative in our hemisphere. Sadly, China is everywhere in our hemisphere. You guys should see if there are any openings for economic advisers.

I don't ever see this happening because we'll lose control of nations through sanctions, which I feel we use our currency as a weapon, and the reason for BRICS. We could devalue our currency like we did in the 80s.

I am starting to believe tariffs are a waste of time and will cause unnecessary hardship, and because of politics, people vote short-term and with their pocketbooks, and all this will probably be reversed with the new administration. But the idea is good in the long run for Americans. I believe with manufacturing, we'll have increased workers' wages and less inequality.

Trump is already postponing the tariffs because the economy is signaling recession.

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The dollar as the reserve helps us control terrorism and money laundering as well though bitcoin negates some of this.

Trump started out with an extreme position on trade but it was a good way to put China down without them going overboard. If they want to manufacture in the USA to return then they should choose some electronics, chips, drugs shipbuilding and subsidize which they started to do with chips. The USA has lots of oil and food so I think that would cover things pretty well.

Trump's ideas too are to use tariff revenue to keep the lower taxes. You are right that I doubt the USA will keep tariffs long. Taxes seem likely to go up in the future to lower deficits. A Trump type of realignment is not likely to last. Farmers, poor and middle class voters are going to take too hard of a hit. It might be all worthless too if we have a serious market correction because then no one will buy into it.

Richard T said:

Trump started out with an extreme position on trade but it was a good way to put China down without them going overboard.

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If China gets any worse economically, they might use war, and the youth are upset with Xi. Who knows, a coup may happen, and we'll get someone a little friendlier.

Richard T said:

Trump's ideas too are to use tariff revenue to keep the lower taxes.

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I'm happy that my Social Security won't be taxed next year, but I feel we have to raise taxes to reduce our debt.

Richard T said:

A Trump type of realignment is not likely to last.

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I agree, because our voters are for what you can do for me now, as we saw last election. It's going to take a while for this realignment to take place, like you said earlier. I do feel this would be a good long-term plan, but I have my Christian worldview that things in the future won't be great.

Richard T said:

Farmers, poor and middle class voters are going to take too hard of a hit. It might be all worthless too if we have a serious market correction because then no one will buy into it.

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You can bet your bottom dollar that we'll have a liquidity crisis in the future. 10-year rates are going up, and bad for rolling over our debt, and China might be doing some funny stuff by selling, which is helping rates stay high. Plus, Japan is selling its debt, all the while foreigners aren't buying as much as they used to, mainly domestic purchases. Some are saying that many are selling debt to buy gold, also. Some say we might have another 2008 GFC I feel for the young people

I've been hearing a lot lately that the Fed has less wiggle room in monetary policy because of our high debt, but you'd know more about this than I.

Laodicean60 said:

If China gets any worse economically, they might use war, and the youth are upset with Xi. Who knows, a coup may happen, and we'll get someone a little friendlier.

I'm happy that my Social Security won't be taxed next year, but I feel we have to raise taxes to reduce our debt.

I agree, because our voters are for what you can do for me now, as we saw last election. It's going to take a while for this realignment to take place, like you said earlier. I do feel this would be a good long-term plan, but I have my Christian worldview that things in the future won't be great.

You can bet your bottom dollar that we'll have a liquidity crisis in the future. 10-year rates are going up, and bad for rolling over our debt, and China might be doing some funny stuff by selling, which is helping rates stay high. Plus, Japan is selling its debt, all the while foreigners aren't buying as much as they used to, mainly domestic purchases. Some are saying that many are selling debt to buy gold, also. Some say we might have another 2008 GFC I feel for the young people

I've been hearing a lot lately that the Fed has less wiggle room in monetary policy because of our high debt, but you'd know more about this than I.

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I appreciate the respect you give others but your knowledge of world economics and markets seems astute to me.

I think your Christian view too reflects mine and thus you seem right on the turbulence ahead. There is too much movement now and the currency, bonds, and even stocks need to find new equilibrium levels based on tariffs which of course are unknown. The economy is cyclical as business theory cycle predicts and I would add that God can hamper or accelerate an economy at anytime. So with new tariffs (even at 10%) inflation undefeated and if the economy rolls over as many expect now, it looks ugly. Why is this time potentially different? Keynesian solutions to prime the economy with new spending seem limited by debt levels. monetary (Quantitative easing and lowering i rates) solutions are limited by lingering inflation, and so it will be interesting to see what the plan is as things do get worse.

As you spoke of 2008, I did see that China holds lots of mortgage backed securities. If they sell off, it is enough to drive mortgage rates higher. I don't know if housing could crash like 2008, though I would be in the market if it did. God give us wisdom and help us all to trust in you in preparation of what is to come. That we would be Christians with a heart to give and be able to help others with needs as you supply us.

Richard T said:

I appreciate the respect you give others but your knowledge of world economics and markets seems astute to me.

I think your Christian view too reflects mine and thus you seem right on the turbulence ahead. There is too much movement now and the currency, bonds, and even stocks need to find new equilibrium levels based on tariffs which of course are unknown. The economy is cyclical as business theory cycle predicts and I would add that God can hamper or accelerate an economy at anytime. So with new tariffs (even at 10%) inflation undefeated and if the economy rolls over as many expect now, it looks ugly. Why is this time potentially different? Keynesian solutions to prime the economy with new spending seem limited by debt levels. monetary (Quantitative easing and lowering i rates) solutions are limited by lingering inflation, and so it will be interesting to see what the plan is as things do get worse.

As you spoke of 2008, I did see that China holds lots of mortgage backed securities. If they sell off, it is enough to drive mortgage rates higher. I don't know if housing could crash like 2008, though I would be in the market if it did. God give us wisdom and help us all to trust in you in preparation of what is to come. That we would be Christians with a heart to give and be able to help others with needs as you supply us.

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What do you think about the Fed bailing out hedge funds? I don't like it because we reward risk-taking with bailouts. I think that stimulus checks straight to the people will bring the economy back quicker we have a severe recession. I'm basing this on the 2020 checks and how that overheated the economy.

Since you are shorting like I am, do you see momentum turning to the upside for a little before another leg down? Or do you think we'll get one more high before the CRASH? I get conflicting stories on YouTube.

Laodicean60 said:

What do you think about the Fed bailing out hedge funds? I don't like it because we reward risk-taking with bailouts. I think that stimulus checks straight to the people will bring the economy back quicker we have a severe recession. I'm basing this on the 2020 checks and how that overheated the economy.

Since you are shorting like I am, do you see momentum turning to the upside for a little before another leg down? Or do you think we'll get one more high before the CRASH? I get conflicting stories on YouTube.

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I am open to trying some practical things in any economy that could expand benefits without doing too much harm. I would be far more careful with untended consequences though.

I have no love for hedge funds. I don't like that hedge funds managers make money but it does not count as income but instead is taxed at lower rates. How Private Equity and Hedge Funds Are Taxed

In contemplating bailouts, some firms really are too big to fail. Meaning their losses can cascade to others and crash the system so bailouts can be helpful if this is the case. It would be better though to require everyone to take less risk, and break up the larger entities into smaller parts. We see too many bailouts though. FDIC does that to depositors over the limits often. The US government did that with some who deposited money in Fintech companies like Synapse. Why bail out the middleman Synapse that was not insured" Even worse, after bankruptcy they had no records of what money actually when to what banks with what guarantees.

I figure both bitcoin firms and fintech will need more regulation. It is hard for government to get in front of all the possible ways people can lose their money. Meanwhile, regulations are so stringent in some money transfer firms that I can't even send money to myself from the USA to wherever I am. So there is a lot of stupidity in regulation as well. But at the highest levels that is where the pain will eventually come.

"Since you are shorting like I am, do you see momentum turning to the upside for a little before another leg down? Or do you think we'll get one more high before the CRASH? I get conflicting stories on YouTube."

I think most investors today are too optimistic. Bear markets are known to have sharp rally's too. The macro and most micro data seems to be negative. Alcoa for instance, just reported a good quarter but talked their future estimates down due to tariff headwinds. We probably will see more of this, possible more core inflation and higher unemployment. It will be worldwide likely. The fed dialed down their quantitative tightening but they are not expanding too much and there should be some contraction from the past that is not hit the system. Money contraction in a red hot market seems destined to fail. It did in 2000-2002. I am no genius though so yes it could rally but so far every rally has failed. The one recent IPO is underwater, and the earnings cycle is just starting. This is not a panic yet like Covid was. The market still has optimism even if the US consumer does not. It takes awhile to turn a ship. plus Trump is a cheerleader for the markets and may very well switch policies soon. He is looing like he will just be seen as a liability by more and more poeple as time moves on.
I always thought God might find it sort of an attention getter to crash the market to a level that was the biggest crash in history. Nothing like getting everyone's attention for the end times with their money. But even the 1987 crash was several days before the big drop. I thought this bear might fizzle soon. So many taught to buy the dips, but it seems like the wall to climb in the USA is going to be big and has much further to go. The Dax, Nikkei and other foriegn indexes are just about 5% off their highs, so much money flowing back now, they might be viable. The best question is if this is the big one, a drop of all drops and who can really know? Praying all have the wisdom of God.

Richard T said:

I think most investors today are too optimistic.

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I'm a slow reader, but still working to educate myself from the Hudson Bay paper.

If I were to bet my blessing points, I would say that the market is bouncing from an oversold condition and that we have another leg down around 90 days if Trump resumes tariffs to extremity. I'm also nibbling on short-term treasuries like SCHA or VTGO for when the Fed lowers the funds rate shortly.

I agree about the panic part, the market was disappointed and uncertain because of tariffs, plus the markets were at all-time highs, so many are ready to pull the trigger to maintain profits. Notice the market makers were driving the market before Trump's tariff announcement and did a rug pull. Thx for conversing

If I may share Eurodollar university, this dude sifts through the mental massaging that the FED/ central banks and MS media spews.

You give a good possibility around the time of the 90 day window on tariffs. But Trump can change courses too with some good news once in a awhile. I really do not think the fed is going to help much anytime soon especially with Trump lashing out at Powell saying he should quit. Powell is dovish but until you see a spike in unemployment .5% might do, he may not act.

Richard T said:

You give a good possibility around the time of the 90 day window on tariffs. But Trump can change courses too with some good news once in a awhile. I really do not think the fed is going to help much anytime soon especially with Trump lashing out at Powell saying he should quit. Powell is dovish but until you see a spike in unemployment .5% might do, he may not act.

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Well, I was wrong in thinking China was doing some funny stuff by selling our debt. Last night's Eurodollar University said that the reasons debt is being sold are that they are strapped for cash because of their economies, and it makes sense, along with Japan.

Laodicean60 said:

Well, I was wrong in thinking China was doing some funny stuff by selling our debt. Last night's Eurodollar University said that the reasons debt is being sold are that they are strapped for cash because of their economies, and it makes sense, along with Japan.

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I heard a couple of years ago they were running out of hard currency. But I think it is hard to know. They have lots of local government debt and I would suspect that some of their accounting is compromised and their official statistics flawed. I think other nations including the USA have flaws in their "official" reporting too. At least the USA doe snot have two exchange rates on the dollar, one for inside the nation, and one for outside.
So today, more selling in bonds, more buying of gold. Even bitcoin today is safer than the US dollar. The EU is poised too for stagflation as they lower rates and their economy slows. I guess the rush out of the USA is the flavor of the month though. I just wonder how long and how deep others will flee from US debt?

Richard T said:

I guess the rush out of the USA is the flavor of the month though. I just wonder how long and how deep others will flee from US debt?

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I don't know, but he mentioned in the video that similar actions have taken place in the past, one was the GFC.