Vendettanomics: Trump’s War on Our Economy

• Trump’s economic “strategy” seems like chaos and it is.

• It’s all about self-aggrandizement and retribution.

• He and his stooges reject empirical evidence and accepted economic thought.

• We will examine Trump’s approach to tariffs, the federal deficit, immigration, regulation, and the dollar.

• But it is Trump’s contempt for the Constitution and rule of law that will destroy us.

“You have meddled with the primal forces of nature Mr. Beal, and I won’t have it.” Ned Beatty in “Network”

I began writing this piece in mid-March, just before Obliteration Day, as an effort to collect my thoughts and try to get a handle on the longer-term economic implications of Donald Trump’s actions since the inauguration.

I started with the premise that there must be some grander strategy guiding Trump’s seemingly anarchic agenda. “There must be a pony in here somewhere,” I told myself.

Then came Obliteration Day and the scales fell from my eyes: ruh ro -- no pony. Since then, events have been evolving so fast and furious that I felt like I did as a kid down the shore, getting decked by one wave only to struggle to my feet and get levelled by another. Not only was I dazed and confused, but I was totally disoriented.

Regaining my equilibrium, I renewed my quest for enlightenment. By then a legion of thinkers with bigger brains than mine had jumped into the breach with efforts to explain what had transpired. Much of what I had intended to discuss had been thoroughly dissected and a consensus had started to emerge among thinking people:

1. DOGE and Elon Musk were out of control.

2. Trump’s tariff policies were woefully misguided.

3. Trump has nothing but contempt for the Constitution and Rule of Law.

4. Trump is intent on retribution against all his enemies both real and imagined.

5. Trump’s sole objective is enriching and empowering himself

6. Trump is unconcerned about how his actions might affect anyone else, including most of his MAGA minions.

7. There is some method to his madness, if only we can figure it out. (I don’t know if he coined the term, but Adam Tooze refers to this as “sanewashing.”)

I mostly agree with the consensus. However, I strongly disagree with the final point. While I suspect that many of Trump’s henchmen have broader ideological agendas with some kind of perverse coherence (i.e. the 2025 project), I think Trump himself is, as usual, totally winging it. Just a swipe of Occam’s razor will reveal that Trump is driven only by his vanity and his instinct for power, which is impressive (if you are impressed by that sort of thing.) What he does or thinks or believes at any given moment has nothing to do with what he did the moment before or what he will do a moment later. Sort of a bizarro Chauncey Gardiner. Chaos (leavened with more than a touch of sadism) is the point. By keeping everyone wrong footed and fearful, he can intimidate the crowd and always have someone to blame for missteps.

In a 2017 Substack concerning Trump's Muslim immigration edicts, I wrote this: "I don’t know if Trump himself hates Muslims or not. What I do know is that there are no moral constraints on the depths to which Trump might descend to bolster his power and flatter his own vanity.” It seems that I seriously understated the problem.

Since I am mostly on board with the consensus, I decided that the best contribution I could make to the discussion was to home in on those points where my views seem to differ from the consensus and those points that I think need greater emphasis. So that is what I have tried to do. I hope at least some of it is new and helpful.

Two caveats. First, I assume throughout this piece that deep down Trump and his junta have the best interests of the United States at heart. That is to say, I assume that they are not intentionally working to destroy our Republic. A corollary assumption is that Trump is not acting as the agent of Vladimir Putin. I wish I were more fully convinced of this. (See this from Peter Zeihan.)

Second, I make many judgments about Donald Trump and his enablers, but no one can get into his head and know what is really going on there. Witness his craven (albeit welcome) retreat on China tariffs. This makes any forecast a fool’s errand. But that never stopped me.

THE FEDERAL BUDGET DEFICIT

The following point is widely recognized but cannot be overemphasized:

Donald Trump seems to be gambling that DOGE, his tariffs, and his other actions will collectively cut the federal deficit. The problem is this: If (as I think likely) these gambles fail and instead drive our nation into a recession, the deficit will blow wide open, overwhelming any paltry savings from DOGE, and potentially rendering the debt burden insoluble.

Total Federal Debt

The national debt ballooned more than 25% during the 2007-2008 recession. A 25% increase today would measure a monumental $8 trillion. At current interest rates, annual interest payments would rise to nearly $2 trillion, and the core federal deficit could nearly double (Note that the federal budget was effectively balanced in 2001.)

Federal debt % of real GDP

Can it really be the case that Trump and his cronies are unable to grasp these simple facts? Or, worse, do they grasp them but just not care?

To be clear, reducing the federal deficit is a laudable goal: our nation’s debt burden is an existential threat. The problem is that I am not aware of any reason to believe that Trump’s methods will make a meaningful dent. As everyone now knows, no spending cuts matter unless they involve Social Security and Medicare, which Trump has assured us are off limits.

On the contrary, there is compelling theoretical and historical evidence that higher tariffs, indiscriminate layoffs, population decline, and the denigration of legal norms will slow the economy and perhaps produce inflation in the bargain.

The most perilous threat to the economy is if we suffer a recession in which longer-term interest rates do not decline or even rise. This could easily happen if the government’s funding needs increase exponentially and if the Fed cuts interest rates before the market is convinced that inflation has been vanquished. Then, inflationary expectations will only accelerate. They currently are only 100 basis points lower than they were at inflation’s peak in 2022.

3 Year inflation expectations

TRUMP’S TARIFF STRATEGY: “RUN AWAY, RUN AWAY!”

Since Obliteration Day, we have learned a lot more about Donald Trump’s tariff “strategies”. Previously, I had thought that Trump’s stance on tariffs would be unyielding, given his fetish for that beautiful word. But it turned out that his commitment to tariffs was no stronger than his commitment to anything else. All it took was for China to show a vertebra of backbone and a hiccup in the stock market and Trump folded like a wet towel. All bullies are cowards at heart, and Trump is one big, beautiful bully; one might almost say the perfect bully.

Recognizing that Trump’s future tariff edicts will be no more sensible than his previous ones, let’s take a look at how his trade fumblings are likely to unfold and the effect they are likely to have on the nation’s economy.

It is essential to understand two things about tariffs:

1. tariffs are not inflationary and

2. tariffs will drive prices higher.

If that sounds contradictory, it is just the perverse nature of tariffs. But there’s more.

Above all, tariffs are a drag on economic growth. In other words, they are recessionary. This is because they foster an inefficient allocation of resources. As long ago as 1810 David Ricardo understood this simple truth. In his famous example, he pointed out that bananas could be profitably grown in Britain if the banana tariff was set high enough. All we would have had to do is to build a lot of heated greenhouses. To build, baby, build those greenhouses, we bananacrats would have needed steel, glass, coal, land, labor and capital. Our demand for these inputs would have driven their prices higher. But this would not have resulted in inflation unless the government printed more money. Rather, the burden of higher prices for those specific inputs would have been borne by the other firms that used them; their profits would have declined and, inevitably, some would have failed. By elevating the banana biz above all others, we would have driven resources away from their most productive uses.

Today, as tariffs kick in, prices will rise immediately on tariffed goods and associated products, depending on the price elasticity of each good. (Elasticity is the amount that demand for a product will drop with each dollar increase in price.) Other prices will take time to adjust throughout the economy. So short term, aggregate prices will rise on average. Again, this is not inflation. Ultimately, demand and supply will sort out, mainly through business profits. Profits will rise for those firms that benefit from tariffs and decline for those that do not. Make no mistake; in the long run tariffs will produce slower aggregate growth and unemployment.

Because prices are almost certain to rise temporarily, tariffs will present a major challenge for the Federal Reserve. Unless employment plunges, Chair Powell will be loath to reduce interest rates in the face of rising prices. There is a real risk that he will need to keep monetary policy too tight in the face of what he knows will ultimately be a weakening economy.

Tariffs are an assault on free enterprise. They are industrial policy on steroids. While Trumpeters have issued innumerable justifications for their tariffs, at their core the tariffs represent a unilateral presidential decision to privilege one set of businesses or industries over all others. This is strange policy indeed for professed conservatives. After railing for years about Joe Biden’s socialist industrial policy, Republicans are installing a quasi-socialist industrial policy that would make Biden (or Brezhnev) blush.

I concede that there may be legitimate reasons to impose tariffs and other trade restrictions. Of these, national security stands out; we want to control the resources we might need in case of war. Unfortunately, in the case of China, that horse left the barn a long time ago. Worse, we have now made new enemies by alienating our erstwhile allies in Europe and elsewhere. At least the Arab nations are friends. And with friends like those . . . . well, you know.

Another justifiable reason for tariffs, in rare instances, is Alexander Hamilton’s “infant industries” argument. Prior to independence, Britain had spent nearly two centuries suppressing US industry. Anyway, few historians think these tariffs had a meaningful impact on US development.

In fact. the whole reason economics exists in the first place is because our foundational economic thinkers – notably Ricardo and Adam Smith - were dedicated to the eradication of tariffs. Tariffs were a centerpiece of the mercantilist system that preceded capitalism. This system assumed that the wealth of nations consisted in the amount of gold and silver they could hoard. Like Donald Trump, mercantilists believed that trade was a zero-sum game; imports resulted in an outflow of gold in payment, which was thought to impoverish the nation. To discourage imports, mercantilists advocated high tariff barriers.

Both Ricardo and Smith emphasized the fallacy at the heart of the mercantilist system. They argued that a nation’s wealth was built not on precious metals, but on the most efficient possible utilization of a nation’s resources. This could be achieved through trade. A nation should focus on producing those products in which it had a “comparative advantage” and trade for those that other nations excelled in producing.

Make no mistake, Trump is trying to take our economy back 3 centuries by imposing a neo-mercantilist system. He and his mob are convinced that trade is theft and that every dollar of imports represents a dollar stolen from America. It took me a good bit of mind work to finally accept that ostensibly intelligent people could believe something so stupid, but there is no getting around it

How do we know that this is their belief? Two reasons. First, Trump has said numerous times that our trade deficits with other nations are prima facie evidence of them “ripping us off.”

More shockingly, on Obliteration Day, Trump and his deplorables justified their extortionate tariffs with an algorithm of such exquisite idiocy that no one at first could believe what they were seeing. They took the dollar value of our trade deficit in goods with a given nation (including a couple of islands inhabited only by penguins) divided it by the total goods imported from that nation and then, perplexingly, divided the result by two. Anyone with the slightest knowledge of economics or finance knows that such a metric is ludicrous. To paraphrase Wolfgang Pauli. “It’s so stupid it’s not even wrong.” Among a myriad of other errors, Trump omitted any consideration of US services exports in calculating the trade balance. The US is the worldwide leader in finance, accounting, consulting, and advertising.

This bogus ratio tells you all you need to know about Trump’s mindset. Not only does he believe that anything that leaks out of his cranium is genius (of a very stable kind) but that everyone else is so dumb or so cowed that they will accept it. Recall in his first term when he presented the map of a hurricane on which he had penned his own invented path with magic marker.

For the sake of argument, let’s say that Trump is right. Let’s say every dollar of trade deficit is a dollar stolen from American suckers. Now consider the chart below. The trade deficit for the past decade has averaged about 3% of GDP while GDP growth has averaged 2-3%. Does this really mean that Americans have been robbed of $7 trillion over the past 10 years? Trump and his poodles emphatically would say yes.

US trade balance

The years from 2002 to 2009 are especially instructive. The trade deficit spiked from $420 billion in 2002 to $763 billion in 2006. Then, in 2009, the deficit reverted back to $394 billion. Does this really mean that foreigners stole $400 billion less in 2009 than in 2006? These were difficult years; you’d think a criminal would have stolen more when times are tough. But Donald Trump emphatically would say yes.

U.S. Nominal GDP

What this spike really reflects, among other things, is the pre-financial crisis demand of European banks for dollar-denominated subprime mortgage-backed securities. This trade and payments imbalance was the true cause of the 2008 financial crisis. (See Basel: Faulty ) From 2000 to 2006, we got trillions of dollars worth of Audis, televisions, and sneakers. They got trillions in dodgy mortgage debt. Who is the thief in this scenario?

If it is Trump’s intention to balance our trade deficit, he is not off to an auspicious start.

US Trade balance monthly

Recently, Donald Trump and his enablers have been adamant that tariffs will repatriate “manufacturing” jobs back to the US. I have no idea on what basis they can possibly be making this claim, but they seem to be true believers (well, we know for sure that Trump is a true believer, at least for the time being. The rest may just be simpering toadies.)

There are several obvious flaws with his claim:

First, even if we managed to bring back all this manufacturing, the resources to build those factories and, especially, the people with which to staff them must come from somewhere. In effect, we need to build a bazillion new greenhouses for our modern day bananacrats. But with 4% unemployment, there are no idle unskilled workers and there is a gaping deficit of skilled workers. No, the resources must be bid away from existing businesses. The upshot: businesses that are protected by tariffs will thrive. Those that are not will waste away and die.

Plus, many of the manufacturing jobs slated to return from overseas will go to robots when they get here. If we need to pay US workers many multiples of what comparable workers are paid in China, technology is a cheaper alternative. This is not necessarily be a bad thing: technology jobs pay far better than manufacturing jobs. If only enough Americans had the brains to do them.

Trump’s justifications for his tariffs are riddled with conflicts.

Of course, the most mind-blowing confounder is this: If Trump’s tariffs are merely a negotiating ploy and will ultimately be negotiated down to zero (as his cabal now sometimes implies) then the fictions of “repatriating industry” and “generating federal revenue” are revealed to be the pathetic shams they are.

Remember that Trump started out asserting that tariffs were a tactic to stanch the flow of fentanyl. This was patently absurd. It is my understanding that we get most of our fentanyl through the good ol’ US mail. Plus, I’m not sure how much fentanyl we get from Mauritius, which is assigned a 50% tariff rate.

Then he said that tariffs were intended to raise revenue to allow for tax cuts.

Only then did he contend that tariffs were intended to repatriate manufacturing jobs from foreign nations that have been ripping us off.

I am convinced that Trump was 100% serious about the tariffs on Obliteration Day. It was a huge ego trip, and he sincerely believed that the tariffs would work their magic and that all other world leaders would just bend over. But since then, he has been persuaded that the tariffs were a big mistake and had to back down. To cover his ignominious retreat, he has to pretend that tariffs were a setup from the get-go; the genius negotiating tactic of a great dealmaker.

In any event, I don’t think that hordes of American are champing at the bit to leave their current jobs and spend their lives gluing rubber soles to canvas uppers (I’m assuming Chuck Taylors here). Yes, we can impose tariffs high enough to make such work remunerative, but sneakers will become far more expensive, and unaffordable for many people. Plus, resources will be bid away from currently profitable businesses.

Here’s another thing: for an administration that professes concern about government efficiency, they seem strangely blase about installing a brand-new and gargantuan bureaucracy of inspectors, investigators, accountants, and customs agents.

But do not despair completely. There is good news; tariffs are certain to resuscitate at least one hallowed American industry, an industry that from time to time since colonial days has greased our economic gears and greatly enriched many of the founders. That industry, of course, is smuggling.

TRUMP’S CONTEMPT FOR THE RULE OF LAW

Of all the calamities being visited upon our economy and society by Trump’s reign, by far the most existential threat is its contempt for rule of law, the Constitution, and the inherited norms of our Republic.

Trump’s assault on the law will have long lasting ramifications throughout our society: for immigrants, for minorities, for free speech, for our courts, for voting rights, for due process, and on and on. This is all widely understood.

Less widely appreciated is the damage that this rejection of legal and ethical standards is likely to inflict on American business.

My more progressive friends will roll their eyes, but the fact is that capitalism is not founded on avarice. It is founded on trust. Think of it this way; a couple of times every week you zap $20 or $25 to Amazon, confident that the next day you will receive in return an undamaged book or coffee mug.

Why do you trust people you’ve never met, a thousand miles away to send you exactly what you ordered and not take the money and run? For three reasons:

First, you and Amazon have made such exchanges so often that they have become routine. You don’t really give it a second thought. It is normative.

Second, you know that it is in Amazon’s self-interest to provide you with the promised services. Yes, they could abscond with your payment, but they would far prefer to retain your trust as a repeat customer.

Lastly, the law. Capitalism is by far the most efficient system ever devised for utilizing and allocating resources. It is rule of law that has allowed capitalism to flourish and enhance human well-being for three centuries. With all its complexity and all its flaws, the American legal system has evolved into an extraordinarily effective mechanism for protecting private property and individual rights.

Without rule of law capitalism cannot exist. To the extent rule of law is diminished, capitalism will function less efficiently. Both firms and customers need confidence in fair, consistent, and dependable application of the law to make planning and investment decisions. They need confidence that these laws will not change radically over time. Businessmen face plenty of other variables whose risk effectively is stochastic. Keynes called this “radical uncertainty.”

Together, capitalism, democracy, and rule of law have bequeathed to us Americans lives of safety, good health, justice, and comfort that were unimaginable to our ancestors. We all are profoundly lucky to live in such a system. Until very recently throughout the world, the sovereign had the right to intervene arbitrarily in any business enterprise or personal life. But few American businesses have ever had to worry about arbitrary government intervention in the legal process.

Until now. In three short months, the Trump junta has unleashed a breathtaking assault on due process, the Constitution, and legal norms. With wild abandon, Trump has unilaterally abrogated contracts, indiscriminately pardoned domestic terrorists, violated the due process of residents, cancelled whole departments established by Congress, perpetrated a crypto currency grift, withheld appropriated funds, weaponized the justice department and committed other outrages too numerous to mention.

If I may digress a bit, I believe that our economy is an “emergent system.” By this I mean that it is a system that has evolved from causes and forces far too complex for humans fully to comprehend. As they evolve, emergent systems develop properties and spontaneous order that are not predictable based on the characteristics of their component parts. Often, as they evolve, they become even less comprehensible to human minds. Examples of emergent systems are the human body, termite nests, slime molds, the internet and, probably, human consciousness. Perhaps the most compelling and accessible description I have encountered of how emergent systems work is that of Jane Jacobs in her masterpiece “The Death and Life of American Cities.” Conservative Nobel-prize winning economist Robert Lucas (originator of the highly influential but deeply suspect theory of “rational expectations”) considered Jacob’s book one of the great works of economics.

Because our understanding of emergent systems is profoundly limited, our efforts to change them must be marked by equally profound humility. We can make changes at the margin to improve the system by our own standards, but we can really have no idea what the unintended consequences of our actions might be. We can make an educated guess, but we simply cannot know for sure. We can try to reduce inequality, which is a laudable goal. But for the system as a whole, this effort could set in motion a chain of interactions that might make us all worse off. Above all, we must eschew heroic projects geared to change the system root and branch. We must avoid the very thing that Trump is doing. Not only do such radical actions rarely produce the benefits we intend, but they could also bring on the collapse of the entire system.

To me, this is the essence of what it means to be a conservative; reverence for the system we have inherited and humility about our ability to change it to suit our will. But the predicate is first to understand as best we can the forces that got us here.

Trump and his enablers are the furthest thing possible from conservative. Authoritarian, certainly. Fascist, perhaps. But their overweening hubris betrays no respect for anything other than those things that will augment their own power. Their actions already have severely damaged our Republic - hopefully not irreparably. Given sufficient time and resources, they are likely to destroy it. It is highly ironic that the 2025 Project’s subtitle is “The Conservative Promise.” It was anything but.

I should emphasize a final benefit of democracy and rule of law that is essential if capitalism is to flourish: the non-violent transfer of power. If a nation’s legal system and regulatory structure is overturned every time there is a new administration, investing will become impossible. If one can be hounded and sent to jail in one administration for actions legally allowed by its predecessors, people will be loath to take risks. Donald Trump has amply demonstrated his contempt for stable political traditions, free and fair elections and the peaceful transfer of power.

I thought I would share a selection that illustrates the importance of the peaceful transfer of power. It is from the wonderful book “New World, Inc.” by John Butman and Simon Targett.

In September 1580, a three-masted galleon, riding exceptionally low in the water sailed into the English Channel. As the ship, named the “Golden Hind”, neared land her captain – a short, stout man – barked out a question to some fishermen as they scudded by.

“Is the queen alive?”

The captain, Sir Francis Drake, had not set eyes on his home coastline for nearly three years. After such a long time away, Drake knew it was entirely possible that Elizabeth had died or lost her throne.

It would not have been the first time an English mariner had come home from a voyage to find a new monarch on the throne. In 1509, when Sebastian Cabot returned to England, Henry VII had died and, with him, royal interest in voyages of discovery. Likewise, in 1554, Richard Chancellor returned from Muscovy to find Edward dead and Mary wearing the crown – and preparing to marry Philip of Spain.

Here is another example: in the early 1400’s the Chinese Admiral Zheng He led several expeditions of Chinese “Treasure Fleets” to lands as far away as West Africa. In ships many times the size of Columbus’ puny crafts, each of his voyages carried thousands of soldiers, diplomats, merchants, and foreign officials. But after a new Ming emperor took the throne and Zheng He passed away the voyages ceased, and the Navy was effectively shut down. By 1500, it was a crime in China to build a ship with more than two masts.

All authoritarian governments are inherently resistant to change. All change, no matter how beneficial for the nation they rule, is seen as a threat their grasp on power. This is why they are desperate to control the media and education and the justice system. Many of Trump’s actions are redolent, to say the least, of those employed by authoritarian rulers now and in the past.

IMMIGRATION

I’ll admit to strong feelings about immigration. I’m for it (See “Trump’s Immigration Fatwa”.) Why? Well, for one thing, I tend to root for the underdog. More than that, I believe that immigrants strengthen our country. I believe that immigrants, whether Irish, Jewish, Hispanic, or Asian have always been a self-selected cohort of highly motivated, industrious, family-oriented individuals who are intent on improving their lives and the lives of their children. Plus, despite the deluded ravings of the maganiacs, the fact is that they commit far less crime than “real” Americans. We should welcome people like that as citizens.

Think about it. If a young mother is willing to risk her life walking two thousand miles while carrying her baby just to be an American, that is someone I would be honored to have as a neighbor. Such an individual is unlikely to take the United States for granted.

Having said this, I concede that we must get control of our borders. Billions of people throughout the world would prefer to live in America, and we cannot accommodate all of them. I confess I do not have a perfect solution to this problem, but it seems to me that last year’s legislation was a pretty good (and bi-partisan) start. That bill, of course, would have passed the Senate had Trump not put the kibosh on it.

Too many of our long-time fellow citizens are disgruntled and feel entitled to a better life. They always expected to be rich and for life to be easy, but it is not. This, they believe, cannot possibly be their own fault. Many believe that their birthright has been unfairly stolen by sinister elites or godless demons or systemic racists. Everyone feels like a victim. It is ironic that this was a central theme of J.D. Vance’s book “Hillbilly Elegy.”

But we are not victims; we are profoundly lucky – all of us – even in these fraught times – to be Americans. If we can’t appreciate that, maybe someone else can.

I am proud of my English, Irish, and Swedish heritage. But all of us “real” Americans must admit that we have made a mess of things. Immigrants can’t do worse.

By the way, has anyone notice that without immigration, our population is not growing? Has anyone noticed what is happening in Japan, and China, and Europe? Populations in all those places are plummeting. If we want enough workers to staff Trump’s repatriated factories, especially skilled workers, and enough people do the work that supports us baby boomers in our dotage, immigration is the only source.

This is the most head scratchingly perverse implication of Trump’s entire agenda; if Trump’s apparent economic objectives are to be achieved, the thing we will need most is massive immigration.

DEREGULATION

For the past two decades, I have been an implacable critic of federal regulation. (See “Basel: Faulty”, “Law and Order: FDIC”, “Insure all Deposits.”) Excessive and misguided regulation imposes an immense burden on the American economy. My expertise is bank regulation. Since 1988 and especially since Dodd Frank in 2011 bank regulation has gone grievously off the rails. Bad regulations caused the 2008 financial crisis. I figure that if bank regulation is so hopelessly misguided, other industries must suffer from a similar burden.

But like most Americans, I also believe that effective, even-handed regulation is sometimes needed to mitigate capitalism’s flaws. For instance, deposit insurance and the money creating power of banks make effective bank regulation essential. It is just way, way overdone.

The problem is that Trump and his Yahoos (especially one particular chainsaw-swinging, ketamine-addled Yahoo) have evidenced no interest in fostering a more effective regulatory structure. By indiscriminately firing regulators and shutting down entire agencies they seem intent on blowing up the entire system. Their actions will make rational reform all but impossible. As anyone knows who has worked in the private sector, when a CEO starts taking a chainsaw to employees, the best employees, who can readily find another job, are the first to leave. Thus, the federal government’s best employees are already gone, and Trump’s actions will make it extremely difficult to hire qualified employees in the future.

In fact, while paying lip service to deregulation, Trump with his tariffs and other measures is interfering in the private sector to a far greater degree than previous administrations. As mentioned above, his tariffs are effectively industrial policy; they “pick winners” by definition. Trump has disrupted decades-old networks of supply and manufacturing. He has unilaterally abrogated private contracts. He has threatened companies into changing hiring practices. He has terrorized CEOs into trips to Florida to pledge fealty. He has brazenly manipulated the crypto currency market to fatten his own wallet. He has extorted Law firms into huge ransom payments.

THE DOLLAR

Much of our trade deficit can be attributed to the status of the dollar as the world’s reserve currency. No product produced in America is more valuable to foreign governments and private citizens than a piece of paper denominated in dollars. Most essential commodities that trade worldwide are denominated in dollars and most smaller countries, along with some large ones, borrow in dollars. This means that they must always hold dollar reserves to pay for essentials and stay current on debt. Our trade deficits and the dollar’s reserve status are two sides of the same coin. In a strange way, the dollar-based system is a validation of mercantilism; it really does make a small country richer (or, at least, less vulnerable) to hoard dollars.

When COVID hit, many smaller nations found it impossible to access dollars and approached the brink of default. Fortunately, the Fed stepped in and flooded the system with liquidity. But there is no guarantee that future Fed responses will be equally beneficent, especially now that inflation is a constraint.

The dollar’s reserve status clearly gives us a big advantage over our trading partners, but it is unclear just how big that advantage is. Paul Krugman thinks the advantage is minimal. I think it is quite large, but I have never seen a convincing quantitative estimate of the benefit.

I am not among those who believe that the loss of the dollar’s reserve status is likely. I simply can’t imagine what the alternative currency might be. But if America’s global credibility continues to slide, it is certainly possible that this could happen. Just bear in mind that if this does happen, in my opinion, it would be a catastrophe for the United States. It is an “exorbitant privilege” that should not be taken for granted.