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Most pundits agree the majority of America voted for change. This CNN exit poll concluded, “72% of Americans Unhappy With Way The US is Going.” The most frequent issues mentioned were immigration and the economy.

Sheriff-Elect Trump is quickly assembling a cabinet of change agents, and began threatening foreign governments with huge tariffs, demanding immediate changes.

While some praise the tariff threats, good friend Chuck Butler constantly reminds us that there is a tariff risk, “Can you say…. Smoot/ Hawley tariffs? I knew you could….”

Let’s look at tariffs through the lens of common sense. What’s really going on? Will they work?

What is a tariff?

Tariffs are taxes that must be paid when an importer brings in goods from another country. This raises the cost, resulting in higher consumer prices. Tariffs are risky government meddling in a free-market economy to produce a political outcome.

What is the purpose?

Tariffs generate tax revenue; however, they are generally levied for different reasons….

Protecting jobs for domestic workers. Yahoo Finance explains:

“President Joe Biden…accused China of dumping practices when he introduced new tariffs on about $18 billion worth of Chinese goods — including a 100% increase on electric vehicles (EVs) and a 50% increase on semiconductors.

…. ‘They’re not making any money off them,’ Biden said. ‘They’re doing it to put other people out of business.'”

Predatory pricing is a pricing policy designed to put your competition out of business; and is illegal in the US.

Protecting jobs is politically popular, but – what if other countries have innovated, and produce higher quality goods at lower cost? Competition sparks innovation, improves supply and the natural market forces serve to keep a lid on prices. A tariff supporting a non-competitive industry interferes with the normal supply-demand curve, while creating inflation; simply prolonging the inevitable.

Influencing behavior. Yahoo Finance continues, “The World Trade Organization (WTO) largely supports free trade policies, but it allows countries to enact trade barriers like tariffs in response to human rights concerns.”

AP news reports:

“President-elect Donald Trump threatened to impose sweeping new tariffs on Mexico, Canada and China…to crack down on illegal immigration and drugs.

…. He said the new tariffs would remain in place ‘until such time as Drugs, in particular Fentanyl, and all Illegal Aliens stop this Invasion of our Country!'”

The proposed tariff is to motivate other countries to change their behavior. This is politically popular; Americans want the border closed immediately and the inflow of drugs stopped. Hopefully they will negotiate a fair deal and the tariffs won’t happen.

AP adds:

“President-elect Donald Trump…threatened 100% tariffs against a bloc of nine nations if they act to undermine the U.S. dollar.”

Why are the BRICS working to undermine the USD? In 2022, BBC reported:

“The European Commission has proposed excluding three more Russian banks from Swift, an international payment system used by thousands of financial institutions.

It comes after the EU and its allies suspended seven institutions from the system in March.

The move aims to hit the country’s banking network and its access to funds via Swift, which is pivotal for the smooth transaction of money worldwide.”

Biden and the EU were ramping up the Ukraine conflict, weaponizing the dollar against Russia by kicking them out of SWIFT. Other countries realized, “If they can do that to Russia, they can/will weaponize the dollar against us.”  The US bullied the world and should have expected a pushback.

Trump is threatening to use tariffs to slow down the process. Perhaps there is a different motive….

Renegotiate agreements. The presidents of Mexico and Canada immediately went to Mar-a-Lago to meet with the president.

Trump’s tariff threat against the BRICS nations is designed to change behavior. Hopefully, in both cases, everyone will calm down and work out something meaningful for the benefit of all.

What about Smoot-Hawley & The Great Depression?

Let’s look at history. In 1913, The Federal Reserve was created under the guise of darkness. That was soon followed by WWI (1914-1918) and the roaring 20s.

Washington Internation Trade Association (WITA) explains: (with my emphasis)

“During World War I, a number of countries, including the U.S., had greatly expanded agricultural production; as Europe recovered from the war and its agriculture production reached earlier levels, production worldwide exceeded consumption and prices fell around the world. Farmers had gone into debt during the boom times, investing in new equipment and land, and were hard hit when prices fell.

There was overproduction in the industrial sector as well. While the upper 1% was doing very well, those farther down the income scale were not doing as well and many were buying cars, appliances and other products on credit.

Additionally, many Americans had been buying stocks on margin and when the stock market collapsed, they saw their equity plummet and they stopped buying goods and services; in the first half of 1930, consumers cut their expenditures by ten percent. Companies were afraid to invest in new capacity or products, and they too stopped spending.”

Sound familiar? The Fed was established, banks lent money hand over fist, people speculated with cheap money and we had the roaring 20s. The top 1% did very well, until borrowers couldn’t repay their debts.

WITA continues:

“Economist Milton Friedman, lays blame on the Fed. …. Between 1929 and 1933, the money supply contracted by one-third, and as a result many companies couldn’t get loans. The problem was exacerbated by the failure of policy makers to prevent bank failures.”

President Hoover swooped in like Mighty Mouse, vowing to save the day. WITA explains how politics (no surprise here) came into focus:

“The Tariff Act of 1930 (aka the Smoot-Hawley Tariff Act), started out as a bill that would only raise tariffs on some agricultural products, but a host of other special interests piled on and before the legislation finally reached President Hoover’s desk it represented one of the largest tariff increases in U.S. history.

…. In May 1930, 1,028 leading American economists presented President Hoover, Senator Smoot and Congressman Hawley with a letter urging Hoover to veto the bill if it passed Congress.

The economists argued that the tariff increases would raise the cost of living, limit our exports as other countries retaliated, injure U.S. investors since the high tariffs would make it harder for foreign debtors to repay their loans, and damage our foreign relations. Unfortunately, this is what happened.

…. Two years later unemployment had reached almost 24 percent in the U.S., more than 5000 banks had failed, and hundreds of thousands were homeless and living in shanty towns called ‘Hoovervilles’. Our economic woes spread around the world:…while our unemployment rate increased some 600%, unemployment in Great Britain rose some 130% and over 200% in France and Germany.”

The Corporate Financial Institute (CFI) chimes in:

“The legislation did the most harm by souring trade relations with other countries.

…. The Hoover administration experienced protests from 23 trading partners following news of the higher tariffs. However, the U.S. ignored the retaliation threat. As a result, Canada, the U.S.’ largest trading partner, imposed extra duties on some American goods.

…. Within two years, several countries adopted similar retaliatory duties. …. U.S. imports and exports with Europe fell by two-thirds between 1929 and 1932.

Global trade declined at a similar rate in the four years the legislation was in effect, making it harder for the United States to pull itself out of its economic difficulties.”

CFI offers a timeline:

While the Smoot-Hawley tariffs may not have been the cause of the Great Depression, most agree they made things much worse.

Today, the slightest inkling of an economic downturn is greeted by the Fed flooding the system with money; creating high inflation; kicking the can down the road.

Politicians created an omnibus tariff bill, Hoover stopped listening, bullying the world, creating an all-out trade war.

FDR ran against Hoover, with his campaign song:

“Happy days are here again

The skies above are clear again

Let us sing a song of cheer again

Happy days are here again.”

FDR rescinded much of the Smoot-Hawley tariffs, and felt extreme government spending programs would turn things around. It didn’t work either.

The Trump Tariffs??

Sheriff Trump’s (Make America Great Again) tariff threats appear designed to bring about meaningful negotiations. The US needs negotiated fair deals, not only with other governments, but also with US companies to keep jobs here in the US.

MAGA will not work if the rest of the world suffers. A skilled negotiator understands both sides must come away with a fair deal, or it won’t work.

So far, the threat of nuclear war has brought countries to the bargaining table; the consequences of following through with the threats are much too great. Let’s hope the tariff threats do the same. A worldwide trade war will harm all concerned. Hopefully a negotiated settlement will be quickly accomplished and Trump will keep his word and remove the tariff threat.

If Trump really wants to fix much of the cause of our economic woes, he should dump the Fed and reinstate Glass-Steagall.

Will the plan work? Stay tuned!
 

On The Lighter Side…

I hope everyone had a wonderful holiday season, we certainly did. No matter how old we are, we still remember special, wonderful Christmases past. I hope everyone had one of those special times you will remember fondly forever.

Jo and I drove back to AZ after Christmas. The drive from Dallas to El Paso is 600 long miles. Does the wind ever stop blowing in west Texas? It’s so strong you keep both hands on the wheel, particularly when going under a bridge or passing a truck.

When it’s Jo’s turn to drive I’ve got plenty of time to daydream.

There is something mesmerizing about the dust devils that rise up out of nothing, while the tumbleweed continues to quickly move with the wind.

Watching oil rigs pumping up and down like a band leader, I chuckled to myself, wondering if I was watching the west Texas version of the Waltz of The Flowers.

“See the dust is swirling, see the dust is twirling.

Tumbleweed dancing, so entrancing.

If I believe my dreams, I could be waltzing with flowers.

If I believe my dreams, I could be waltzing for hours.”

Now we are home and time to get back to work.
 

Quote of The Week…

“Let’s start the year with great optimism, and at the end of the year be proud that we exceeded our expectations.

Happy New Year!”

— Dennis Miller
 

And finally…

Jo found some New Years humor for our entertainment:

• I went to buy a camouflage sweater to wear on New Year’s, but I couldn’t find one.
• I wanted to take a bath for New Year’s, but I decided to leave it where it is.
• I’m not a hard drinker on New Year’s. In fact, I find it pretty easy.
• My New Year’s resolution was to become a gold prospector, but it didn’t pan out.
• Bacon and eggs walk into a bar on New Year’s Eve. The bartender says, “Sorry, we don’t serve breakfast here.”
• I wanted to cook a special dinner for New Year’s Eve. But I ran out of thyme.
• My boss told me to enjoy New Year’s Eve. So I didn’t go to work.
• I made a reservation at a fancy Italian restaurant for New Year’s Eve. It cost me a pretty penne.
• I once told a chemistry joke at a New Year’s party, but I didn’t get much of a reaction.
• When someone asks me if my champagne glass is half-empty or half-full, I say, “Either way, fill it up.”

And my favorite:

• Why is partying in Times Square overrated? Because they drop the ball every year.

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