Once upon a time long-long ago, I considered an academic career as a history professor before I caught the farming and marketing bug. Historical perspective of current events is important to me. DTN once called my writing style, the “Mark Twain of the Plains.” I don’t know that I would go that far but Mark Twain is attributed as saying, “History doesn’t repeat itself but it rhymes.” I strongly believe that and have always gone back for the historical perspective of where we were in my analysis.
For example, economists would compare the Great Recession 2009 to previous post WWII recessions and that was not apples to apples. The Great Recession was a similar cycle trough to the Great Depression in the 1930’s. Fed Chairman Ben Bernanke knew that and shaped Fed Central Bank policy accordingly. Bernanke was a student of the Great Depression having written his doctoral dissertation on the subject and was likely the best man for the job at just the right time to bring us out of what otherwise would have been another Depression. He used the lessons learned in the 1930s so as not to repeat those mistakes as they kept both fiscal and monetary policy too tight back then deepening the depression. The Bernanke Fed kept the economic retrenchment at the recession level preventing it from becoming a depression. Granted, today they are reaching for normalcy in Fed policy and that will take some time.
I have alluded in this report many times to the Smoot-Hawley tariffs and how they took a nasty economic collapse and turned it into the Great Depression. I have discussed, more than once, that one of the differences between this economic period and the 1930’s was that the world is more open on trade and less protectionist. Globalization since WWII has created astounding economic wealth bringing literally hundreds of millions of people, even billions, out of poverty. Yet there are some who did not adapt to globalization and governments did not do enough to help them, which has today created a populist backlash and angst reflected in Trump’s base.
No sane Economist today supports Trump’s proposed tariffs but he doesn’t care, labeling them as elitists. That rhymes with 1930 when 1000 economists wrote Herbert Hoover a letter asking him not to sign Smoot-Hawley, but responding to the angst of his day, he did anyway. Trump did not listen to his advisors either. The result back then was a deepened crash of the global economy into 1932. President Trump has a different world-view than mine and I have no idea whether he is cognoscente of history but these tariffs and the fact set upon which he bases them, is absolutely wrong. It shows an ignorance of history and economics. I guess that makes me one of those elitists.
Wars are unpredictable and I expect that the tolerance for volatility of many traders will be tested in the days ahead. If our trade partners do not respond aggressively retaliating for these tariffs, then Trump will take that to mean he can move forward with impunity. Tariff inspired inflation of consumer goods will go up like a tax on everything that we buy. Then again, if they hit back hard, Trump will get to display his tenacity as a counter-puncher letting trade partners know what “America First” means.
I didn’t think that we were dumb enough to repeat Smoot-Hawley but it appears that I may be wrong. The fact that world central bankers kept the preceding economic down-trough shallow enough to be called a recession instead of a depression means that we are starting from a better level than the state of the economy in 1930, preceding those tariffs. Nevertheless, this Hoover-like decision by President Trump calling, “I want tariffs!…Someone bring me more tariffs!”, would set the country and the world economy on a course of much greater economic risk.
He overruled his security advisors who opposed starting a trade war. He used national security as a smoke screen justifying the tariffs. WWII followed the Great Depression. Donald wants the military to be ready for what rhymes, coming after the economic war he is ordering. This is the most stupid thing that a President has done since George W. Bush ordered the Iraq war. Congress passed Smoot-Hawley so Hoover wasn’t the only one to make such a grave mistake. I expect that this time Congress, led by Speaker Ryan, may act to limit the President on the breadth of his trade action but then again Congress is dysfunctional. Trump was handed a good US economy and was doing things to make it better. That could end with the Trump tariffs.
All presidents have issued a tariff or two during their terms seeing justification but none since Hoover have promoted use of tariffs as Trump is threatening. The Trump administration is advocating a strategic change in US trade/foreign policy, altering decades of free trade expansion. It is protectionist to a degree not seen since Smoot-Hawley. Tariffs on Chinese solar panels brought reciprocal barriers on US sorghum. China and the EU have vowed that they will retaliate. Trump is obsessed with U.S. trade deficits and China has the whopper of a trade surplus, so is the whale Trump plans to harpoon.
The ag sector backed Trump so it makes a great target for trade retaliation. China is our biggest ag market and therefore the greatest threat to ag markets. Trump is going to poke them and then we will see if and where they poke back. Keep that up and everyone gets bruised or beaten. No one wins. History is rhyming.
David Kruse is president of CommStock Investments Inc., author and producer of The CommStock Report, an ag commentary and market analysis available daily by radio and by subscription on DTN/FarmDayta and the Internet.
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