Thanks for going down memory lane for the time in the 1980s that I lived in Chi-Chi. One of the interesting things about the 70s show that is worth noting is that early life experiences impact central bankers reaction function. For example, Arthur Burns formative macroevent was the 1929 crash/Great Depression. It must have haunted him, so that at the first sign of economic weakness he would have priortized growth, aka ill advised rate cuts. For our generation, and Powells, the inflation shock/Volcker response is our formative event of the era, so it is my guess if the Powell ends up making a mistake its on the growth side, however, I do love the 1970s analogue charts and use them every chance I get.
That is a great point about the formative years being the Volcker years. However, don't we think the 9/11 and GFC experiences have also brought some concern on the growth side. I recall a meeting with Charles Evans in 2019 or so in which he indicated the Fed was very comfortable to let inflation run hot a bit because it knows how to bring inflation down. It was more worried about deflation at the time. Well, fast forward, and I am not so sure it does know how to bring inflation down. It seems those looking for disinflation are relying more on AI productivity gains and Chinese economic stagnation than the success of the Fed which has been running policy too easy for the better part of the 21st century. Maybe this is what the gold buyers are finally seeing. It doesn't hurt that gold has been a better asset to hold than stocks in the 21st century.
Hi Richard…could you please elaborate on why higher tariffs are bearish for the US$? I would think that tariffs need to be paid in $ and should be bullish for the US$. Looking forward to your podcast on Gold. Thanks.
Great question. I believe the higher dollar is the result of more global trade that is priced in dollars. I believe that tariffs will reduce the amount of global trade, particularly if there is retaliation by other countries which I would expect. The examples I would give are: 1. 2018/19 tariffs on China which did see retaliation and resulted in less bilateral trade between the two countries and 2. Smoot-Hawley tariffs in 1930 which also led to retaliation and saw global trade fall by 2/3 over a 5-year period. Given the potential size and scope of reciprocal tariffs, I think the Smoot-Hawley example is plausible. I think an example of where lower tariffs increased global trade is from the GATT and WTO in the post WWII which increased trade by reducing tariffs. Overall, I think fewer things priced in dollars means less international demand for dollars. To your point, initially, would higher tariffs mean higher prices and therefore more demand for dollars? Possibly if it takes time for adjustments. However, I think these adjustments will come more quickly especially if countries can't just do a workaround by shipping into Mexico as they have done in the past. I do think it isn't 100% clear what will happen, I am just hypothesizing that it will be negative for trade and dollars
Thanks for going down memory lane for the time in the 1980s that I lived in Chi-Chi. One of the interesting things about the 70s show that is worth noting is that early life experiences impact central bankers reaction function. For example, Arthur Burns formative macroevent was the 1929 crash/Great Depression. It must have haunted him, so that at the first sign of economic weakness he would have priortized growth, aka ill advised rate cuts. For our generation, and Powells, the inflation shock/Volcker response is our formative event of the era, so it is my guess if the Powell ends up making a mistake its on the growth side, however, I do love the 1970s analogue charts and use them every chance I get.
That is a great point about the formative years being the Volcker years. However, don't we think the 9/11 and GFC experiences have also brought some concern on the growth side. I recall a meeting with Charles Evans in 2019 or so in which he indicated the Fed was very comfortable to let inflation run hot a bit because it knows how to bring inflation down. It was more worried about deflation at the time. Well, fast forward, and I am not so sure it does know how to bring inflation down. It seems those looking for disinflation are relying more on AI productivity gains and Chinese economic stagnation than the success of the Fed which has been running policy too easy for the better part of the 21st century. Maybe this is what the gold buyers are finally seeing. It doesn't hurt that gold has been a better asset to hold than stocks in the 21st century.
Hi Richard…could you please elaborate on why higher tariffs are bearish for the US$? I would think that tariffs need to be paid in $ and should be bullish for the US$. Looking forward to your podcast on Gold. Thanks.
Great question. I believe the higher dollar is the result of more global trade that is priced in dollars. I believe that tariffs will reduce the amount of global trade, particularly if there is retaliation by other countries which I would expect. The examples I would give are: 1. 2018/19 tariffs on China which did see retaliation and resulted in less bilateral trade between the two countries and 2. Smoot-Hawley tariffs in 1930 which also led to retaliation and saw global trade fall by 2/3 over a 5-year period. Given the potential size and scope of reciprocal tariffs, I think the Smoot-Hawley example is plausible. I think an example of where lower tariffs increased global trade is from the GATT and WTO in the post WWII which increased trade by reducing tariffs. Overall, I think fewer things priced in dollars means less international demand for dollars. To your point, initially, would higher tariffs mean higher prices and therefore more demand for dollars? Possibly if it takes time for adjustments. However, I think these adjustments will come more quickly especially if countries can't just do a workaround by shipping into Mexico as they have done in the past. I do think it isn't 100% clear what will happen, I am just hypothesizing that it will be negative for trade and dollars
Thanks for the quick response and explanation. This helps!