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| Meme "recycled" from Reddit |
I used to mock the idea of the “expectations fairies” — at least in the context of neoclassical theory. However, Keynes’ “animal spirits” is back, we are running into a situation that does not have a lot of precedents in the post-World War II era. The brain trust in the White House has done a lot of things, but very few of them so far would have macroeconomic impact (outside of countries where US aid was significant). Instead, the issue is the effect of future actions.
Since my last article, President Deals partially caved in Canadian/Mexican tariffs, but has just announced new tariffs on Canadian products (dairy and lumber, from what I could tell). We also have had reports that Trump had earlier threatened to revise the Canada/U.S. border (i.e., annexation of Canada).
This constant chaos (and existential threats) means that the required re-negotiation of the Canada/U.S. free trade treaty is a non-starter, and the best that can be hoped for are some kinds of “trade cease fire” while Canada desperately re-orients its economy away from North-South trade. At the same time, Europe is dealing with the effective demise of NATO, and the call for nuclear weaponry is growing. Trump also appears increasingly frustrated that nobody cares about his Ukraine “peacemaking” efforts (since he gave the Russians everything he could give, he is no longer of use to them).
The tariff hammer finally fell on Canada/Mexico, and it is unclear how long the new policy will remain in place (and whether new tariffs will be stacked on top of them). Although the tariffs will have major negative economic effects, the Trump White House is detached from objective reality, and so the negative effects will not force anything.
The Tariff Week speculation continues, and at the time of writing, it is unclear whether the Tariff Hammer falls on Canada/Mexico (deadline tomorrow). I just want to comment on the Ukraine blow up, which was far stupider than I expected.
There are a few broad scenarios I see going forward, one of which will have hard to predict side effects.
On the domestic front, the administration is doing its utmost to destroy confidence and force a recession. Perhaps the plan is that the economy will emerge from the wreckage by around the midterms, so the business press can gush about growth prospects. Although the House managed to get a budget plan passed, it is still not clear that they will agree on anything once the scale of economic damage is clear.
I was planning on waiting for the fallout of The Lavrov-Rubio Pact before writing my next article, but so far things remain in flux on that front. Although one could pick up pennies in front of a steamroller by worrying about short-term economic data movements, geopolitical events may wipe out pre-existing tendencies at any time.
