The Economic Gamble of the United States
Trust The Plan!
Trump has dismayed the world this week by announcing tariffs on the trading partners of the United States worldwide. Economists and investors around the world are shocked and appalled in equal measure as global stock markets take a tumble. At the same time, those who support Trump reiterate the now familiar refrain – ‘Trust The Plan!’
Clearly, Trump has a plan, but is it one we should trust? That is the question.
Since the 2020 pandemic, governments have felt they must overspend to counteract that unforeseen emergency. Overspending was already a problem, and signs of a financial disaster to come were already apparent, as I discuss in my book Truth Decay – How Bitcoin Fixes This.
Overspending
However, the pandemic took the spending of governments around the world to a whole new level, and the usual critics of government spending looked the other way as everyone became focused on the immediate health emergency.
By 2021, surging inflation was becoming an increasing problem and was noticed by everyday people, especially in the United States.
This inflation resulted from the money supply expansion during the health crisis, and the low interest rates allowed to proliferate during the preceding years. People in the US received cheques to stay at home, and in the UK, the government made cheap loans accessible to businesses to help them stay afloat. New companies, particularly experts in PPE equipment, grew overnight. It was a very strange time.
Monetary Inflation vs Price Inflation
The resulting price inflation, however, became a big problem, causing many in the general population to freak out.
The government had to step in. You see, they can get away with as much monetary inflation (easing of the money supply) as they want behind the scenes, as long as they can control the price inflation (increase in the price of goods and services) that people experience daily.
Monetary inflation has been a valuable economic tool of governments since the outbreak of the First World War, as I explain in my previous newsletters. Still, this money supply expansion is usually carefully managed and generally hidden from unsophisticated eyes. The recent pandemic, however, appears to have been the proverbial’ straw that broke the camel’s back,’ meaning that the attempts of the financial system to control price inflation as a disguise of monetary inflation are starting to fail.
Once monetary inflation becomes apparent through uncontrolled price inflation, all hell will likely break loose, and hyperinflation will take hold, as has been seen many times before in history.
Interest Rates
Something needed to change, so this was when the central banks began raising their interest rates.
However, due to the amount of debt already in the financial system, they can only take this so far before the entire system begins to break down. The excess loans already issued at low interest rates become a big problem when renewed at higher rates.
Interest rates are one way to control inflation because they prevent individuals and businesses from taking out more cheap loans, which add to the money available in the economy (monetary inflation). However, this does not address the excess cash already in the system, contributing to price inflation.
Removing the effects of the excess liquidity caused by monetary inflation was always going to be painful; there is no doubt about it. It has been attempted many times in history and always precedes a financial crisis. It happened in 1820, in 1929, and in 2008, to name just a few examples. As I demonstrate in my newsletter – Bitcoin & Inflation – people love it when their assets go up, and they hate it when they go down. The financial industry typically throws a hissy fit in these circumstances, as we are starting to see right now.
Taxation
One strategy to protect the financial system and remove excess liquidity is to increase taxes, which siphon the excess liquidity back to the government. People hate excessive taxation, though, and most of the population is already taxed close to their limit. So, another solution is required so that individuals already suffering will find the answer less threatening. Finding a palatable answer is an ongoing political battle.
A tried and tested way around this is to find a victim and establish them as an enemy. The best enemy is usually the rich. That story never gets old, but unfortunately, people aren’t seeing targeting the rich as changing anything anymore, and as Trump is rich himself and needs the rich to keep him in power, he needs a whole new enemy.
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A New Enemy
Creating a new enemy is a tactic that Trump is playing to significant effect at the moment, accusing his trading partners of being unjust for applying tariffs on goods imported from America, while conveniently overlooking the fact that they do this partly to compensate for the strength of the dollar, the currency that they need to pay with that is owned and managed by the United States and gives the US their already exorbitant trading privilege.
For this reason, it is bizarre for Trump to retaliate with tariffs when the US dollar is the world’s reserve currency. This privilege makes imports to the US cheaper and their exports more expensive. This trade imbalance is the real reason that the manufacturing base of the US has been decimated over the years. The supremacy of the US dollar makes it cheaper for manufacturers to work abroad. It is misleading to blame foreign countries for decimating US manufacturing with high tariffs.
Deflation
However, to soak up excess liquidity in the system, tariffs act as an additional tax, redirecting some of the excess US dollar liquidity back to the government and effectively bringing about deflation. It also introduces friction into the financial system, lowering the velocity of money (the rate of transactions on which others charge fees), which is also deflationary. At the same time, it balances out the effects of deflation on the retail market by raising prices for the everyday consumer through slight price inflation. So, everyone can rally behind Trump making America great again by manufacturing some monetary deflation while simultaneously creating an effect of price inflation to balance things out.
Stock Market Woes
Hopefully, the effect on the everyday consumer will be mild. On the other hand, corporations and investors who weren’t savvy to ‘The Plan’ will squeal in pain as the stock market plummets due to monetary deflation. Trump gets to continue to be the hero to the little guy while the sophisticated investors like Warren Buffet who have been preparing for this by selling their investments for the last two years and are sitting on enormous cash piles, ready to repurchase the stock market at the most opportune moment, get to make out like bandits.
It is well known in investment circles that more money is made on the stock market as prices are on their way down than on the way up. Astute investors live for these moments. So while prices in the retail market may still be ok, all other aspects of our infrastructure that depend on the stock market, like house prices, pensions & even Bitcoin, which has not seen a significant stock market correction before, could crumble before our eyes. Watch out below!
Impact on the Bitcoin Price
It is depressing when many Bitcoiners have been encouraged to see Bitcoin as a safe haven asset. Its design and security are indeed innovative and valuable technologies. Still, there is no denying that its staggering price rise over the last fifteen years is primarily due to the excess liquidity in the financial system and the underlying fear of the dangers of hyperinflation.
As a ‘conspiracy theorist’, it wouldn’t surprise me at all to find out that as the financial elite have now established just how valuable Bitcoin is an investment vehicle, it is in their interests to crash the Bitcoin market while protecting the dollar, so that they can buy in at a lower price, just as the retail investors have to sell as they cannot handle the price drop of their other assets and savings, accumulated as a result of the rise in the price of Bitcoin for the last several years.
Unfortunately, the world still operates through fiat money, that is, money produced and managed through the laws of individual countries. These swings in the price of assets will continue to be a feature of that system. Many maintain that the price swings of Bitcoin make it too volatile to be a currency, while forgetting the numerous banking and financial crises of the past created through the poor management of fiat currency that destroyed many people’s lives.
Bitcoin as a Solution
Hopefully now that many more people understand the nature of our financial system, even if the price of Bitcoin drops through a severe market correction there will be plenty of people ready to buy as they realise that if we are to have a more stable future, we need a form of money that it is no longer possible to manipulate.
It will still take many years for this more stable future to become apparent, but at least now we have hope. With Bitcoin, every country loses the power to manipulate their currencies, which means a fairer and more level playing field for trade. No nation can use its form of money to create an unfair advantage. The advantages will come through other means. Some will have natural resources to trade, others will have manufactured goods and so on.
The Future of Free Trade
The great economist Adam Smith, who wrote the first book on Economics, ‘The Wealth of Nations’, persuaded the British of the virtues of free trade, although, ironically, he did this just before the British earned their exorbitant privilege by establishing the British Pound as the world’s reserve currency!
Nevertheless, Smith observed that all things being equal (which they rarely are), it is of benefit to countries when they trade their excess of production with countries who can supply them with what they need. Removing tariffs helps remove any friction in this process, and all can benefit from it.
As long as money continues to be our medium of exchange, inequalities will always be present, and fiat money will exacerbate these. However, with an incorruptible currency such as Bitcoin, trade negotiations in the future are likely to be less fraught. As Bitcoin disrupts fiat currency, it disrupts the concept of countries, giving them less to argue over and trade wars are therefore less likely to lead to real wars as they have famously done in the past.
Until next time, enthusiasts!
Victoria
Trump's Tariff Tantrum!
With my latest appearance on the World Crypto Network, we discuss the beginning of Tariff Wars, the controversy over stable coins and more…
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