Sigh, Chaos Continues (7)

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).

We are definitely in “the cool zone” and we are now facing a global political realignment. Economic flows will have little choice but to realign along the boundaries of the new political blocs. The post-war alliance structure (NATO, etc.) allowed developed market investors the luxury of ignoring geopolitics, but geopolitical risk is back with a vengeance.

To a limited extent, the American economy is somewhat insulated from trade disruptions. However, attacking the tradeable goods sector while simultaneously dismantling the welfare state is a recipe for a deep decline in nominal GDP (the Greek experience of what happens when you attack a welfare state while in a downturn must be kept in mind). The White House brain trust appears to be content with this. To the extent that there is any rational plan, it would appear to revolve around the belief that they will get a desired attack on the power of labour and thus reduce inflation, and the economy will be hoped to be growing by midterms. It’s certainly a plan, and I guess we’ll see how it well it works out for them.