April 9, 2018

Tariffs: Peter Navarro VS Larry Kudlow

Excerpted from Doug Kass twitter

Tariffs are a zero to negative sum game - they produce cost push inflation. 

Larry Kudlow may have been a calming influence yesterday but it is the economic handmaidens and trade hawks (Wilbur Ross and Peter Navarro) that have Trump's ear.

To me, the views that animate Navarro's policy prescriptions, unlike Larry's, demonstrate his economic illiteracy.

* There is no inverse relationship between imports and GDP as Navarro asserts.
* In fact, there is a strong positive relationship between changes in trade deficits and changes in GDP.

Both Navarro and Ross are proponents of steel tariffs. As I have mentioned, such tariffs hurt producers that utilize steel products much more than they benefit a smaller population of steel producers. The byproduct of which could be rising steel costs which may ripple throughout the economy.

In reality, the US depends on China - we are in a flat, networked and interconnected global economy:

1. The Chinese export market is important to the U.S.

2. China produces low cost goods that benefit American consumers.
3. China funds our budget deficit, their surplus of savings is imported to the US - squaring the circle. If China stops buying our Treasuries, where do we get funding?

We need more Kudlow and less Navarro - but I am afraid, as mentioned above, that Navarro will prevail. If so, more shareholder wealth may be destroyed and CEO confidence (and spending plans) may be damaged. 

The Interest Rate Tightrope

Then there is the issue of Fed policy that we must superimpose upon hastily crafted trade policy.

Remember, the path of interest rates are often even more important than fiscal policy. Consider that the Federal Reserve raised rates at the same time Reagan reduced taxes in 1981 - and, despite lower taxes, the U.S. immediately fell into a recession.

Today the two year US note yield is once again above 2.3% and LIBOR continues its uninterrupted rise - a subject oft discussed in my Diary.

With increasingly ambiguous signs of economic growth (in both the US and EU), the odds of a last half 2019/early 2020 recession may be ++