The absolute Idiot's guide to Tariffs and the Bonds Market

Part I: Why you shouldn't try to understand the tariffs

This is the first part of a two part article having a look at the tariffs and their current impact on the economy. Even though the stock market has almost recovered, we are still far away from having weathered the storm. Part One of this piece will try to establish why I think that the tariffs are best understood as megalomaniac’s hubris, part II will try to explain in layman’s terms what the first part of the fallout is that we are facing. I will precede this piece by saying that even though I constantly refuse to engage in predictions, I do think that the financial market’s confidence that this will just go away is just as ill advised as their confidence that it would have never been a thing in the first place.

Playing 5D Chess against a Pigeon

There are people that are deeply convinced that Trump is playing 5D-Chess. Others at least assume that he is running a fairly transparent racket to enrich him and his cronies. Even fewer assume that he is having a coherent policy vision and finally there are those that think that he is mainly suffering from delusions of grandeur, paired with absolutely reckless stupidity.

I will admit that I fall squarely into that last category. Surely this doesn’t rule out that he enriches himself and his entourage along the way, as he did when he announced that he would put his tariffs on a 90 Day hiatus: but it doesn’t change the fact of the matter that his truly outstanding trait remains a possibly world historically unique brand of ignorance.

Fairly soon after the announcement of the tariffs a term emerged that I had not heard so far: “sanewashing”. It referred to the tendency to invent a good reason behind the policy and to come up with models that made it at least remotely plausible that somehow something beneficial would emerge from the mayhem, like a flower blossoming on top a of pile of manure.

And even though the people that think that Trump is a bona fide madman are my people I find it hard to resist this urge: there is something fundamentally appalling to the thought that these policies are as thoughtless as they seem. The mind encounters something like a “horror vacui” when pondering this possibility: it is akin to trying to envision a square with three corners or the problem of squaring the circle. When encountering these terms, on may be entirely cognizant of the impossibility of solving these problems, yet one intuitively thinks about them for at least the fraction of a second – there must be something one is missing, an angle one hasn’t explored, a brilliant strategy one fails to see.

There is not. And it is absolutely crucial to understand this as this insight will have to keep us on our toes until we make it out the other end of a Trump presidency. Somewhat recently I pointed out that I am not in the business of predictions, so I will try to shy back from making any in this regard, yet I do think that taking a somewhat sober inventory of the situation we find ourselves in might have some benefits. I want to add that I think that this type of sober assessment is done far too rarely: the horror vacui situation forces even otherwise reliable analysts to rationalize the events of the past week – a problem which gets further exacerbated by the fact that even talking about it proves to be difficult as one inevitably gravitates towards language that suggests reasons where there aren’t any: this starts with the tendency to repeat the claim that the tariffs are reciprocal, which they are in no way, shape or form.

I think that there are two distinct main points that need to be understood in order to get a fairly accurate idea of the inner workings of the situation.

1) Why there is no possible way to understand the tariffs as such

2) Why the tariffs were put on a 90 Day Hiatus even though their goal was inachievable in the first place.

Why there is no possible way to understand the tariffs as such.

“You’ve got the markets seeing your brilliance”, Senator John Barasso told Trump after he rescinded the tariffs for 90 days and had the markets recovering a bit from the first shock. I can only speculate that first responders needed a crowbar to dislodge him from Trump’s rectum after that. It was sycophantism at an almost comical level, comparable only to the cultish zealots around Musk that this Tweet parodied:

To recall in detail what had happened in which order is giving the administration already too much credit. Nevertheless, a few news outlets at least tried to recreate a timeline of the events. Time , NBC and PBS are only the tip of the iceberg and even though each of their accounts is confusing enough as it is, none of them manage to capture the utter confusion that had gripped basically everyone throughout the rollout of the policy.

Treasury Secretary Scott Bessent eventually deemed it necessary to convey to the administration that they would need to align their communications to focus on the endgame: better trade deals with foreign nations.

Unfortunately for Bessent, it was far from obvious that this was indeed what the endgame was – a problem that Bessent was well aware of, as evidenced by his interview with Tucker Carlson on the very same day that saw him call for this non-existent clarity.

As a matter of fact, not only was there no endgame in sight, but there were at the very least five different games being played at the same time.

The five Goals that were announced were

· Creating leverage for trade negotiations with foreign countries in order to stop America from being exploited

· Boosting the American industry by on-shoring industrial production

· Facing off with China

· Generating revenue to counter-finance proposed tax-cuts

· Lower prices for consumers

Each of these goals taken at face value was already preposterous. Taken together, they were basically catastrophic – that they still managed to exist simultaneously should be the main clue that there was indeed no proper goal at all but rather an unhinged fantasy: show strength and watch the world bend to our whims.

I will be the first to admit that the world has proven to be rather spineless when it comes to standing up to Authoritarians, yet the problem with bending the world to your whims remains that even if you have the power or audacity to do that, you still cannot bend it in to different ways at once.

So let’s consider the stated goals in their constellation: if the goal of the tariffs is to create leverage in order to renegotiate trade deals, they would have to be negotiable. To have them be negotiable, you would have to retain the option to lower them adequately – therefore reducing or even negating their capability to force industry to reallocate their production to the United States.

Conversely, if the goal was to on-shore production, you would not be able to use the tariffs as adequate leverage in negotiations with foreign countries. After all, the incentive for a business to transfer its production to the United States – a costly and time-consuming process in any case – is its expectation that it would have to deal with a trade obstacle in the long run. If a business assumes that the tariff that made the factory it was going to built might go away any day, it may very well decide to wait this moment out rather than to sink its investment.

A similar problem results if one assumes that the primary goal was to create revenue: the revenue in question could obviously not come about if negotiations with the other countries resulted in a lowering of the tariffs – nor would it result if they moved their production to the US. All of this, mind you, is not even considering the additionally stated goal to lower consumer prices, which would neither occur if businesses were facing rising costs nor if they would need to build an entire domestic supply chain: unless of course the foreign producers would decide to not only eat up the tariffs entirely but also to take an additional hit to their margins… a thought so preposterous that I haven’t seen a single take that seriously pondered this as a possibility.

One may have noticed that one of these goals has been left out here: the confrontation with China is indeed not technically at odds with any of the other goals. On the other hand, to provoke a confrontation is in itself neither a particular achievement nor as such necessarily desirable. After all, China isn’t only one of the world’s largest economies, but also massively integrated with the American Economy: to erect a de facto trade embargo with tariffs exceeding 100% on both sides surely creates turmoil, though not necessarily desired effects, least of all shrinking consumer prices or additional revenue.

All of this is to say that the goals of this policy are fundamentally at odds with themselves: there is no rhyme or reason to them or any clear strategy that is being followed. To play the Advocatus Diaboli by pointing out that they might partially achieve some of these goals is entirely missing the point: one might as well maintain that the burning down of one’s house partially achieved the goal of cleaning up one’s room.

In lieu of assessing any of the rationalizations after the fact, one should really consider the gist of the actual policy that was underlying the tariffs in the first place: notably, a trade policy meant to counter the trade deficit that the US had with other economies and which seemed to be designed by asking an AI how one would go about such a thing.

Rather than getting our minds clouded by any potential benefits or drawbacks or prognostics we should remember several key stepping stones on our way to this global economic turmoil.

These hawkish tariffs have been notably championed by Peter Navarro, one of Trump’s main economic advisors who rose to prominence after Jared Kushner, Trump’s son-in-law discovered one of his books on Amazon and was enchanted by the title: “Death by China”.

Navarro’s expertise was and is notably bolstered by economics professor Ron Vara, that Navarro likes to cite in his books.

Unfortunately, of course, Ron Vara is an entirely made up credential and simply an anagram of Navarro’s own name.

When the tariffs then went into effect, they were entirely predicated upon the notion that a trade deficit in the trade in goods would be a bad thing. All of the things I will say next should be obvious to absolutely anyone without having them spelled out, but considering the fact that the entire administration of the world’s biggest economy did not consider this obvious enough to stop this policy in its tracks it seems reasonable enough to repeat this once more.

The tariff rate in percent was calculated by taking the trade deficit and dividing it by the imports, multiplying the result by 100. What is a trade deficit?

The trade deficit is the monetary equivalent of the Imports from a Country minus the exports to that same country. To put this another way, it is what you buy minus what you sell. The problem here is naturally that buying from a country constitutes in no way being exploited by said country: the tiny nation of Lesotho, that was hit with Trump’s highest initial tariff – 50% ‘discounted’ rate – for example exports mainly diamonds and is as one of the poorest nations unable to import a lot. It is very much unclear how this tariff was supposed to be used as leverage against Lesotho, whose diamonds would be in demand even after the tariff and who would be very much unable to ramp up its consumption of US products. It has to be unclear, as it is nonsensical. The entire scenario has been very adequately compared to people complaining that their pizza baker does not even their trade deficit with them by buying their goods.

(full comic at https://xkcd.com/3073/ )

As if this notion wasn’t absurd enough, the Trump administration’s calculation additionally decided to not factor in the trade in services, which remain a major driver of the US economy, thereby cutting the last tether to reality this entirely absurd equation may have had. The policy was, in short, devised by a crook, developed by an oversimplifying AI, enacted by an equation that made as much sense as figuring out the temperature by dividing the number of bananas in your cupboard by the number of plates and that was meant to bring about mutually exclusive policy goals.

Maybe the market saw Donald Trump’s brilliance when they recovered after the first initial shock. But maybe they just took a sigh of relief to wait for the next one. Paul Krugman seems far from relieved, even if and especially when considering the policies that some have greeted as course corrections.

Which brings us to the question: if the policy was so entirely divorced from reality from the start, what could have been powerful enough to reverse it? What was the straw that broke the camel’s back to enact the 90 day hiatus?

It seems as if what shook Trump in the end was not really any movement in the stock market: rather, it was unforeseen movement in the Bonds market that have as of now not recovered.

While it does seem somewhat unclear how dangerous this development actually is, one should at the very least be wary of any development that is egregious enough to be registered by Donald Trump. Most people, like the initially quoted John Barasso or quite frankly me are mostly oblivious to why this question matters. I will try to explain this as simple as possible in the next blog post. However, if you are in a hurry and have at least a basic understanding of fiscal politics, this Guardian article will probably do just as well.