Long ago, when I took a class in international finance, I was surprised to learn that there were more US dollars in circulation outside of the country than inside. It would be interesting to read about the effect of the administration’s policies with regard to this aspect.
This is why USDT and USDC are somewhat important for the continued dominance of the US dollar. Foreigners have access to a digital dollar that is replicated by private industry in the form of a stablecoin. It is not produced explicitly by the government so Big Brother cannot turn it on or off, or watch you through the lens of currency.
Big brother can absolutely turn it off. Stablecoins are only stable because they are backed by actual dollars. The dollar’s continued dominance is really of no geopolitical significance if the U.S. government can’t use it as a weapon.
“But how are foreigners supposed to get the dollars to invest in the US? There is only one way: They have to sell us stuff, more than they buy from us. You can argue about behavior and incentives, but this is an accounting identity, a budget constraint. More investment means more trade deficit.”
Well, not necessarily. There can be two offsetting transactions in the capital account. For instance, you finance foreign direct investment by running down previously accumulated foreign assets…
To get dollars why not just convert some of your own fiat currency to dollars? Yes, conversion without an underlying asset will reduce your currency’s exchange value over time, but since when has that been a concern of motivated politicians?
If the Japanese sell yen to get dollars, where did the people on the other side get dollars? If foreigners, they had to sell to the Us to get them. If US, they want to use the Yen to buy things in Japan.
In a future war between U.S. and China - a non-zero probability - re-homed industry (think steel production, chip fabrication and shipbuilding) and domestic access to vital mineral resources may well make the difference between Mandarin and English as the future official language of America. This thought may seem laughable, but so would have the idea that Latin would become a dead language to a Roman Senator. Looking at things entirely through the lens of economics is fine for an economist in an ivory tower, but throughout history only those nations with the continued ability to defend themselves have survived. Our nation is only 250 years old - an eyeblink compared to most, and there is absolutely NO guarantee it will still be here in ten years, much less another 250. Trump's international economic policies have a dual purpose, and you are only discussing one of them. This is like discussing the economics of 'green' vehicles without also discussing the economics of lithium mining.
Yes, but let's not wrap everything in the flag. It's a long way between a lithium mine and an F-35, and no national security reason the batteries in my new electric bike, or the bike itself, have to be made at 5 x cost domestically.
Yes, but let's not wrap nothing in the flag, either. Where are you (or your children) going to go when there is no America? Europe? UK? If you have girl children their life in either of those countries will be much more like Iran/Iraq/SA/Somalia than it is here. Oh, you say - I don't have any children so it doesn't matter; I can afford to view the world through my 'new-world-order' tinted glasses and sip some more Chardonay. My problem isn't so much that you don't want to 'wrap your analysis in the flag', but that you don't seem to think that the flag is worth considering at all, while simultaneously benefitting from all the things that same flag gives you. You claim the authority to speak about weighty international economic matters because of your expertise in that field. I claim that 'expertise in the area' (whatever the particular 'area' is) has been repeatedly shown to be mostly worthless because the 'experts' are 'wrapping' their analyses in a global flag to the detriment of our own. You may think that you are being tarred due to other 'expert's misadventures, and you may be right - or not. Maybe paying 5x for your tony electric bike batteries is a spectacular bargain when what you get in return is a bright future for your children.
Do you know John Cochrane personally, or have you engaged in private conversations with him that have caused you to use such phrases as, "you don't seem to think that the flag is worth considering at all..."? Or to characterize him as saying to himself, "I can afford to view the world through my 'new-world-order' tinted glasses and sip some more Chardonay."?
The reason I ask is that such malign "sentiments" bear no relationship to any of his public statements with which I am pretty familiar having listened to and read them over several years. Surely someone with your "expertise" in military and defense matters is familiar with the basic requirement to "know your enemy". You have very much misrepresented, Dr Cochrane's world view and denigrated his love of the US as they are represented by the content of his public statements.
The 80% cheaper argument assumes no malice. China is training dependency into the rest of the world. You could call it grooming. The low low prices are the van dispensing free candy.
Your comments about the identity between trade deficits and investment by foreigners in the U.S. calls to mind points emphasized by Bill Poole (among others) while he was president of the St. Louis Fed. Politicians, and often economists, like to focus on trade deficits as the causal force. The "we're addicted to consumption" phrases. When, in reality, the other side of this identity may well be as or more causal. The U.S. has been an attractive place for foreign capital for a long time because of the combination of solid returns with lower risk compared to many if not most places in the world. Seeing the capital account as an important force also flips the narrative that somehow the U.S. being the reserve currency/debt nation is a bad thing.
Trump is using all of them to some degree of short term success.
It is easy to get in someone’s face when you have something they want or need.
The rational response which we are seeing but will take a few years is to remove the need.
The problem with number four is it works great until it doesn’t. I don’t know what police do with madmen on the street but sooner or later normal society wins. Even if at great cost to everyone.
You can only play madman so many times before people either figure out you're bluffing (TACO), or else you're forced to actually do something insane just to prove you mean it.
A useful analysis. Two things, though. First, you write: "And, one presumes that an effort like this is vetted by his economic team, so it provides an interesting insight in to their thinking as well.
The Journal does not link to sources of numbers, and I won’t play the numbers game."
Sadly, if this article is indeed an insight into his economic team's thinking, the numbers are too important to ignore. "In less than one year, we have secured commitments for more than $18 trillion, a number that is unfathomable to many." It should be unfathomable--it's not close to being true. What team member lets this number go out? Or are they uninterested in reality?
Second, you write: "Tariffs as negotiating bludgeon is something that I and fellow economists underestimated last spring. A threat of something that hurts the US, but hurts the foreigner more---and especially hurts politically more than economically --- can be used to coerce all sorts of behavior." Albert Hirschman wrote "National Power and the Structure of Foreign Trade" during WWII where he documented the use by Nazi Germany of trade policy to bludgeon other smaller countries in a variety of ways. Indeed much of the postwar "rules-based system" was a response to
this behavior, e.g., the emphasis on multilateral instead of bilateral agreements. For countries-no matter how large and powerful--that don't want another world war, dismantling this system is indeed short-sighted.
The numbers quotes are so ridiculously made up that one has to question both competence as well as integrity of people responsible for putting them out.
> ut hurts the foreigner more---and especially hurts politically more than economically --- can be used to coerce all sorts of behavior.
Actually, it is not even true. Would love to see an example of what Trump's tariffs achieved that he could not have achieved otherwise was worth achieving in first place. Tariffs definitely made everyone take notice, lobby etc. but no country seems to have made any major changes to anything as a result of this. Where they have, such as Canada allowing Chinese EVs it is probably against US interests.
Following the path of Trump's tariff policy making, or better, threatening, was at first for me like following a random walk. Over the months I have learned that that is his MO. It is hard to figure out his desired end results. That is on purpose.
Using two venerable models of trade theory, one long run and one short run, I think I know what he is doing. He is tilting the income distribution to his voters. The deviation from freer trade means the winners win less than the losers lose, but the losers are not his voters. Trump is not a trade theorist, but the idea that American workers are aided by protection was extant in the US labor movement well beyond the 1930's, and Trump would certainly have heard something about it in New York City.
Now, the venerable models have extreme simplifying elasticity assumptions, perfect substitution between domestic and foreign goods, e.g. I need a computable general equilibrium model to give a contemporary answer, and I don't have one. I'm not worried because empirical elasticity estimates are too low anyway, so I trust the old time medicine will give roughly the right answer, certainly in direction.
Mr. Trump tells the American people that various countries are going to invest billions of dollars into our economy. Just a question from an old hermit, when is all this money going to arrive and when will it result in and increase in manufacturing and wages? (According to my "AI" function, in FY2025, the total Federal government spending was $7.01 trillion and total revenue was $5.23 trillion, resulting in a deficit of $1.78 trillion a decrease of a paltry $41 billion from the previous year. With approximately 19% of all federal revenue going to pay the interest of the national debt.) Just the rambling thoughts of an old sailor. (Of historical interest, I got a better exchange rate by giving my money to the bar girl instead of going to the government exchange office. Hope I haven't upset anyone. )
Long story short, Trump has mostly gone senile, Navarro and Miller are running the show. They do not know what they are doing or they simply do not care. Reasonable economists such as you are trying to make sense of things but you can't because your training is insufficient to properly understand Trump's make believe world.
While agreeing that the Canadian voters rejected Poillievre mainly in response to Trump's tariffs it may be worth remembering that Trump himself seemed delighted that Carney was the new Canadian head of state rather than his actually conservative opponent. Maybe his background in World finance and global "real politik" made him preferable to Monsieur Poillievre's independent streak and unwillingness to "kiss the ring" of the "Great Man. Or he may just feel that Carney is more easily controlled - or at least more predictable.
I'm not sure that personal knowledge or not is any part of my comments (although I do know John personally and have lots of respect for him and his work). My comments are based on my own perception that 'experts' (no matter how expert they are, and I think John is right at the top of his profession) seem to think they can armchair quarterback in one area because they are 'expert' in another, and their analyses don't seem to take in to account - at all - that the U.S. is in real danger of going the way of the Romans, and if America goes, there isn't anywhere else to run.
Long ago, when I took a class in international finance, I was surprised to learn that there were more US dollars in circulation outside of the country than inside. It would be interesting to read about the effect of the administration’s policies with regard to this aspect.
This is why USDT and USDC are somewhat important for the continued dominance of the US dollar. Foreigners have access to a digital dollar that is replicated by private industry in the form of a stablecoin. It is not produced explicitly by the government so Big Brother cannot turn it on or off, or watch you through the lens of currency.
Thank you
Big brother can absolutely turn it off. Stablecoins are only stable because they are backed by actual dollars. The dollar’s continued dominance is really of no geopolitical significance if the U.S. government can’t use it as a weapon.
“But how are foreigners supposed to get the dollars to invest in the US? There is only one way: They have to sell us stuff, more than they buy from us. You can argue about behavior and incentives, but this is an accounting identity, a budget constraint. More investment means more trade deficit.”
Well, not necessarily. There can be two offsetting transactions in the capital account. For instance, you finance foreign direct investment by running down previously accumulated foreign assets…
Foreign investors hold $8Trillion in US Treasuries. Japan has 1 trillion, Canada 400 billion, Taiwan 295 billion, ...
Exactly.
I’m simple minded:
To get dollars why not just convert some of your own fiat currency to dollars? Yes, conversion without an underlying asset will reduce your currency’s exchange value over time, but since when has that been a concern of motivated politicians?
If the Japanese sell yen to get dollars, where did the people on the other side get dollars? If foreigners, they had to sell to the Us to get them. If US, they want to use the Yen to buy things in Japan.
In the foreign currency markets?
The dollar money supply isn’t a zero sum market. Paper instruments or dollars, what’s the difference when both can be spent or invested?
Thank you for your response ;-).
In a future war between U.S. and China - a non-zero probability - re-homed industry (think steel production, chip fabrication and shipbuilding) and domestic access to vital mineral resources may well make the difference between Mandarin and English as the future official language of America. This thought may seem laughable, but so would have the idea that Latin would become a dead language to a Roman Senator. Looking at things entirely through the lens of economics is fine for an economist in an ivory tower, but throughout history only those nations with the continued ability to defend themselves have survived. Our nation is only 250 years old - an eyeblink compared to most, and there is absolutely NO guarantee it will still be here in ten years, much less another 250. Trump's international economic policies have a dual purpose, and you are only discussing one of them. This is like discussing the economics of 'green' vehicles without also discussing the economics of lithium mining.
Yes, but let's not wrap everything in the flag. It's a long way between a lithium mine and an F-35, and no national security reason the batteries in my new electric bike, or the bike itself, have to be made at 5 x cost domestically.
Yes, but let's not wrap nothing in the flag, either. Where are you (or your children) going to go when there is no America? Europe? UK? If you have girl children their life in either of those countries will be much more like Iran/Iraq/SA/Somalia than it is here. Oh, you say - I don't have any children so it doesn't matter; I can afford to view the world through my 'new-world-order' tinted glasses and sip some more Chardonay. My problem isn't so much that you don't want to 'wrap your analysis in the flag', but that you don't seem to think that the flag is worth considering at all, while simultaneously benefitting from all the things that same flag gives you. You claim the authority to speak about weighty international economic matters because of your expertise in that field. I claim that 'expertise in the area' (whatever the particular 'area' is) has been repeatedly shown to be mostly worthless because the 'experts' are 'wrapping' their analyses in a global flag to the detriment of our own. You may think that you are being tarred due to other 'expert's misadventures, and you may be right - or not. Maybe paying 5x for your tony electric bike batteries is a spectacular bargain when what you get in return is a bright future for your children.
Do you know John Cochrane personally, or have you engaged in private conversations with him that have caused you to use such phrases as, "you don't seem to think that the flag is worth considering at all..."? Or to characterize him as saying to himself, "I can afford to view the world through my 'new-world-order' tinted glasses and sip some more Chardonay."?
The reason I ask is that such malign "sentiments" bear no relationship to any of his public statements with which I am pretty familiar having listened to and read them over several years. Surely someone with your "expertise" in military and defense matters is familiar with the basic requirement to "know your enemy". You have very much misrepresented, Dr Cochrane's world view and denigrated his love of the US as they are represented by the content of his public statements.
I can see why we need to manufacture drugs in the US especially anti anxiety medication.
The 80% cheaper argument assumes no malice. China is training dependency into the rest of the world. You could call it grooming. The low low prices are the van dispensing free candy.
Your comments about the identity between trade deficits and investment by foreigners in the U.S. calls to mind points emphasized by Bill Poole (among others) while he was president of the St. Louis Fed. Politicians, and often economists, like to focus on trade deficits as the causal force. The "we're addicted to consumption" phrases. When, in reality, the other side of this identity may well be as or more causal. The U.S. has been an attractive place for foreign capital for a long time because of the combination of solid returns with lower risk compared to many if not most places in the world. Seeing the capital account as an important force also flips the narrative that somehow the U.S. being the reserve currency/debt nation is a bad thing.
Fantastic article
The most successful forms of game theory in order from weakest to strongest are
1. Tit for tat. I do to you what you did to me in the last round.
2. Forgiving tit for tat. I acknowledge the possibility of signal error (unintentional non-cooperation) and forgive occasional defections.
3. Pavlov. If I get some degree of reward, I repeat that behavior.
4. Perceived madness.
Check out Robert Sapolsky here from 50:00 forward. Stanford Lecture on Behavioral Evolution, https://www.youtube.com/watch?v=Y0Oa4Lp5fLE
I wonder which system Trump is using.
Trump is using all of them to some degree of short term success.
It is easy to get in someone’s face when you have something they want or need.
The rational response which we are seeing but will take a few years is to remove the need.
The problem with number four is it works great until it doesn’t. I don’t know what police do with madmen on the street but sooner or later normal society wins. Even if at great cost to everyone.
You can only play madman so many times before people either figure out you're bluffing (TACO), or else you're forced to actually do something insane just to prove you mean it.
A charitable critique.
Good piece John.
A useful analysis. Two things, though. First, you write: "And, one presumes that an effort like this is vetted by his economic team, so it provides an interesting insight in to their thinking as well.
The Journal does not link to sources of numbers, and I won’t play the numbers game."
Sadly, if this article is indeed an insight into his economic team's thinking, the numbers are too important to ignore. "In less than one year, we have secured commitments for more than $18 trillion, a number that is unfathomable to many." It should be unfathomable--it's not close to being true. What team member lets this number go out? Or are they uninterested in reality?
Second, you write: "Tariffs as negotiating bludgeon is something that I and fellow economists underestimated last spring. A threat of something that hurts the US, but hurts the foreigner more---and especially hurts politically more than economically --- can be used to coerce all sorts of behavior." Albert Hirschman wrote "National Power and the Structure of Foreign Trade" during WWII where he documented the use by Nazi Germany of trade policy to bludgeon other smaller countries in a variety of ways. Indeed much of the postwar "rules-based system" was a response to
this behavior, e.g., the emphasis on multilateral instead of bilateral agreements. For countries-no matter how large and powerful--that don't want another world war, dismantling this system is indeed short-sighted.
Very sensible comment.
The numbers quotes are so ridiculously made up that one has to question both competence as well as integrity of people responsible for putting them out.
> ut hurts the foreigner more---and especially hurts politically more than economically --- can be used to coerce all sorts of behavior.
Actually, it is not even true. Would love to see an example of what Trump's tariffs achieved that he could not have achieved otherwise was worth achieving in first place. Tariffs definitely made everyone take notice, lobby etc. but no country seems to have made any major changes to anything as a result of this. Where they have, such as Canada allowing Chinese EVs it is probably against US interests.
Following the path of Trump's tariff policy making, or better, threatening, was at first for me like following a random walk. Over the months I have learned that that is his MO. It is hard to figure out his desired end results. That is on purpose.
Using two venerable models of trade theory, one long run and one short run, I think I know what he is doing. He is tilting the income distribution to his voters. The deviation from freer trade means the winners win less than the losers lose, but the losers are not his voters. Trump is not a trade theorist, but the idea that American workers are aided by protection was extant in the US labor movement well beyond the 1930's, and Trump would certainly have heard something about it in New York City.
Now, the venerable models have extreme simplifying elasticity assumptions, perfect substitution between domestic and foreign goods, e.g. I need a computable general equilibrium model to give a contemporary answer, and I don't have one. I'm not worried because empirical elasticity estimates are too low anyway, so I trust the old time medicine will give roughly the right answer, certainly in direction.
Mr. Trump tells the American people that various countries are going to invest billions of dollars into our economy. Just a question from an old hermit, when is all this money going to arrive and when will it result in and increase in manufacturing and wages? (According to my "AI" function, in FY2025, the total Federal government spending was $7.01 trillion and total revenue was $5.23 trillion, resulting in a deficit of $1.78 trillion a decrease of a paltry $41 billion from the previous year. With approximately 19% of all federal revenue going to pay the interest of the national debt.) Just the rambling thoughts of an old sailor. (Of historical interest, I got a better exchange rate by giving my money to the bar girl instead of going to the government exchange office. Hope I haven't upset anyone. )
Long story short, Trump has mostly gone senile, Navarro and Miller are running the show. They do not know what they are doing or they simply do not care. Reasonable economists such as you are trying to make sense of things but you can't because your training is insufficient to properly understand Trump's make believe world.
and YOU are an expert? Perhaps stay in your own lane.
While agreeing that the Canadian voters rejected Poillievre mainly in response to Trump's tariffs it may be worth remembering that Trump himself seemed delighted that Carney was the new Canadian head of state rather than his actually conservative opponent. Maybe his background in World finance and global "real politik" made him preferable to Monsieur Poillievre's independent streak and unwillingness to "kiss the ring" of the "Great Man. Or he may just feel that Carney is more easily controlled - or at least more predictable.
I'm not sure that personal knowledge or not is any part of my comments (although I do know John personally and have lots of respect for him and his work). My comments are based on my own perception that 'experts' (no matter how expert they are, and I think John is right at the top of his profession) seem to think they can armchair quarterback in one area because they are 'expert' in another, and their analyses don't seem to take in to account - at all - that the U.S. is in real danger of going the way of the Romans, and if America goes, there isn't anywhere else to run.
To apply literal analysis to any political writing, let alone one written by Trump, is probably not as useful as one hopes.
It was likely written to influence voters, not economists.