He may still turn things around, but it’s a shame about President Trump and the economy. All he had to do was nothing, and what they refer to as "the economy" would be soaring now. Of course, Trump wouldn’t be president if he had it within him to do nothing. Which is why every president is victimized by unforced errors. Referencing historian Stephen Ambrose (1936-2002), the “presidential gene” ensures monumental mistakes that are easy to spot from people on the sidelines. But that’s why the spotters are on the sidelines.
The Washington Post’s Megan McArdle claims Trump’s trade war “risks turning into a run on the United States.” McArdle then references various market indicators supporting her pessimism. The bet here is that she could be persuaded to rethink not just what she deems accepted market wisdom, but also her long-term pessimism rooted in something rational: precisely because trade wars eviscerate the natural cooperation among humans and machines a little or a lot, the inevitable result is reduced economic growth. It all looks bad right now, but the bad should have McArdle optimistic about the future. And not because tariffs will foster some remarkable "rebalancing" as the ignorant claim. But first, it’s best to focus on what McArdle deems market truth.
She writes that “when you impose tariffs, your currency should strengthen.” Her supposition ignores history along with what a desire for tariffs signals to actual markets. Trump has been rather explicit about his desire for a weaker dollar, which means he’s gotten one. For historical perspective, FDR famously devalued the dollar from his bathtub in the 1930s, while President Nixon did so by decree. Fed Chairs Meyer (FDR) and Burns (Nixon) begged their bosses and the Treasury secretaries serving their bosses to not do what was so economically damaging, but they were powerless.
So, with it hopefully established that presidents get the dollar they want, it’s easy to see why a currency would weaken under a president pursuing tariffs. Despite the logical truth that a falling currency would in no way render a country’s market goods more competitive overseas, it’s a known quantity in markets that a desire for tariffs is often an implied request for a weaker currency. Memory says McArdle has referenced the 1985 Plaza Accord in past write-ups, and the latter instructs here. Japan was the China of its day, and protectionist types in politics feared Japanese exports were somehow hurting the U.S. Totally mindless. But Plaza was all about a substantial decline (described as "orderly" at the time) in the dollar as a way of allegedly boosting U.S. exports while shrinking imports. Again, totally mindless. But then "macroeconomics" is a synonym for mindless.
McArdle then writes that “When stock markets dive, bond markets tend to get stronger.” No. Since 1982 U.S. equity markets have been on a pretty remarkable bull run, one that has largely coincided with a rally in debt markets, including Treasuries. Which was and is logical. A Treasury is a dollar income stream paid by governments, and a booming economy that feeds governments reliant on economic growth would plainly enhance the reliability of that income stream. Conversely, a collapsing economy would logically imperil the reliability of Treasury income streams on the way to rising yields.
Regarding McArdle’s long-term pessimism, it’s arguably not merited exactly because tariffs will sap economic vitality and in the process lay a wet blanket on electoral optimism. Which means if tariffs bring harm, so will they harm the Republican Party’s chances to hold onto the House and Senate in 2026. Which means President Trump’s ability to do more damage is coming to a close. Watch markets that are a look into the future begin to price the previous truth, and with it watch any presumed run on the U.S. reverse itself.
