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The medicine tastes bad, but a cure is needed.

by | Jun 3, 2019

Kid with Bad Tasting Medicine
“I am all in favor of growing the American economy and engaging in trade with the world, but not at the expense of American workers. The North American Free Trade Agreement is a perfect example of this. Ask the textile workers of North Carolina how NAFTA worked out for them – if you can find any.”
– Ted Yoho

If uncertainty is the enemy of the market, then certainly the enemy is present. 

The addition of Mexico tariffs to an ever-widening trade spat brought chaos to a market last week, already looking punch drunk from a continuous barrage of bad news on trade.   Expect more of the same.  The objectives of the current administration are worthy and worth supporting.   The medicine tastes bad, but a cure is needed.

For many years conducting business with foreign entities has been asymmetrical, creating unfair advantages as US firms and workers try to complete in the global economy.  Many will cite our high trade deficits and loss of manufacturing jobs as the most obvious example of the “unlevel playing field”.  But two things seem worth noting.  Many years ago, the US decision to end convertibility to gold (and the Bretton Woods agreement that followed) allowed the US dollar to become the world currency.  This caused the dollar to be the most demanded in the world making it as good as gold.  When the US can purchase goods from the world by printing money or issuing debt, trade deficits will follow. And as for the loss of manufacturing jobs, rapid technology growth and labor productivity improvement seems the more likely causes.

Remember the US agricultural sector when in the 1800’s it absorbed 80 percent of the labor capital and today uses only 2 percent?

Technology was front and center during this dramatic shift.   The same kind of shifts that are going on in most sectors today.  Tariffs may not be answer to our trade deficit problem, but they do seem to be an effective way to direct attention to the one-sidedness of many of our trade agreements and their need for change.  Most Americans agree that something needs to be done and our President likes to get things done no matter what the medicine tastes like.

On a different matter, I went on record earlier this year stating the FED would raise rates twice during 2019.  The probability of two rate hikes seems remote at this point.  It was a naïve prediction that I now recant.

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