Bond Economics: No Feedback

• President Trump has repeated the line that the problem with Chinese tariffs is that some girls will not be able to get multiple dolls. Although this appears quite bizarre, it reflects the situation for foreign imports in decades past. The first inroads of Japanese/Taiwanese imports were in cheap consumer goods, particularly toys. The first wave of Chinese imports after WTO accession followed that pattern — they pushed out existing low end importers. However, a dependence on low end consumer goods does not accurately fit the situation in 2025 — Chinese manufactured goods are everywhere in production chains as well as consumer goods. In addition to looming empty shelves (allegedly weeks away), American production will shut down as key inputs are lost. Trump’s remarks indicate that he is unwilling to even consider such a possibility.

• Trump minimised price rises in some goods (strollers) while pointing to the fall in price in gasoline. He can accurately point out to reporters that gasoline is more important than any other individual consumer manufactured good. The problem is that gasoline is a single product, while there are lots of other manufactured goods. The only way to defeat his logic is to use CPI inflation. Unfortunately, CPI arrives will a lag of months, and he will have considerable ability to pick and choose prices (if not have the data doctored outright).

• Anecdotes point to what should be expected: small and medium firms are about to be obliterated by having key markets cut off. However, these firms are too small to bribe Trump, are not traded in public markets so that they will not generate analyst coverage, and are so small that news reports on their demise can easily be dismissed. Their failures will only leave a footprint in data when it is too late: job and bank credit losses due to firm failure.

• Trump’s wacky idea of putting a tariff of 100% on foreign movies may be a signal of a new front in America’s trade war versus the world. (He appears to have no authority to make such a move, but that has not been stopping him.) Of course, only a clinically insane person would launch a trade war in a market segment where their own country has a massive export surplus, but guess where we are? The United States is vulnerable opening a trade war in services, but once again, the negative effects would hit with a lag.

• Trump has now appeared to offer clarity on what he counts as a “trade deal”: his setting or changing American tariffs counts as a “deal.” (The White House has promised 90 trade deals in 90 days.) As I predicted in my immediate post-election musings, these “deals” are about bribing Trump, and not the economic interests of the American economy in aggregate. As such, there is no reason to expect these “deals” to reflect what is happening to the economy on the ground.

The American right has built a culture of obedience to Trump, and created a closed information system that rejects anything critical of him. Although Trump himself had decent political instincts for avoiding unpopular policies, there is no sign that he is now receiving any useful evidence if his policies are unpopular.

A collapsing stock market is probably one thing that might penetrate the information wall around him — but the stock market refuses to collapse. Although this might look crazy, it reflects a belief in the pattern of the first Trump term: he will backpedal on foolish policies quickly, not creating long-term damage for equity prospects. Unfortunately, this efficient forward-looking behaviour short-circuits the main information path that would cause a policy reversal.

Appendix: Book Comments

My book on inflation was near the final editing pass, but I had no desire to try to launch it during the whirlwind chaos of Trump’s first 100 days in office.

Furthermore, it has been overtaken by events. It is relatively easy to see that the United States will be hit by some form of an inflation spike in a matter of months. The overall tone of the book is fairly dovish on inflation, which might not fit with a potential tsunami of price hikes.

I either will have to just make some comments about the situation at the time of publishing, or add a chapter on The Trump Tariff Inflation. I will be reviewing the text, and start taking a stab at writing about the current situation for a book chapter.