Thursday, May 31, 2018

Trump Tariffs, Trump Deficits = Trump Inflation

Four German marks would buy one dollar in 1921. By 1923, the exchange rate was four trillion marks to the dollar.
Economics can be devilishly complicated but there are rules of thumb.
  1. Deficit spending is inflationary.
  2. Tariffs are inflationary.
  3. Recessions/Depressions are deflationary.
This is why the Federal Reserve during the Nixon/Ford/Carter presidencies hiked interest rates to usurious levels, nearly 20%. They wanted to induce a severe recession to, in the words of Gerald Ford, Whip Inflation Now!

Trump is flipping two inflation triggers at the same time.

His tariff wars against Europe, Canada, Mexico, China (the entire world except Russia) will cause the inflation of prices of imported goods and domestic goods built using imported materials. Also, by removing price competition, retailers will increase prices just because they can.

Trump's deficits will exceed $1 trillion a year by the end of his term. Double that if the US goes to war with Iran. Double it again if the Fed hikes interest rates to induce a recession.

There is one more rule of thumb that applies.

A bird in the hand is worth two in the bush.

If you need something, buy it now. Every day you wait the price will go up and the value of your savings will shrink.
There is a story of a man in Duesseldorf bringing a wheelbarrow of cash to the market to buy food. He ducked into the store for a moment to find out the current price of bread, it changed hourly. When he went back outside to fetch his cash he found the wheelbarrow had been stolen but the money had been dumped on the ground, The thief thought the worthless reams of cash weren't worth the effort of stealing.

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