First understand, then win

I hope

As promised, following are my thoughts on what the Trump government is really attempting to do with the US economy. I write with great authority but, in truth, a lot of this is a hunch so please take it as such.

As you read please keep the following thought firmly in mind. Economics is the measurement of the results of applied psychology. The following is an explanation of how our minds are being controlled to see the world through a particular lens. Such control is not abnormal or abusive. It is how the world works and has always worked.

Also, I have used an inordinate number of words to explain my hunches. I apologize for this but attempts to shorten the essay just distorted its meaning so it is what it is. Get a bigger mug of coffee and I hope this gives you some insights into my interpretation of Trumpworld.

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The problem of pain

The great genius of Alexander the Great, quite apart from his ability to marshal the skills of his father’s generals, was his ability to overprint Greek culture and language over the defeated Achaemenid empire. In 331 BC, the world around the Mediterranean Sea and east to the Indus River, became Greek. Even as the empire broke up following the death of Alexander, Greek was the lingua franca throughout and remained so for most of the next four hundred years.

In his book, The Problem of Pain, C. S. Lewis wrote,

"God whispers to us in our pleasures, speaks in our conscience, but shouts in our pains; it is His megaphone to rouse a deaf world."

Pain is God’s megaphone to wake people up. Donald Trump understands the power of pain and he is working to wake up a world that is somnolent. Mr. Trump is either the AntiChrist or the Prophet depending upon one’s perspective. He is neither, of course, but he controls national and international conversations more completely than any contemporary or historical person. His thoughts have become our lingua franca.

Fearlessly stepping into controversy, I think Donald Trump is Alexandrian in how he is influencing the world. You may, of course, disagree. Consider a few of the topics that he has introduced into widespread public discourse.

• The scourge of illegal immigration.

• Trade imbalances with the United States and the validity of tariffs.

• The rise of fentanyl importation and deaths in the US.

• The moral and economic need to end the Ukraine and Middle East wars.

• The incredible waste and corrupt spending of governments through associated non-governmental organizations (NGO).

• The corruption of Five Eyes police and intelligence agencies.

• The need to normalize relations between nations including Russia and China.

One may hate Mr. Trump and think that he is crude and vulgar. That is ok if one wants to virtue signal but if one wants to make some money in the next four years, a better strategy might be to understand Mr. Trump. No one becomes a billionaire real estate developer by being an idiot – not even Mr. Trump. The US president has a plan, and we shouldn’t discount him until we understand what that plan is. Hate him if you must, but disagree only when you have a solid economic argument to refute his thinking. I do not say this to sing the praises of Mr. Trump. I say this because I want to make some money rather than die a pauper as the current turmoil in the stock market suggests I might.

Before getting into Mr. Trump and his megaphone to gain our attention, it is necessary to explain the worldview which, I think, animates his thinking and has informed our economy. I speak of Modern Monetary Theory (MMT).

Modern Monetary Theory

In 1716, a Scottish gambler and grifter, with a beautiful head of hair, named John Law landed in France just as the new King Louis XV was trying to sort out the financial mess left to him by his extravagant father Louis XIV. Louis Quatorze invented high heels, built the extraordinary palace of Versailles, never saw a war in which he didn’t want to participate and hated Paris. He left his son with a throne and no money.

John Law had just the answer for the new king. His theory was complex and for four years it worked like a top. Until suddenly it didn’t. And then the French crown was plunged into de facto bankruptcy. In simple terms, Mr. Law argued that, if the French currency were minted and given value by the French crown, then when the French crown needed more money, it need only print more currency. Easy. Mr. Law provided backing to his new Banque Royale through an investment in far off Louisiana. Skilled arm waving convinced many French subscribers and the distance from Paris ensured months would pass before bad news could arrive to pop any investment bubbles. But bad news did arrive, and the French financial system deflated with alarming speed.

Undoubtedly, Mr. Law was as surprised to lose his bank accounts and landed assets as King Louis XV was to lose France’s wealth. Nevertheless, he was also wise enough to decamp for the Habsburg Low Countries and stay a step ahead of the French authorities for the rest of his rather sordid life.

More recently, a reconstituted version of John Law’s theories popped up again in France – the not-so modern, Modern Monetary Theory. For Canadian readers, our new Prime Minister has whole heartedly adopted some MMT policy prescriptions such as quantitative easing.

Quantitative easing requires a few words before discussing what Mr. Trump may be up to.

Following the financial crisis of 2008, smart people in the financial capitals of the world were concerned that banks were shrinking their balance sheets too fast which would trigger a credit crisis as large as the Great Depression in the 1930s. The US Federal Reserve Chairman at the time was Ben Bernanke whose PhD dissertation addressed the financial reasons for that depression. He argued persuasively for increasing bank liquidity by pushing enormous amounts of new “money” into the financial system at low rates of interest.

When the US Federal Reserve issues credit, it does not print money. It simply generates a computer transfer of credits from its balance sheet to the bank accounts of the twelve banks authorized to receive these transfers. The Federal Reserve is a private corporation and so the federal government must repay the Federal Reserve for the transferred credits. It has all the contours of a potential ponzi scheme. For this reason there is increasing pressure to close the US Federal Reserve and no longer have a central bank. This discussion is beyond the scope of the present essay but suffice to say that there are equally good arguments for keeping the federal reserve system. It is complicated.

When the new credits/money is in the hands of the twelve banks, the bankers are contractually bound, and, because it makes them a lot of money, delighted, to lend it out at comparable interest rates to make sure the economy has sufficient capital to meet the short-term operating demands of the US economy. Due to temporal mismatches between when a company produces items for sale, sells those items and is paid for the items, companies need to borrow short term capital to pay their bills. When they can’t borrow capital for such payments, the economy freezes as it did in the Great Depression.

When there is sufficient capital or liquidity in the system to meet these short-term borrowing needs, the financial system is in balance. If a flood of new capital is made available at low interest rates to a balanced system, corporations are incented to borrow the cheap money and invest in high-risk ventures or buy back their stock to push up their market price. Neither of these uses of capital build or strengthens the economy. But it makes the owners of those companies wealthier and happier. Take note. The taxpayers of the United States are now on the hook for money that was unnecessarily created and lent out to corporations that used it to improve their stock prices. It was a huge wealth transfer from the relatively poor to the relatively rich.

When the low-interest rate debt must be repaid, the corporation simply takes out a new loan at an equally low interest rate to pay off the first loan and the cycle repeats. Under normal circumstances, the net effect of this non-productive infusion of cash is massive inflation.

For ten years I predicted massive inflation but there was no inflation. I began to doubt Adam Smith and David Ricardo. Why is there no inflation? The Doge revelations of the past month have explained why inflation took such a long time to arrive. The financial system was teetering on inflation until it was finally overloaded by President Biden’s ironically named “Inflation Reduction Act” which pushed US spending from $4.5 trillion per year to over $6 trillion per year. The flood of cash overwhelmed the system and inflation finally arrived. I was jubilant. I hadn’t missed the call on inflation after all. It was just another timing thing.

And then I paid my grocery bill and rediscovered why inflation sucks.

By the way, the term Doge, an acronym for the Department of Government Efficiency, is usually associated with a digital currency known as Doge. The much better and more appropriate association to me is Enrico Dandolo, the Prince or Doge of Venice. Dandolo, rather than pursue the 4^th Crusade in 1204, personally led western armies in a successful attack on Constantinople. As he climbed off his boat to attack the city he exclaimed something like,

“Come on you lazy b@s*@rds! Follow me!”

Sr. Dandolo was, at the time, 97 years old. Some historians think that his conquest of the city led to the weakening of the Byzantine empire and its eventual conquest in 1453 by the Ottoman Turks.

Now that is a Doge – Doge Dandolo, the Destroyer!

With the inflation of 2021 came high interest rates from the central bank to remove money from the system and drive costs down. Quantitative easing became quantitative tightening as the federal reserve started buying back its bonds to drive up interest rates. Five-year bonds bought in 2020 at one percent interest are coming due in 2025 at three and four percent interest. Take note. High interest rates reduce the rate of inflation but never reduce prices. To reduce prices the economy must deflate which is hard to control and very scary, so central bankers don’t want to go there.

Now, with higher interest rates and a tumbling stock market, companies will not be able to sell enough stock to pay back their loans without hurting their stock price. Investments which were risky at one percent now become nonperforming at three percent. Further to my comment about making money rather than dying a pauper, the next year is going to get interesting.

How the Biden government pushed so much “liquidity” into the US economy in such a short time is not germane to this topic of corporate finance, but it is an interesting story. Again, Doge has exposed how the money was fed into the system. The government gave enormous amounts of money to the NGO sector of the economy to facilitate the illegal entry of millions of migrants into the United States and then, through other NGOs, gave money to the migrants for food, rent, cell phones and transportation.

Could that money have gone to US citizens instead? Of course, but if the government had paid its own citizens, the scheme would have been exposed before the vast sums could be spent. Besides, having twenty million new illegal immigrants means a lot of potential new voters when “paths to citizenship” are created. This was, of course, diabolical, but it was also pretty clever. The plan fell apart when inflation destroyed the Biden economy, and the Democrats lost the 2024 election. They, like me, didn’t get the timing thing.

Trump’s economy

In 279 BC, at the Battle of Asculum, King Pyrrhus of Epirus fought with the Tarentines (and a few elephants) against the Roman legions and won. Unfortunately, the battle destroyed his army, and Plutarch relates that Pyrrhus said,

“One other such victory and I will be utterly undone.”

The term, a pyrrhic victory, has been used ever since to describe a fight not worth having.

In 2024, and against all odds – lawsuits, assassination attempts, restrictions on free speech - Trump won the US presidential election. It remains to be seen whether his victory was pyrrhic or not. Trump is faced with a public service bureaucracy, particularly in the intelligence gathering services, that wants to thwart his every move. By the way, all public bureaucracies view their elected leaders as “short termers” and themselves as keepers of the country’s “eternal flame”. Democracy in this context is not very democratic.

Having taken the reins of power, Mr. Trump must now reduce the interest rate on the debt and pay it down quickly, reinvigorate a private sector that has been increasingly crowded out of the economy, and spur the development of small to medium sized businesses to generate more well paying jobs and revitalize the middle class. Simultaneously he wants to dramatically reduce the size of government, free the economy from over regulation, rebuild US military strength and reformat the geopolitical alignment of the entire world.

It is quite a job jar.

Treasury Secretary Bessent has been vocal about his focus on the bond market and dismisses the gyrations of the stock market. There are a couple of reasons for this. In the first place, the net effect of quantitative easing and flushing the financial system with cash was to drive up stock valuations. The buy-back of stock and the appearance of corporate earnings growth resulted in a stock bubble like the tech bubble of 2001. In the mind of Mr. Bessent, in the past twenty years the rich got richer, and he is happy to have them sit this one out.

Secondly, the bond market has captured his attention because that is where interest rates are determined, and he desperately needs lower rates to reduce the cost of the $36 trillion government debt and to prevent a liquidity crisis when corporations refinance their low interest debt with higher interest debt. He wants to avoid a recession if possible and certainly hopes to avoid a series of bank failures.

The Trump government also wants to reduce the value of the US dollar to make domestic manufacturing more competitive with countries with low labour rates. China has been debasing its currency and paying low salaries for decades to transfer manufacturing from the US industrial heartland to the Chinese mainland. The Americans are going to use Chinese tactics to reverse that trend.

One of the more interesting arguments made by the Trump government is that the intrinsic value of the US economy resides in the power of its consumer market. In fact, they have floated the idea that, like a Costco membership, corporations domiciled outside the United States may have to pay a “membership fee” to sell to the US consumer base. At the moment this fee is being exacted through tariffs, but tariffs are inflationary and are paid by US importers. A membership fee does not suffer those downsides.

Tariffs – a bridge to a new economy

Tariffs, Mr. Trump’s “most beautiful word in the English language”, is perhaps one of the most poorly understood concepts in modern economics. What is Mr. Trump doing? What does Mr. Trump want us to do?

President Trump is going to transition the US economy from being government-heavy to being private sector-heavy. In theory, with low taxes and decreased red tape, the animal spirits of the economy will explode with growth. The issue is getting through the transition and for this he needs cash from the tariffs. The apparent chaos of the Trump government is the cost of the transition. Millions lose their jobs, housing prices drop, the stock market is buffeted and trade partners are furious. But now world leaders are listening, and Mr. Trump is driving the conversation.

You can’t pull 2 trillion out of the economy without causing disruptions. You also can’t pull 2 trillion out of the economy and wage constant war. This is the interconnect between the economy and the geopolitical changes that are coming.

And is it really chaotic?

Many economists argue that tariffs are unnecessary in a free market because they introduce distortions that are difficult to anticipate and thus impossible to control. At best, they argue, tariffs are a means of gaining a short-term advantage. But what if the a priori assumptions are incorrect? What if the market is free but not fair? What if the market is distorted? Aren’t tariffs a way to manage the distortions and rebalance the market? That is Mr. Trump’s argument, and it is hard to disagree with him.

Since its entry into the World Trade Organization, for example, China has been distorting its economy by paying salaries that are below market and undermining the value of its currency so that no one can compete with it. It routinely overproduces its products and dumps the over-production into western markets at ruinous prices. It demands that western companies joint venture with Chinese companies and then steals the intellectual property of those companies. This is a fair market?

Canada, since the Second World War has been embarrassingly laggard in its commitment to homeland defense. Instead, it has relied on the largesse of the Americans to provide a military shield. Mr. Trump is now saying, “Enough is enough.” Well… Isn’t enough… enough?

A week ago, the premier of Ontario declared that, in response to US tariffs, he would refuse to sell power to the Americans. Did Mr. Ford not know that the tariffs will be paid by Americans and not Canadians, that such a sudden withdrawal of strategic services is, under United Nations rules, an act of war, and that the US has significant idled coal plants that could fairly quickly replace Ontario energy? Was he really willing to risk almost C$1 billion per year of energy revenue on an act of war? It appears the Americans will restart those plants now that Mr. Ford has alerted them to the risk of relying on him. His declaration was an act of spite that put at risk a lot more than his nose. In my view it was breathtaking stupidity, and he is lucky that he just won a new four-year electoral mandate.

Tariffs can cause changes in the behaviour of countries like China that have regularly been cheating on trade. But this doesn’t explain tariffs on Canadian oil and auto manufacturing. Oil production is not going to migrate to the US and auto manufacturers need time and vast sums of money to move all production out of Canada and into the US. What is going on?

As the Biden-era government spending drops, the GDP will plummet. It was quantitative easing that created an investment bubble, but it was government spending that prevented those asset bubbles from popping. It was massive government spending that prevented the US economy from entering a recession. It will require some unallocated cash to smooth the bumps caused by a falling GDP. Hence tariffs.

Tariffs generate a lot of cash very quickly. Mr. Trump can’t raise taxes because lower taxes are a key part of his promise to the MAGA base. Tariffs are a tax by another name, and they can generate the cash necessary to bridge the US economy through the coming storm to a rebalanced, consumer-driven GDP.

Tariffs, in and of themselves, are not currently driving the stock market down. The stock market is responding to uncertainty but more than anything it is responding to the lack of government spending. It is also realizing that the massive spending on artificial intelligence (AI), paid for by low interest loans, is not likely to pay off. We are living through 2001 again. Like the silly rhetoric of,

“High tech must be evaluated by new norms!”

the promises of AI were never real and the AI entry fee of investing billions of dollars per month was designed to create a high barrier to entry. Then came Deep Seek and others with inexpensive training regimens and a recognition that most large language model AI requests come back quoting either a Wikipedia entry or something the model made up.

Revolutionary technology indeed.

What to expect going forward?

Will the result of Mr. Trump’s recalibration of the US economy justify the pain of the next 12 to 18 months? We are going to find out. Early indications are positive. Trump has announced private sector investment plans in the multiple trillions of dollars. Mike Rowe of America’s Dirtiest Jobs, recently said in an interview that he has been asked to find 100,000 skilled tradespeople for a single contractor. In addition, there are 7.2 million skilled labour jobs going vacant for want of trained personnel.

Under the persuasion of my erudite daughter, I am convinced that the leader of Canada is increasingly irrelevant to my retirement. Mr. Trump has screamed his message that Canada will have a new relationship with the United States. Already, Canadian political leaders are asking to renegotiate the USMCA, our trilateral trade agreement with the US and Mexico. Presumably they “want the pain to go away!” I believe that such negotiations, for security reasons, will draw Canada into a new and much closer economic and military relationship with the United States.

Mr. Trump’s northern boundary, that “imaginary line that just appeared, no one knows why” will, in fact disappear and there will be a North American-wide approach to security, immigration and economic development. We may continue to have a Prime Minister, but he will actually be a Governor. The quid pro quo, I hope, is we may be able to have a one-time, at par, conversion of Canadian dollars to US dollars. Remember, Premier Ford’s attempt to cut off power to the United States lasted less than four hours. Canadian sovereignty may already be an illusion.

Mr. Trump believes that the US economy will be unleashed when regulations are reduced. That is no doubt true. Currently the US economy is over-regulated as proven by the fatuous conclusion that carbon dioxide is a pollutant. But he should beware the siren song of getting rid of too many regulations. There is a necessary balance required. It is possible to cut too much, and my worldview says that,

“All have sinned and fall short of the glory of God”.

Speaking for myself, a few guardrails are necessary to keep me from doing stupid things.

So where does this leave us? Is Mr. Trump more Enrico Dandolo, the Destroyer than Alexander, the builder of Greek culture? I am taking the latter bet and I think there are good reasons for optimism. I do believe in the animal spirits of the US economy. More than that I believe in the spiritual benefits of the US constitution, and it seems that this document has not stale-dated after all. I am optimistic of Mr. Trump’s success because he is Alexandrian in his power, and he has some of the smartest people in the world working towards his goals.

Canada will benefit from the mining strategy of “close-ology”. With the fences down, our economy will prosper along with that of the US. Will I lament the loss of our sovereignty? Not really. I will still cheer for Canadian over American teams and that has always been about the extent of our patriotism.

More importantly… I don’t think I will die a pauper after all.

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Postscript: I point out that this essay was written on St. Patrick’s Day and in honour of my Irish heritage, I chose a picture of the lovely bridge that spans Antietam Creek in Maryland, USA. During the worst day of fighting in US military history (September 17, 1862), a regiment of 150 Irish volunteers perished while attempting to cross the bridge.

Our travails today must be kept in perspective.