Transcription
You know the world is out to screw us. We should screw them before they screw us.
[Music]
There is a severe, severe problem in the US economy. One guy has just gone crazy, generated about $79 billion out of import tariff. The bottom of the population has not seen any improvement in standard of living. That is the tariff shop. So I should not be jealous.
[Music]
Nilant, welcome back. Thank you. I think you continue to be in demand on Sparks. For some reason, I think the things that you have to say about, you know, what's happening in the country, world economy, I think people find it very insightful. In fact, I was wondering like, how do you have such encyclopedic knowledge about so many different topics and also a way of communicating? I mean, not just to make you feel better because you showed up at 7:00 a.m. to record this. So, I need to keep you happy also for future episodes. But still, a lot of people don't want to do that.
Um, so the first is to stay curious. Um, and that means that even as you're driving like a 15-minute distance, you sit on your Audible book. Uh, always are, we've discussed this in your podcast before, they always are hungry for a good book, a good podcast, a good Substack. And, uh, and yeah, and then, uh, as you know, and we both studied this, maybe not very well, but that's why I'm not still doing computers. But, you know, when you are storing information, um, patternless information is very hard to store or it takes a lot of space. Uh, so if you stitch a narrative around it, it's much more efficient. So that's how I store information. So it simplifies my brain, and then there are cues and mnemonics, mnemonics that that help me then, you know, build the story as I go along.
So, uh, I'm just curious. One thing I struggle with is I also consume a lot of information, but I feel like, in fact, I was talking to my son and realized early in my teenage years and 20s, I wonder, you know, my ability to analyze and synthesize things, is it getting compromised?
No, I think there is. See, frankly, that's the problem with me as well. Uh, I guess the difference, um, between you and me is that your day job is very different. My day job is to explain things to people. So, you, you once you're explaining to someone, you say things in a certain way, and then while you're ending that, your brain is telling you, you know what, you could have done it better. And so the next time you do it, it's tiring. I don't think it's a very good use of time. So what you're doing is much more efficient, but, um, but yeah, but so that rehearsal, I think also helps.
Fair. All right. So I should not be jealous. So one area which, you know, desperately needs a lot of insight is, you know, what's happening with this whole Trump tariffs. It's been like a daily soap opera and honestly, a personal effect at some point, just sick and tired of, you know, is this global geopolitics? It just, you know, one guy has just gone crazy. Is there a, you know, bigger picture behind all of this? Very difficult to understand what is going on.
So what is the first overtake? So first is that, uh, you know, the large society when they have to change direction, um, how do you do it? You either do you do it through bloodshed, um, or you elect a new leader who gets the message. And in this case, I think the the message from the electorate is that there is a severe, severe problem in the US economy. And as we discuss, uh, you will see how serious those problems are.
So look, um, at this stage, I can see that there are some grand objectives. So underneath all the statements, and I'm also trying to prevent myself from seeing patterns where there are none. Uh, because sometimes, you know, you know that that simplification process, you you end up creating things, hallucinate, u, uh, and and so, but so therefore, I'm relying also on pronouncements. So what has his Treasury Secretary, Bessent said? His Commerce Secretary, Lutnik said? Stephen Miran, his Chairman of Council of Economic Advisers? Trump himself? And you see their actions, you see some of these pronouncements, and then you, uh, take a step back and say, okay, so what exactly are these guys trying to solve? And they may not have enunciated it, um, but so I think there are four objectives.
Let me just back up. These grand objectives are the electorate's grand objectives in some ways, and these guys are verbalizing and acting on it, right? So that is a more popular, huh, that, you know, the number of people who don't like immigration is now meaningful enough that collectively we should do that. Um, and and yeah, so there is, so I think the first big objective is political, which is that the US has had a significant increase in income inequality. So in the last 40 years, median per capita incomes on a real basis, inflation-adjusted, uh, or wages on a real basis have barely grown. So think about an economy which has gone from, you know, competing with Japan, being smaller than Europe, to now, by mile, the biggest economy in the world, and yet the bottom half of the population, this is the interesting thing about medians or the averages, the bottom of the population has not seen any improvement in standard of living, maybe marginal improvement in standard of living.
A second striking data point is that if you take a white man who's a graduate, and a white man who's not a graduate, the graduate white man's average life expectancy at birth is now 84 years. So it has gone like this. The average, that the life expectancy at birth for the average white man is flat. It was going up a bit, then. I haven't been able to find the data behind this, but I heard a quote somewhere that the difference between a non-graduate white man and a graduate white man now is 17 years. Wow. Incredible. So that tells you that there is a very deep-rooted political issue here, and and Trump swept the non-graduate white man vote. Okay. So this is something that he feels, uh, is very important, uh, and needs to be addressed. Now, some of these problems I'm going to state are so complex that it's, it's, I don't think anyone has a solution. I think that is how a lot of policy happens, and I, I, there's, I've been thinking about it a lot. There's fascinating stuff that has happened in the past. So this is one objective. So there's a political objective.
There's also a military objective, which frankly, the common man doesn't bother about too much, but, uh, call it the deep state, call it the elites, you know, whoever. Uh, so, so an $86,000 per capita GDP economy, wanting to make steel, wanting to make aluminum, wanting to make pencils, saying that we don't make ships anymore. M. If you had any doubts that this is, uh, preparation for war. Peter Navarro, who's his trade advisor, um, said when asked, why do you want to impose 25% duties on autos? He said, oh, because they are the arsenal of democracy. And this phrase is a very striking and very evocative phrase because it was popularized by FDR, Franklin Roosevelt, in a speech given on the 29th of December, 1940. So Churchill had been pestering him, pleading with him that, look, please send me fighter aircraft. In 1939, the US had made 60 fighter aircraft. In that speech, Roosevelt said, we will use the arsenal of democracy to make 60,000 aircraft in 1943. That did that. So when he gave that speech, see, the US has always been divided, always been chaotic, noisy. So FDR had very left-wing views. Um, so people ridiculed him. They made it. So in 1942, all the auto companies stopped making cars. Mhm. They started making tanks and and aircraft and and ammunition. Mhm. So, uh, they even started making gliders. In fact, there was one factory, uh, there's a book called The Arsenal of Democracy, uh, which talks about Edsel Ford, was the son of Henry Ford, and how Henry Ford and Edsel Ford were fighting. Henry Ford hated the guts of FDR. Yeah. Henry Ford had been given a medal of honor by Nazi Germany. Uh, so, so you don't know whether he was really a pacifist or whether he, Okay. He did not accept it. He did. He did. Oh, yeah. Yeah. So, in fact, it is striking that Edsel Ford went and signed a contract that we will make so many fighter aircraft and so many will go to Britain, so many will go to the US, and Henry Ford forced him to renege. Uh, it was so the, the chaos that happens when you go into granular history is striking. Anyway, so the fact is that they think that auto manufacturing is critical, but critical for what war? I mean, what are they anticipating? There's only one war that can be anticipated. How realistic is that? Is it? I don't know. Is it mostly going to be trade war, or is it? No, you don't want to make steel and aluminum for a trade war. Preparing for it, still one thing versus, you know, having a even, you know, minuscule odds but realistic, you know, odds. But odds, see what is happening now. You see what is happening in, uh, you know, Israel suddenly wakes up and says, you know what, there was an international order, there was at least these are all man-made human myths that we all believed in, was international sanctions. So I, I'll just come back to, you know, the, this bigger grand objectives that, you know, America might have. In fact, in this arsenal of democracy, and that tells you how hard it is to fight wars. H. Um, so when Hitler, I think, two weeks before he committed suicide, uh, so Herman Goring, his is acolyte, mentioned that, uh, he was despondent. There's no point shooting down American fighter aircraft because they're like bees, there will be so many of them behind them because the Americans just beat the stuffing out of them by just producing. In that book, there are there are stories of like fleets of aircraft like hitting German towns, and so there was a time when Germany could manufacture any aircraft and then suddenly make 60,000 of them. So then can Pakistan do that? Does it have the money to buy it? It sold its ammunition to Ukraine to get some dollars. So reasonably, they shouldn't be doing it. But anyway, so that's a very different debate. But coming back to this, there is a grand objective of which is political, which again is a, is a very diffuse objective, but there is a problem which they need to solve, but it's a very serious problem. There is a military objective that in case you get into a hot war, how quickly can you prepare yourself and produce the stuff that is needed to fight a war. Exactly. Exactly. And and Second World War, not the exact fighter aircraft, but, you know, metals. In fact, there were four factories in France and Germany which were actually producing for the German side. Anyway, that's that's a very different debate.
But the third objective, uh, and that's the most critical one from the Indian perspective, is the currency reset. Uh, in a in a global monetary, if there is one reserve currency, it is much more efficient for everyone. I think we've discussed in one of your earlier podcasts that, you know, it's like, you know, if you have 30 major currencies in the world, uh, you need to have liquid exchange rates, meaning the the price at which a buyer wants to buy and the price at which a seller wants to sell should be a very narrow gap. It's called the bid-ask spread, should be very narrow. So you need a lot of people trading it. If you have, you know, uh, N C2 for 30, you are talking about 30 to 29 by two. But if you put a hub and spoke, so you put a dollar in between, so you don't only need 29 liquid exchange rates, which is much easier to do. So economically, it is better that there is one currency which is in the middle.
Now, the problem is that if that currency, which is then called the reserve currency, becomes, that country needs to have a current account deficit. So again, I, I'll spend a minute on the SC. If I need the dollar to prove to you that I'm a safe company or country or whatever, I need to, uh, accumulate dollars. Yeah. Now, if there is US, I need to provide them something so that they can give me dollars, and the dollars I hold are their liability, right? So they have to have a current account deficit, and their liabilities will keep going up. That's this is the nature of this model. Now, you see the problem that after a while, the liabilities go very high. There are scenarios, and I don't want to get into academic debates, but there are ways in which this can be sustained perpetually. But what the US did, I think after 2008, is by losing control of its fiscal deficits, it allowed the liabilities to explode. So now is what, 150% of GDP? 90%? So, uh, so the, yeah, the liabilities are 200%. But net liabilities. So what what happens is, you know, so there are there are three types of entities. So there is the government, there are corporates, there are households. So for a country, you just add up these three. So their gross liabilities are now $62 trillion. Their gross assets, so they also own like they own Indian equities, Chinese equities, land, whatever, whatever, that's about 34. So the difference is minus 28, which is minus 90% of GDP. Now, just for, uh, scale, it was only minus 20% in 2008. It was minus 40% in 2018-19. Mhm. It's now minus 90. So it is like going like this. This is very similar to the Nixon shock of 1971. So there is a, there is a real effective exchange rate, which is a measure of currency's strength and weakness. The dollar in on its REER, the REER is exactly where it was in 1971, in 1985, just before the Plaza Accord, and and now after the '71 Nixon shock or the Smithsonian Accord, which was an agreement at that time, and the '85 Plaza Accord, the REER for the dollar fell by 30 to 40%.
So in this is current situation bad for America? Terribly bad. So what has happened now is that, um, one, the dollar is so strong. So a lot of the manufacturing anyway can't happen. Mhm. Uh, I would say that is their own doing, and they wasted the the the the exorbitant privilege they had of being able to print the reserve currency. They completely destroyed it. I think that they're just irresponsible.
And you should just quickly explain the way strong currency means imports are very easy, but exports are hard. It's just the, Exactly. So, so imagine if the dollar was 30% cheaper. Now, of course, there will be a one-shot increase in their inflation and some adjustment, and they'll have to consume a bit less. It will not be painless. But if you let it drift, it will break apart at some point. Mh. Uh, because it's like kind of feeding into an unsustainable situation.
No. So, u, uh, so, yeah, so there has to be an adjustment, and in 1971 and 1985, the last two times it happened. So the adjustment process was against what I would call friendly currencies. Mhm. So it was like in the Plaza, it was on the the Deutschmark and the JPY, Japanese Yen, and in both places, America actually has a military base. See, when it comes to these kind of adjustments, brute force helps. Yeah. So, so it was easy to negotiate that in 1971. Remember that you were you were trying to negotiate against the Europeans and the Japanese, again, military base, and you had just rebuilt most of Europe through the Marshall Plan. So, so you were in the driving seat in some ways. Yeah. And and they did it exactly work like what is happening now. Uh, so one fine day, u, Nixon and Steven, there's a fascinating book, Three Days at Camp David, uh, they, they, 15 people fly to Camp David, decide that, you know what, no point consulting with allies, things will get waterlogged, just tell them no peg to gold. Till then, dollar was pegged to gold. So no peg to gold, and we are imposing 10% import duties. You see, 10% baseline duties, um, and if you want to change that, come and negotiate. M. And that's when the Smithsonian Accord was signed, and our currencies were allowed to appreciate against the dollar.
So what happens is, and this is fascinating, your liabilities remain the same, 62, 62. This is as of December '24. Your assets in dollar terms get revalued up. So 34, if you move by 30%, becomes 44. And as some of these changes happen, US equities start losing favor, and some of the assets fall in value, and suddenly what was minus 28 is now minus 14 or minus 10, and you can restart this game because it's in everyone's interest to have this game. Mhm. The challenge is China, because this time you have almost an equal adversary. Not the same, but it is almost an equal adversary. And you can't control them literally. You can't arm-twist them into accepting it. So you have to negotiate. So for that, and I'm assuming this is why he's doing it, you have to pretend to be mad, pretend to be unpredictable. Imagine in a month he's got China to the negotiating table. See, most of us would say, in a month, the Chinese are negotiating. Swell. And you know, the Bessent and the Vice Premier are going to be negotiating. So this, I think, is the third big objective, that this currency reset is overdue. Mhm. If it is not done, things will not sustain.
And the alternative, what do you anticipate this currency reset to, what degree? I mean, just let's just look at from the rupee point of view, right now, is about maybe 5% appreciation for rupee with respect to dollar. Where does this, yeah, so USD, that's a, it's a trickier one. Mhm. But, um, see, what is there, and what is needed, and then what is achievable? I would say that a 35-40% drop is needed. 35-40% has to be because, see, it has happened in the past, uh, but the challenge is that, uh, you, you can't engineer it as easily as you did in 1971, 1985. The financial markets were small, global markets were less interconnected. So you could influence, central bank would do something, do some fiscal here, fiscal there, and this happens over three to five years.
That came as an to conceptually understand, like if 35% uh, uh, devaluation of the dollar were to happen, the country, one is the export into US becomes harder. On top of that, whatever dollar assets I'm holding, the value goes down. Yes. So it's like US benefits at the cost of pretty much default. It is a default. I know. I know. So, uh, uh, so but that's what happened, right? So, and and this might is right. You look at look at how been right. Yeah. Yeah. So, look at what happened. So the the the shred that there is a multilateral rules-based order was very helpful for getting the world together and reducing poverty and all of that, and I'm hoping that we get to some other such shred, but underneath that shred was might. And so look at the Bretton Woods agreement where the the dollar became the central currency was then you think about Bretton Woods, Take on Italy, Germany, Japan had been beaten. M. UK was completely broken. Yeah. And the number of times Churchill was pleading and begging was, uh, India, China non-existent. Mhm. It was only the US. Yeah. This is why, you know, Keynes kept opposing. He said it's not going to work, and it didn't work. The dollar peg didn't work, and so, but no one listened to him. '71, the same. And you see the comments and people think that Trump administration and somehow are are unique in their sort of bad words or or selfish nature. John Connally was a Treasury Secretary under Nixon, used words like, oh, you know, the world is out to screw us, we should screw them before they screw us. And that is why this this peg to gold was broken, and all that. M. The, and and they said the same things that they are saying now, which is that, look, you know, the dollar has been so useful for the world, we are doing national service, or we are doing international service by, uh, allowing the currency to be used outside US borders, right? Uh, and the world has benefited. What do we gain out of it? So,
Understood. This is the third grand objective. Fourth is,
Fourth is, uh, uh, tariff to to get fiscal revenues. Now, this again is the, like the first. See, the first two objectives, you get the third one also, you get the fourth one. I don't even get the objective, uh, but they want to generate revenues out of this. So the most economists disagree. Revenue. It is not an economically efficient way to generate revenue. So, so between 1866 and 1913, so after the end of the Civil War to the start of the First World War, 50% of US federal fiscal revenues came from imports, import tax. Income tax had been introduced shortly during the Civil War, um, but then it was removed, and it was introduced at 1% in 1915. So, uh, the Trump administration and a lot of the believers and thinkers behind it, uh, are absolutely fascinated by the pre-World Wars isolation of the US. It's too expensive. Can't afford it. Which someone would have said that this should have been done after the 1990s. So, so this is the, uh, uh, so anyway, so they want to generate revenue out of it, and they want to use this to give a tax cut to the people. So they're saying that foreign evil manufacturers, we will charge them something to access the great American market, and the money that we make out of it, we'll give a tax cut to the low-income earners in the US. That's the grand plan.
Now, in 2024, they generated about $79 billion out of import tariffs. Only 17, and it's a lot of money, but you're absolutely right that trillion economy, $30 trillion economy, their federal receipts are 5 trillion, their fiscal deficit is now this year going to be 2.2, 2.6 trillion. May 79, but what they, they, I think will end up with is an extra $400-500 billion this year because that is the level of the tariff shock this year, but, uh, because front-loading and, you know, so there are lots of things, but, and half the year is gone because their year is October to September. So, but on an annualized basis, so if you put 10% baseline tariffs on everything, 2.3, they report about 3 and a half trillion. To 79 billion is 2.3% of that. If your baseline tariff is 10 to 4x steel, aluminum, semiconductors, finance, autos will also drop demand will also drop. No. So sensitivity, I mean, so, you know, people whose job is to do this, and so their estimates are that now the reciprocal tariffs, especially against China, are effective in embargo. Correct. So those things will happen. But, so these are the objectives. Now, the challenge is that there's no strategy.
But, but see, that is how decision-making has to happen. See, if you read this, uh, the Keynes book, fantastic book, The Economic Consequences of the Peace, that how what were the problems that Keynes saw with the Treaty of Versailles, basically when Germany was hammered. And look at the data is throwing. So the French president is obsessed with Germany. As of 1870, after 1870, to 1919, their population is up 70%, their steel output is up some 200-300% or 500%. How can you push them back to that same level? So he gives this, for example, and there are many such data points that, you know, Germany produced 190 million tons of coal. These guys said, oh, your war, our coal mines are destroyed, so you had to give us some 25 or 40 million tons of coal. They said, boss, Germany's mines are also destroyed. They have fewer people, their shifts are shorter, their production will drop to 110. So, but, you know, how this was being decided. So the French president is obsessed because they were the most affected neighbor. UK after a while lost interest. Woodrow Wilson was a professor, he had no negotiation experience, and France would think that you start with a very extreme view. M. World is full of these things. You know, after the Second World War, uh, the number of Germans, see, we have not seen or been read enough about this side of history. Germans were pushed out of Poland. See, remember that it's a, it's a flat land, right? I mean, people keep moving around. So they were pushed out of Poland and all most of Eastern Europe. Uh, the Jews were kind of going to the US. So the Americans said it was enough, so let's push them to Israel. There was a lot of opposition there. So the US president accepted Palestine. So when these changes happen, someone has to decide, and that person is not the best and the most informed. So strategy, I think all they will do, and they are doing, is that, so what is grand objectives without grand strategy, it's just wishful thinking and, you know, just dreaming. It's like, it's grand objectives also requires some concerted effort, or you're saying you just destroy the the way things were, and most likely it will, you know, so, Exactly.
So they know. And so when people question that you're throwing them into the arms of China. So if you look at the $62 trillion of liabilities that they have, obviously foreigners that own $62 trillion of US, mostly with allies. So it is suddenly, people say $1.7 trillion current surplus of GDP. So Vietnamese Dong, USD, VND has been flat through a spectacular growth in Vietnamese exports. So somewhere you are saying, almost, you know, the genius of Trump may be difficult to appreciate, but it's going somewhere. There's no genius, uh, there. He's just realized he's a good politician. As a human being, may or may not like him, but I think he's a good politician. He's understood that there are deep-rooted problems.
No, but if through whatever his chaotic actions, if, you know, America were to make progress towards some of these grand objectives, that's exactly what he's saying. Make America Great Again. Looks like this all. So he wants to make America great again. The the problem is that the tools he's using are terrible. Terrible for who? For everyone. Including Americans. Including Americans. Including the Americans. You know, you mentioned those who are left out of this whole economic development. Incomes are flat. It's bad for them as well. Exactly.
So, so yeah. So, uh, so think about manufacturing. See, manufacturing for a strategic economy is very important. M. Manufacturing to create manufacturing jobs because the non-graduate white man cannot do non-manufacturing jobs. That's the assumption he's making. Look, a large part of the job losses in manufacturing have not happened because of China. China has clearly, I think, misused the the global trading norms and, you know, the manipulated things. And frankly, I mean, I do think that some checks and balances need to be brought there, but I don't think manufacturing will create as many jobs as are needed to to lift the incomes here. So, but, you know, deal with this frankly, he had his own biases. So, so anyway, the point is, this is how the world runs. Um, it is important to understand these are the broad contours of how things are likely to shape up because, see, the objectives will not be lost. The thing is, so hopefully this conversation will give people some relief from all this drama from your Trump tariffs.
Thank you. Thank you.
At Sparks, we aim to bring to you stories of exponential impact. We share in-depth analysis of what goes behind success stories. If you find our conversations interesting, you can join us by subscribing to our YouTube channel. You can also listen to Sparks on Spotify, Apple Podcast, or any other audio platform of your choice. If you have any suggestions on who we should invite or what topics we need to cover, just let us know in the comments. We are always listening, looking for ways to improve and keep getting better as we go along.
[Music]