Transcription
It seems to me as though we're entering into a new chapter of this elevated and elongated period of heightened economic and policy uncertainty. But there's something that we really have to get to the core at, which is that tariffs and totally rebalancing and reshaping global trade for President Trump is like a religion. I mean, we can all talk about the art of the deal and that maybe all of these aggressive tariff threats are just a ruse to get deals. We hear about deals. We haven't seen any yet. And time is more or less running out before this starts to truly impair President Trump's credibility.
But just remember that Donald Trump went on this tariff and trade crusade vocally and emphatically back in 1987. And he didn't let up when he was a private citizen and he hasn't let up in both of his terms as president. He has stated on record many times that tariff is his favorite word in the dictionary. And what I go back to because you mentioned liberation day to which I have been saying liberate us from what? Our sanity. And you think about why were there reciprocal tariffs with crazy numbers on all these various countries is because of what this additional levy on top of the 10% baseline tariff. What they implied each one of those numbers was really a quotient. It was a given country's trade surplus with the United States divided by their export base and that was the reciprocal tariff. And the hidden message behind that was that is the number country by country that would totally eradicate totally eliminate that bilateral surplus that country A, B, C, and D were running against the United States.
So you have to dig through now withstanding the roller coaster ride we've been on and the threats and then the reprieves and then the alleged deals that this is really the mindset of the president and his super protectionist team which is that it wants in the end as its ultimate goal the complete evaporation of trade surpluses from the rest of the world on the United States. That's the one thing we have to take out of this is that is the ultimate goal. Everything that we've been seeing and I know that we're all focused on this minute by minute, hour by hour, day by day. It's been an incredible headline driven market, but we have to understand, you know, what the endgame is because what this is telling me is that the administration doesn't seem to fully comprehend how the balance of payments works. And that really troubles me because the balance of payments by definition have to balance.
So the United States does run a trade deficit with the rest of the world, but it runs an equivalent capital account surplus with the rest of the world. So what happens is that these accumulated trade deficits primarily on the product side are met with they coincide with an equivalent inflow of capital into the United States because the balance of payments have to balance. Now it's a academic debate as to what drives what does the current account drive the capital account? Does the capital account drive the current account? But the balance of payments have to balance. And it's totally normal and apppropo that the world's reserve currency traditionally does run trade deficits with the rest of the world. It makes perfect sense that the richest and the most powerful country in the world runs trade deficits with the rest of the world. That is just common sense. But the view in Washington is that this is just stealing jobs and investment from the United States to its trading partners.
But it just comes down to Sir Isaac Newton's you know famous third law of motion about every action has an equal and opposite reaction. The United States benefits from these trade deficits by the capital account surplus. Because what these accumulated capital account surpluses, what it's meant is that not only do foreign investors help fund the US fiscal deficit because they own about $9 trillion of Treasury securities, but they also help fund the debt market for the corporate sector because it's not usually discussed but should be that the foreigner also owns about $5 trillion worth of US corporate bonds. And then the big mama is the equity market. And everybody always talks about the foreign buyer strike on US treasuries, but the foreign investor owns twice as many US equities as they own treasury securities. They own almost $20 trillion of US equities, which of course helps fund corporate America. So that's the net benefit.
You see, you can always just focus on one side of the balance sheet and say we're a loser because we're running trade deficits and that means these jobs in manufacturing are being created somewhere else. But the offsetting benefit is that the United States by virtue of these capital inflows consistently have a lower cost of capital that would otherwise be the case, both the debt and equity cost of capital and a higher rate of return on assets. And that therefore creates the tremendous increase in wealth that the United States enjoys that's not comparable in any other country. Of course, it's a vicious circle cuz that wealth creation generates an impact on confidence in spending and there is a 95% correlation between consumer spending and imports. And so that's why the United States has just about the lowest personal savings rate in the world. And at around 70%, it has just about the highest consumption to GDP ratio in the world. So how do you not run trade deficits with the rest of the world when their savings rates are higher, their consumption ratios are lower, the rest of the world lives more frugally, but the rest of the world also has much lower wealth accumulation. So there's a symbiotic relationship between the current account and the capital account. And my concern all along has been that the White House just focuses on the trade deficit without realizing that the trade deficits have coincided with years of accumulated capital inflow that has made America wealthier.
I think the problem in the United States is how that wealth and that income has been distributed. It is not the fault of the foreign investor. It is not the fault of the foreign producer that to this day, whether you have Democrats in power or Republicans in power, these gaping wealth and income inequalities, all we've had is a situation where fiscal and regulatory policy has benefited the upper end of society in the United States. And that's why the lower end has continued to lag to this very day, which creates its own societal problems. So you can point the finger at America's economic problems and blame it on the rest of the world. But the problem to this day and include it in this big beautiful bill does not address I think what remains one of the fundamental constraints on the US economy and on its society which are these virtually unprecedented income and wealth inequalities. That's really the issue here.
And the problem with tariffs is that a tariff is basically not much different than a sales tax. Now you can argue about how much gets passed through. How much does the domestic importer pay the duty? Then how much does the wholesaler pay the duty? Then how much does the retailer pay the duty? And then what ultimately gets passed on to the consumer. But it is foolhardy to believe that none of it gets passed on to the consumer in terms of higher prices. That is just ridiculous. But again, it bothers me when I see out of the White House that there's not going to be any inflationary impact whatsoever. There is. And the problem is that wages are not going to keep up because the labor market is loosening. So this is going to crush real work-based income for the most vulnerable parts of society in the labor market who will not have the bargaining power this time around to make up for what is going to be a price shock. Whether it's big or small, there is going to be a price impact that's going to impair real wages. And once again, who's going to get left behind is going to be the little guy. And so this is going to foster more I think resentment and dislocation especially from a societal backdrop from what's happening now on the trade side.
Everybody says that well you know middle America got burnt by all these free trade deals and it got burnt by globalization. No, I am not willing to throw the works of Adam Smith and David Ricardo and the theory of comparative advantage into the waste paper bucket. I'm not going to be doing that and nobody should. The problem in America is how government policymakers have chosen to ignore how to distribute the fruits of globalization. It's just been allowed to further widen these income and wealth disparities. And that is in my opinion top three issue in the United States today. And unfortunately it's not getting much attention. Well, I'm not saying anything needs to happen. What I'm saying is that we are on an unsustainable path.
If you take a look and we get the quarterly numbers from the Bureau of Labor Statistics, you're going to see that starting about 40 years ago, the labor share of income was at a very high level. And that was back in the, you know, leave it to be labor days where there was stability in society. For the past four to five decades, that number has only been coming down and is at a record low. I'm talking about the labor share of income. It's at a record low. Nobody talks about this. But yet productivity is at an all-time high. So you have a situation where normally the proletariat should be bearing the fruits of productivity, but they're not. Their share of income is going down. If you're taking a look, for example, at real weekly earnings out of the monthly non-farm report, it hasn't budged in the past 5 years. But as you said, profits have done great. And look, I'm a capitalist, but you know, capitalism and democracy are always dancing a tenuous dance and you do want to preserve democracy. Capitalism needs democracy. And so, yeah, I'm a little bit worried about what I'm seeing because there is no effort either in fiscal policy and there is no effort on this trade policy. There's really no effort here, nor has there been for many, many decades to ensure that the income pie is being distributed in a more efficient manner. That's the missing link in these tariffs. It's going to raise prices not on recreation services, which a lot of low-end consumers can't even afford anyways, but it's going to raise the price of a wide array of consumer staples, which people need. and the low end of the income strata spend almost 100% of their earnings on. They are going to get squeezed big time. So I just feel that this tariff and trade war is a colossal mistake. It has a tremendous amount of political capital behind it but it is a huge policy misstep and will have laws of unintended consequences that people aren't talking about today. I shouldn't say that because I'm talking about it in my daily but this will not end well.