A sudden spike in tariffs has small businesses on the ropes, and the broader economy may be next. Yes, individually big businesses can lobby and bribe Trump and Trumpists for loopholes. But small...
The way that Trump agreed w/ Nvidia's CEO at Mar-a-Lago to allow H20 exports to China, then reversed himself days later, probably reinforced to China's government a single conclusion: those who negotiate with Trump get nothing but egg on their face. Equity markets assume that Trump and Xi will negotiate a better deal. Is that a good assumption? I suspect that China would like the US to endure a punishment phase (empty retail shelves at Christmas) before there are any substantive discussions.
Of course it is not quite the same, but the Trump tariff shock is _just_ a huge ex ante shift in relative supplies and demands like COVID. The Fed might "flexibly" crank up enough over-target inflation as it did with COVID [that’s what having a Flexible Average Inflation Target is for] to produce a full employment fall in real incomes (stagflation).
One fears, however that either out of excessive fear of misguided criticism for creating inflation or to demonstrate independence from Trump bullying for interest rate cuts, the Fed will fail to cut rates/increase QE/ whatever to create enough inflation and we will fall into a recession with even greater fall in real incomes. https://thomaslhutcheson.substack.com/p/the-fed-and-trump
Unfortunately stagflation looks less likely than recession. Apparently, it is this latter scenario that Slok has modeled. Ideally his model would yield “Voluntary Trade Reset Recession (VTTR )or Voluntary Trade Reset Stagflation (VTRS) depending on modeled Fed policy.
DeLong: Am I just off base in thinking that the Slok model -- useful as it is to parameterize the trade war damage -- is really seriously inadequate in not having Fed policy in the causal chain of tariffs to VTTR? https://thomaslhutcheson.substack.com/p/voluntary-trade-reset-recession
We don't really need a model to know the tariffs are bad. The hard call is the Fed's: to inflate (and how much) to get a full-ish employment real income decline or hold (closer) to the average inflation target and risk a real recession? That's decision that needs to be modeled. Right? Slok's is not that model and Dynan and Posen have no model at all. Do we want to see Powell courageously defend an incorrect decision?
The way that Trump agreed w/ Nvidia's CEO at Mar-a-Lago to allow H20 exports to China, then reversed himself days later, probably reinforced to China's government a single conclusion: those who negotiate with Trump get nothing but egg on their face. Equity markets assume that Trump and Xi will negotiate a better deal. Is that a good assumption? I suspect that China would like the US to endure a punishment phase (empty retail shelves at Christmas) before there are any substantive discussions.
Of course it is not quite the same, but the Trump tariff shock is _just_ a huge ex ante shift in relative supplies and demands like COVID. The Fed might "flexibly" crank up enough over-target inflation as it did with COVID [that’s what having a Flexible Average Inflation Target is for] to produce a full employment fall in real incomes (stagflation).
One fears, however that either out of excessive fear of misguided criticism for creating inflation or to demonstrate independence from Trump bullying for interest rate cuts, the Fed will fail to cut rates/increase QE/ whatever to create enough inflation and we will fall into a recession with even greater fall in real incomes. https://thomaslhutcheson.substack.com/p/the-fed-and-trump
Unfortunately stagflation looks less likely than recession. Apparently, it is this latter scenario that Slok has modeled. Ideally his model would yield “Voluntary Trade Reset Recession (VTTR )or Voluntary Trade Reset Stagflation (VTRS) depending on modeled Fed policy.
DeLong: Am I just off base in thinking that the Slok model -- useful as it is to parameterize the trade war damage -- is really seriously inadequate in not having Fed policy in the causal chain of tariffs to VTTR? https://thomaslhutcheson.substack.com/p/voluntary-trade-reset-recession
We don't really need a model to know the tariffs are bad. The hard call is the Fed's: to inflate (and how much) to get a full-ish employment real income decline or hold (closer) to the average inflation target and risk a real recession? That's decision that needs to be modeled. Right? Slok's is not that model and Dynan and Posen have no model at all. Do we want to see Powell courageously defend an incorrect decision?