I guess we’re all supposed to be breathing a little easier about the prospect of a global trade war now that Larry Kudlow is said to be Trump’s likely pick to take Gary Cohn’s place.
I mean, as noted on Monday, this would represent a further descent into the absurd as it would amount to installing another TV personality in the White House and let’s face it, no one has taken Larry seriously in a long, long time. But it would play to Trump’s Gipper fantasies and it would allow the rest of us to reminisce about the good old days, when men were men – i.e. when they all wore suspenders and contrasting white collars while chain smoking Merit Ultra Lights and complaining about taxes.
On the other hand, it’s not clear that Larry and Trump are on the same page about all the issues, with the most notable being trade. Kudlow isn’t a fan of Trump’s tariffs which is why it seems weird that Trump would choose him for Cohn’s vacated position considering that the whole reason that position is vacant is because Gary didn’t like the protectionist lean (well that, and he wasn’t a fan of the whole pro-Nazi slant last August).
Also, Bloomberg reminds you that Kudlow isn’t particularly enamored with Trump’s approach to obtaining a handful of pussy:
In 2016, when a tape surfaced before the election featuring Trump boasting about grabbing women’s genitals, Kudlow said he was “furious” and threatened to vote for Mike Pence as a write-in candidate.
Oh, come on Larry. How are you a hard-chargin’, 80s relic who is anti-pussy grabbin’? Something just seems off about that. Maybe we can’t trust you after all.
Anyway, back to the trade wars, Goldman is out with yet another “this is a bad idea” piece in addition to the half dozen they’ve already put out over the past week. This one is more straightforward and basically posits four scenarios, to wit:
- US tariffs without retaliation. We round up the announced tariffs to 1% of total imports, partly because the Trump administration has already announced a few specific tariffs (e.g. on Canadian lumber) and partly because some further restrictions are likely even in a mild conflict scenario. We allow interest rate and the exchange rate to respond endogenously to the tariffs, but assume that equity prices remain unchanged.
- A US-focused trade war. We assume that the US tariffs lead to retaliation from trading partners and further US tariff increases. In this scenario we assume that tariffs on all trade to and from the US rise by 5pp. But we assume that trading partners do not put up tariffs between each other; for example, the EU and China both put up a tariff against US imports but do not erect trade barriers between each other.
- A global trade war. We assume that each country imposes a 5% tariff on everyone else. For example, the EU puts up a tariff against China in response to the US steel tariffs in an effort to prevent Chinese steel from flowing to Europe.
- A global trade war with a global equity sell-off. We assume that global equity markets drop by 10%, in addition to the global 5% tariff.
Spoiler alert: the outcome of all of those scenarios is bad. Under the “best” case (option 1), the U.S. sees some marginal GDP gains and everyone else isn’t completely fucked, but anything other than that is a disaster:
Obviously, the more it escalates, the worse things get.
“The global cost of protectionism rises more notably if a severe trade war erupts, in which tariffs go up everywhere [and] global inflation rises somewhat more notably, which weighs on world consumer spending and forces central banks to raise interest rates,” Goldman goes on to write, describing scenario 3, before adding that “a drop in equity prices reinforces the negative effects of the trade war.” Note that this would potentially wipe out “Goldilocks.”
Here’s a not-so-fun chart that shows you the country-by-country breakdown of what Goldman calls “the cascading effects”:
So you know, that’s what Trump is setting the stage for. Your guess is as good as anyone else’s as to whether he fully appreciates what the ramifications here are. And we’re going to go out on a limb and say that his base hasn’t really thought this through either.
It looks like our best and last hope is Larry Kudlow – I bet you never thought you’d have to say that.