Streetwise Professor

August 25, 2015

Donald Trump: Leader of the Mercantilist Zombie Apocalypse

Filed under: China,Economics,Politics — The Professor @ 6:53 pm

Running the risk of serious brain damage, I watched Trump on O’Reilly last night. It was a cage match to determine the world champion of economic ignorance. I declare it a tie.

The “discussion” started out with China. O’Reilly asked Trump about China’s alleged devaluation policy. Except O’Reilly couldn’t pronounce “devalue”: he kept saying “devaluate.” But Trump took the bait and ranted (but I repeat myself) about how China has relentlessly devalued its currency over the years.

Except, of course, it hasn’t. It devalued years ago, but since the financial crisis it has pegged the yuan to the dollar, and only recently made two small devaluations.

Indeed, the yuan has been appreciating in recent years. Since 2011 the yuan has risen from about 6.8 to the dollar to 6.2 to the dollar, before dropping to 6.4 to the dollar as a result of the devaluations. It is arguable whether the yuan is undervalued or overvalued as a result of the peg, but that’s something completely different than devaluation. And it is just wrong to say, as Trump does, that China has been relentlessly devaluing its currency for years. If anything, indicators are that the currency has become overvalue of late: in particular, capital outflows signal overvaluation. Look at real estate markets in the Bay Area, Vancouver, Sydney, etc., or step into any luxury car showroom in the US, and you will see a lot of Chinese buyers. That’s a telling anecdote, but there is hard data to back that up.

What’s more, it’s not as if the US has been passive post-crisis. QE anyone? To ignore this is to ignore one elephant in the room, and criticizing the currency peg without mentioning QE has more than a little of the feel of “Mommy! No fair! Johnnie hit me back!”

Further, even if the Chinese have engaged in policies that keep their currency artificially low, the effect on the US is not unambiguously bad. Yes, some US industries and workers are harmed, but consumers overall would get a great boon, as we exchange overvalued paper for artificially cheap goods. It is not uniformly bad for US manufacturing either, as many of the “consumers” are manufacturers who can purchase cheaper inputs. This raises the derived demand for other inputs, including some labor.

The best part was where Trump repeated one of his common themes that American leadership is dumb (I don’t disagree) but that Chinese leadership is really smart. But then he went on to screech that the Chinese have created a huge bubble that is imploding, and threatens to bring down the US economy with it. But, if the Chinese leadership is so damn smart, why would they create a huge bubble, and then be incapable of preventing its bursting? And if we live in a zero sum world where China’s gain is America’s loss, wouldn’t a Chinese economic collapse be good for the US?

Another lowlight was the discussion of trade with Mexico, which is apparently also governed by those overqualified for Mensa. (Who knew?) He is furious at Nabisco for moving a plant from Chicago to Mexico. Presumably if elected president he will force the company to forego use of the “Ritz” brand (because that’s the name on a fancy-schmancy American hotel!) and preclude them from selling Oreos with a cream center in the US. Nope, just two dry chocolate biscuits, unsweetened, held together with a nail. Ford also came in for a bashing for moving assembly to Mexico.

Perhaps to give him more intellectual credit than he deserves, Trump is a died-in-the-wool mercantilist who believes trade is a zero sum game, and who favors protectionism and beggar-thy-neighbor currency policies. He talks like it is the late-80s, and Japan is still an economic juggernaut that will overwhelm the US, completely overlooking the fact that Japan’s crypto-mercantilist policies gifted it a 25 year long lost decade, and that neo-mercantilist China is on the brink of the same fate. If it is lucky.

Adam Smith is spinning in his grave.

But alas, mercantilism is a like a zombie. It has no brain, and has proven impossible to kill. Which means, I guess, that in Donald Trump, it has found its perfect advocate.

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  1. “It was a cage match to determine the world champion of economic ignorance. I declare it a tie.” Great line.

    Comment by Phil Rothman — August 25, 2015 @ 9:06 pm

  2. The problem is, as you alluded to in your recent post, nobody cares that Trump is an economics ignoramus: they like him because he is saying stuff that the Establishment have for years agreed amongst themselves cannot be said, he doesn’t seem to care who he offends, and the Establishment are looking extremely uncomfortable with it. And I have to say, I’m enjoying this part of his campaign immensely. It’s a shame this job has to fall to somebody like Trump, but how long have the GOP had to come up with an alternative and instead put forward Democrat-lite candidates? Trump is an asshole, but he’s made this campaign a lot more interesting. If Trump bowed out now, I can’t see that the Republican nomination process would suddenly get more intellectually rigorous.

    Comment by Tim Newman — August 26, 2015 @ 12:40 am

  3. Dear Prof:

    Off topic but I would dearly appreciate hearing your views on the issue.

    Why do you think Russia is playing so nice on Iran? One might imagine that if the nuclear deal goes ahead, sanctions will be disabled (more than now, I mean) and Iran will ramp up its production of oil and gas, further exacerbating the supply overhang and, presumably, making an even bigger dent in Rosneft/Gazprom revenues/profitability. Being naive, one might expect Russia to play spoiler, trying to sabotage any deal because that would preserve, if not add to, Russia’s rents. But no. Any theories?

    Comment by Simple Simon — August 26, 2015 @ 2:24 am

  4. @Tim
    Great line about intellectual rigor-intellectual rigor mortis is closer to the fact.

    Reading History of England by Macaulay and absolutely first class great read. I had no idea how little I knew about English History and the history of British politics. Just read through a hilarious passage. James II sentences his nephew the Duke of Monmouth to death for rebellion. The Duke goes to the chopping block and the axeman has a widespread reputation as being a terrible executioner. The Duke gives him gold and jewels and just asks that me makes it quick and says relatives in the crowd will give more valuables if he does a good job. True to form the axeman takes a couple whacks with out finishing the job. The axeman throws down his axe in self disgust and frustration. The Dukes relatives plead with him to pick up his axe and finish the job which he does with a few more whacks.

    Many of the Brits I know like Trump’s lack of regard for PC. The US and Britain have both suffered enormously from PC ploiticians.

    Comment by pahoben — August 26, 2015 @ 9:22 am

  5. @Professor
    Not sure what it is if not free trade but something hasn’t worked out well for the US. Sure lots of cheap BS to consume but the tax bill cometh and only for a modest portion of the spending. It still seems evident that global manufacturing labor has been trivialized by China and the displacements that result just add to social costs in the US.

    Comment by pahoben — August 26, 2015 @ 10:52 am

  6. Simple Simon:

    Weapon sales are very profitable too. Main supplier for iran will be Russia.

    Comment by Jeffrey — August 26, 2015 @ 10:56 am

  7. Well, it’s not the first time that there has been a demagogue candidate for office in the US. Remember the “cross of gold”, William Jennings Bryan? Then there were those who ranted and raved about the “yellow peril”.

    At one time, there was a lot of weeping and gnashing of teeth about Japanese “window power” and the exchange rate, and the amount of US debt held by Japan.

    Apparently Trump also posits protectionism, which I guess would take the form of tariffs. As I recall, many economists argue that one of the causes of the Great Depression was – protectionist tariffs.

    There is no doubt that Trump is feeding into a) public receptiveness for standing up to the media and not shrinking and withering before them, like Republican candidates have consistently done in the past; b) receptiveness for plain speaking (no matter how misguided or stupid or unfounded on the Donald’s part.

    I think that some of the others in the Republican tableau do a great job of meeting that public receptiveness on a far more valid and responsible level – Carly Fiorina among them. Jeb Bush was raised to be a polite preppie – if only he could steer away from mambie pambie talk, I think it would be great.

    As it is, the politicos operate under the fiction that the president can “do something about the economy.” And they live and die by that myth. What presidential candidate would ever tell the truth – “Congress has the power of the purse, the president has very little power over jobs or the economy, but I will do the best I can within my power?”

    Oh, sure, there are specific actions that the prez can take – Keystone Pipeline comes to mind. And I have heard it said that Clinton’s Treasury Secretary resorted to issuing government debt of various maturities to take advantage of variations in interest rates to “create a surplus.” Nevertheless …

    Another myth – that all US government debt must be eliminated.

    Trump has certainly dumbed down the conversation, while highlighting important issues.

    But I would hate to see Repubs continue to respond as “Dem-lite.” It doesn’t work.

    Comment by elmer — August 26, 2015 @ 11:31 am

  8. Speaking of US debt: Russian TV Channel 1 has recently informed its audience that US $ appreciating by 1 ruble means US government debt growing by 18 trillion rubles

    Comment by Ivan — August 26, 2015 @ 12:26 pm

  9. Is “died-in-the-wool” mercantilism some kind of fetish thing?

    Comment by Cole — August 26, 2015 @ 1:52 pm

  10. @cole-No. Freudian slip. Seriously.

    BTW did you go to GSB Chicago late-70s early 80s? If so, it’s been a helluva long time. How did you find your way to SWP?

    The ProfessorComment by The Professor — August 26, 2015 @ 7:08 pm

  11. What do you expect from a country that elects a community organizer twice? Who cares anymore, give the TV guy a chance WTF.

    Comment by Joe Walker — August 26, 2015 @ 7:08 pm

  12. @prof-

    You must understand that what is being said at this stage of the election cycle has nothing to do with what any candidate actually believes. Trying to define any candidate by their statements 15 months from the general election is something only a naive amateur (or a Univision “journalist” tied to the Clinton campaign) would attempt.

    The goal at this stage of the game (am we all agree it is a game) is to stand out from the other 16 Republican candidates and in that, Trump is wildly successful. Name identity, a corp group of supporters and financial support is all any candidate is seeking at least until February.

    Don’t confuse election theater or pandering to voters with the actual positions of any politician.

    Comment by Charles — August 26, 2015 @ 7:28 pm

  13. SWP:

    Charles is brilliant. Vlad hadn’t considered that.

    But then again, most commenters always have unique perspectives that Vlad has never considered. Which is why Vlad always comes here 1st.

    Thx for the thought provoking posts, SWP, as always.


    Comment by Vlad — August 26, 2015 @ 8:03 pm

  14. @Simon-I don’t have a good answer. I wrote a post early on saying Russia would be the Biggest Loser, Iran Deal Edition, and that’s definitely true for the reasons you mention. I thought they would attempt to throw in a spanner at the last moment.

    The best I can do is that Putin is actually taking a longer, and more deeply cynical view. Specifically, he believes this deal will increase dramatically the odds of a serious conflict in the Gulf over the next decade, and that Russia will be the big winner from this, both in terms of energy, but also geopolitically because of the adverse effect on the US and Europe.

    The ProfessorComment by The Professor — August 26, 2015 @ 8:23 pm

  15. Regarding the “cross of gold” comment, that was one Bryan got right (though for the wrong reasons). Read Barry Eichengreen’s Golden Fetters and it was a cross indeed.

    Comment by Randall Parker — August 27, 2015 @ 8:27 am

  16. @prof yes I did; I am still in touch with our mutual pal Phil M (in NZ) and often get here via FT Alphaville…

    Comment by Cole — August 27, 2015 @ 8:46 am

  17. Dear Prof:
    There is no virtue I admire more in a man – especially an academic – than intellectual honesty.
    Your answer is, I agree, not a good one. Oddly, the conundrum of Russian policy vis-a-vis the Iran nuke pact seems to have attracted no attention; I haven’t seen any serious reflection although, to me, it seems to exert endless fascination.
    Presumably the no-pact oil price would be higher than the current price. So that represents a huge sacrifice on the part of Russia, here and now. Why would they not sabotage the pact? KGB playbook with no fingerprints. I find it hard to believe that Putin would trade sacrifice here and now for a contingent benefit down the road. As for weapon sales, how many tanks that don’t move and jets that crash do you have to sell to make up for the scale of sacrifice here and now?
    No. There was either no practical alternative to going along with a deal or there was some quid quo pro large and certain for Russia.
    I opt the former.
    I also observe the unholy eagerness of the Brits to reopen their Embassy in Tehran as though the pact was a foregone certainty to be ratified.
    In the spirit of explanatory parsimony, only one assumption or variable must be able to offer a strong plausible explanation of Russian policy. And the behavior of the other parties who certainly seem hell-bent on nailing the agreement down.
    The only way I can get to the conclusion is that we – the public – have been misled as to the state of play. Iran already has one or two bombs, or the material for a dirty weapon, and the agreement is designed to ensure that they do not increase their existing arsenal.
    There is no announcement of the existence of those Iranian devices in order to preclude mass panic (especially in Israel). There is no alternative but to go secure an agreement and Russia knows it.
    Meanwhile the Saudis ramp up production so as to minimize the revenues available to their mortal enemy.

    What say you?

    Comment by Simple Simon — August 27, 2015 @ 9:17 am

  18. Mercantilism worked well for Great Britain (early on), the United States (in the 19th century–it was called the American system), and more recently for the Asian countries (first Japan, then Korea, then China). Japan’s lost decade wasn’t the necessary consequence of its mercantilist policies. The professor just ASSumes his conclusion.

    Comment by HI — August 27, 2015 @ 11:57 pm

  19. @SiSi
    Very nice piece of reasoning in all cases-props.

    Comment by pahoben — August 28, 2015 @ 4:10 am

  20. […] Donald Trump: Leader of the Mercantilist Zombie Apocalypse [Streetwise Professor] (8/25/15) […]

    Pingback by Roundup – A Talking Cat!?! | The Heat Death Hour — September 6, 2015 @ 10:19 am

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