Was I Wrong About Tariffs?

I’ve been thinking a lot about Donald Trump’s tariffs recently… and I might be wrong about what I said before—i.e., that Trump’s tariffs would be inflationary.

So keep reading. This is not an anti-Trump screed.

This dispatch might be more like a mea culpa, or maybe more like half a culpa. Because life could still go pear-shaped.

The upshot is that we could see a strong dollar—for a bit—followed by a much weaker dollar.

Which is exactly what Trump wants.

So here’s what I’ve been cogitating on…

At face value, tariffs are inflationary. Just to keep the math really simple: If a ton of steel from South Korea costs a US importer $1,000, then that same ton of steel will cost that same US importer $1,250 when Uncle Sam tacks on a 25% steel tariff.

Inflationary.

However…

I’ve been thinking about currency exchange rates of late. The USD/EUR rate is pinching my backside at the moment because the dollar is stronger today—and I get paid in euros and my daily spending is in euros.

Back in August, every €1 that I earned bought me $1.12. Today, each euro buys me $1.035—a 7.5% reduction in my purchasing power in just six months.

No bueno for me… And this started me on some mental calisthenics…

Why is my life suddenly costing me more money? Or said another way: Why are my euros (which I convert into dollars monthly to pay bills I still have in the US) no longer stretching as far they once did?

The answer is in the global currency market’s reaction to Trump’s tariffs and, in the case of the eurozone, lower interest rates here vs. the dollar. The gap between rates fuels what’s known as “the carry trade,” in which investors sell currencies with low interest rates to buy currencies with higher rates. They profit because the interest rate they earn on, say, dollars, offsets the interest rate they pay on, say, euros that they’ve sold.

That’s where we go back to tariff-fueled inflation.

I am now not convinced my previous inflation thesis is 100% accurate.

Here’s why, in a very simplistic example:

1. Trump imposes a 25% tariff on everything made in Europe, which in theory should push up prices on European goods for American consumers, as per the steel example above.
2. But currency exchange rates are adjusting to the threat of tariffs. The value of the euro is declining vs. the dollar, as a way to lower the tariff-laden cost of European goods.
3. The tariff still exists on all products flowing into the US, but the dollar value of that product is lower so that when America imposes the tariff, the cost that US consumers see is unchanged.

No inflation (yet).

It’s all very voodoo that Trump do. Mad genius kinda stuff, really.

Thing is, this isn’t Trump’s end goal. He doesn’t actually want a strong dollar. Indeed, he wants the opposite!

A strong dollar does not help Trump’s cause at all because it makes US products prohibitively expensive to foreigners. And if foreigners can’t afford US goods and services, then that rolls right on across the Fruited Plains, impacting American companies, American jobs, and the US economy.

What he wants is lower interest rates all over the world, including in the US.

In fact, he wants the dollar to weaken globally by forcing foreign central banks to sell dollars to buy back their own currencies.

For eons, foreign central banks have been accumulating dollars through trade that they then convert into US Treasury paper. Trump, I suspect, sees that as a mechanism foreign countries are using to keep the dollar overvalued.

It’s a supply/demand thing. Though there is an absolute Godzilla supply for dollars, demand from central banks sops it all up. That, in turn, keeps foreign currencies unnaturally weak against the dollar, giving foreign companies pricing power when selling into the US and undermining US manufacturing.

That is what Trump is raging against.

And I see his point.

So, he’s pushing for a new central bank world order, and my bet is that he is going to use tariffs to negotiate a certain type of deal with individual countries and the EU.

It could look something like this:

• Trump agrees to remove tariffs.
• Foreign central banks sell dollars and buy back their own currencies.
• Certain manufacturing relocates to America—cars, computer chips, etc.
• If not, then Trump keeps the tariffs in place, maybe even raises them, and uses the threat of revoking US military protection as the bludgeon.

Let me say here that I do not necessarily agree with that last point, assuming it’s even a legit point. Like I said, this is just my suspicion based on Red Bull-fueled cogitation over the last many days…

But I do understand that Trump is transactional to the core, and he cares very little about his persona as the global schoolyard bully. He does what he does to achieve whatever singular goal he has in mind.

The upshot of all of this would be to weaken the dollar against other currencies and bring some high-value manufacturing back to the US.

It would also likely bring global interest rates back in line because the Fed would perceive a weaker dollar as beneficial to the economy by boosting exports… and the Fed would likely look to cut US interest rates to create a kind of Goldilocks equilibrium.

Which means, in the end, that foreign currency assets—foreign stocks and overseas real estate—as well as gold, silver, and bitcoin/crypto would be big beneficiaries.

Like I said, this is a half culpa.

There is a key risk here: Instead of playing ball with DJT, the world throws down with him.

Countries all over the world impose tit-for-tat tariffs. Currency markets would be in a crazy state of flux. Inflation would certainly be an issue. And Trump’s mad genius plan would collapse.

Or, countries just throw their hands up and ditch dollars completely, wiping out the hegemonic advantage the dollar has had since the mid-’40s. Again, Trump’s plan would collapse spectacularly, and American consumers would bear the exceptionally painful brunt of that… which would again be a very good reason to own gold, bitcoin, and the Swiss franc.

For now, I’m going with Option 1.

I think countries are going to play ball with Trump. No one wants to destroy their own economies with a trade war. Not many countries want to lose the shield of the American military at this juncture in global history.

So the takeaway is this:

1. Continue to own/add to gold, bitcoin, Swiss francs.
2. If we see countries playing ball with Trump, then use any early dollar strength to buy foreign stocks and, if your pocketbook allows, overseas real estate. (I’ll have a Global Intelligence cover story coming up soon on a European stock investment to benefit from this.)
3. If we see countries balking and it’s clear a global trade war is imminent, load up on gold and bitcoin. Inflation will surge, interest rates will soar, no one will trust most fiat currencies, and gold/bitcoin will be the beneficiaries of that.

So, this is my half culpa regarding Trump’s tariffs.

I just hope I’m right.

My wallet and I would very much like the euro to return to its previous highs against the dollar.