Trade, Debt, Deficits and the Border Adjustment Tax

I am slowly arriving at a more full understanding of the relationship between international trade, sovereign debt, and government deficits.

While dear friends of mine have been encouraging me to look at gerrymandering, which is a serious political issue and needs to be fixed, the effects of the implementation of Trump's Border Adjustment Tax (BAT) have much more grievous consequences.

First, let me address the gerrymandering issue though, since it has been on my mind lately.  Having a Goofy Kicking Donald Duck district in Pennsylvania and a Latin Earmuffs district (below) in Illinois is absurd.

This kind of gerrymandering is ridiculous and should be outlawed.  We need to take a nice square grid system and overlay it on each state and have that set the districts.  Nothing is fairer than a square grid.  The only places people can quarrel on is the grid size and the grid origin.

But a BAT disrupting global trade, currency exchange rates, and foreign sovereign debt is a far more immediate threat that risks setting off a global contagion that would eventually engulf the U.S.

The root problem in this BAT idea is that the world is not a static system.  It is a dynamic equilibrium.  If we make changes to our tax system in such a way as to affect other countries trade balances, they will respond to counteract those changes.  This BAT issue is the sole reason why I refused to vote for Donald Trump as president.

The currently certain effect of implementing a BAT is that the U.S. dollar would rise sharply in value, being predicted by both economists on the right and left.  This rise would occur due to the flow of U.S. dollars across our borders being slowed, causing lower supply of U.S. dollars circulating in the world compared to a stable demand.

John Mauldin, who I generally consider to be a right-leaning economist predicted that the dollar would rise by as much as 20% in value with respect to other nation's currencies.

As the trade deficit shrinks, fewer dollars will flow from the US to the rest of the world. That trend will make the dollar rise against other currencies, thereby nullifying the higher prices we will pay for imported goods.

Paul Krugman, who is definitely a left-leaning economist, likewise predicts a rise in the value of the U.S. dollar exchange rates.

But of course wages and/or the exchange rate would, in fact, change. If the US went to a DBCFT, we should expect the dollar to rise by enough to wipe out any competitive advantage. After the currency adjustment, the trade effect should once again be nil. But there might be a lot of short-to-medium term financial consequences from a stronger dollar.

I am all for a strong dollar, but I need to nuance this view.  I am strongly in favor of an organically strong dollar, not a forced stronger dollar.  I am beginning to think that forcing the dollar stronger may have equally deleterious effects as forcing the dollar lower.  The effects are simply different and the genesis is not in the U.S.

If we force the dollar value higher, we will immediately cause a direct increase in the servicing costs of the $10 trillion in emerging market dollar-denominated sovereign debt.  This increase has the potential to sink those emerging market economies, much of whose debt is held by Western investors.  The contagion will wrap back around the world and setup a sub-prime debt crisis in sovereign emerging market debt which will inevitably result in a global recession at best or a global depression at worst.

We need to stop considering tariffs and border taxes as a means of solving our globalization woes.  These measures are not helpful in a dynamically volatile system in which other players will respond in kind of changes in the competitive advantage equilibrium currently in place.  We need to enact changes to the tax system that do not disrupt global trade or threaten the stability of emerging markets to the point of collapse.

Bannon: The Sociopath of the Right

I found an excellently written article that gave a lot of information without attempting to push an opinion on readers.  This article is "What Bannon Really Wants" published by Quartz and written by Gwynn Guilford and Nikhil Sonnad.

The article addresses what Steve Bannon, who is the Assistant to the President and Chief Strategist, worldview is and how it influences and guides Trump's administration.

As far as the article is concerned, there are a few curious points.  First, the authors point out that Bannon believes in the "great civilizational showdown" between Islamic Mideast and the Christian West.  What Bannon fails to realize is that Islam is not a unified or centralized force, any more than modern Protestant Christianity.

Not recognizing the true enemy, which is fundamentalist Islam, is a severe mistake that will have far-reaching -- both in time and space -- consequences that will be as severe as Obama's misstep of not recognizing this subset of Islam as the threat.  There are plenty of Islamic sects who do not hold the authority of the Koran as absolute and thus are more secular as a result.  Bannon's error of labeling all of Islam as the enemy is equally as mistaken as Obama's error of labeling none of Islam as the enemy.  Misconstruing this as a grand struggle between civilizations, while sensational, is also wrong.  The fight with Islam is jihadi Islam versus the world (moderate Muslims included).  From the jihadi Islamist perspective anyone who does not believe in their strict interpretation of the Koran and Islam is a legitimate target and should be killed or enslaved.

Where Bannon's worldview takes a wrong turn is in his view of utilitarianism as the ultimate form for moral authority.  This is where Bannon departs from true Christianity and truly Judeo-Christian values.  This basically establishes Bannon, and by extension Trump, as an authoritarian who seeks to use his power to enforce a specific view of the world, rather than enforcing the minimum necessary law for society to exist.  The very fact that he actually broad-banned people from specific nations shows that he is not interested in a free or individualistic society, merely his vision of a free society.

Bannon's idea that society disintigrates without Christianity or Judeo-Christian values is not entirely wrong, but also not correct.  When you remove Biblical Judeo-Christian values from society, you get authoritarianism.  Might makes right is all that is left when you remove the Christian framework from beneath society, and it is becoming increasingly clear that Bannon and Trump have no desire to rule the nation with Biblical Christian values.  They are strongmen who want to impose their version of right on everyone else, and are thus as criminal as Obama, except on the other end of the spectrum of sociopaths.