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All the luck in the world to you if trying to guess where the global tariff situation will be next week. The White House insiders don’t know and neither does the guy who lives there. As of this writing… ahh what the hell, America’s trade policy has assumed the form of a student experiment in absurdist theater.

Are tariff threats a particularly clever, or ham-handed, negotiating tactic? Maybe, but it doesn’t look that way. Whatever it was, we’re now officially in the tit-for-tat stage of a trade spat with our top trading partners and allies. Economists are coming out of the woodwork with cautionary tales like the Smoot-Hawley Act (explained to you in high school while you were napping), which enacted a series of steep tariffs in the early stages of the Great Depression to protect American jobs, business and agriculture by making anything not made in America very expensive. The measures did reduce imports… and then exports when the rest of the world piled into retaliatory tariffs. Did it trigger the depression? No. Did it aggravate it? Probably. Agriculture and manufacturing with any sort of international footprint, essentially the sectors the government was trying to protect, got hurt. Global trade dropped as tariffs went up, the depression got worse and people got testy enough to think that World War II was a good idea.

Since then the free world has generally used tariffs lightly as leverage to get something else, not as a general policy. So surely there is a good, or at least plausible, reason for the trade war that we are starting with the rest of the planet. Surely the powers that be wouldn’t just invent a crisis to justify such a self-destructive policy. Well, you say that.

Out of Balance

It was Aristotle who said, “Give me a child until he is seven and I will show you the man.” What he meant was that someone’s formative years tend to linger in the psyche for entirely too long. When I was seven, Carter was president, and I can’t really say I paid much attention. The 1980s were my formative years, so I constructively spent them listening to REM and skulking about my parents. The current president and I are in no way the same generation, but the 1980’s seem to have left a mark on Donald Trump as well. The man isn’t obsessed with tariffs – not really – but he does think that they are the one-size-fits-all solution to an issue with which he is obsessed: Balance of Trade.

The eighties were a weird time geopolitically. The Cold War was still on, but it was like being in the fourth quarter of a Nick Saban era Alabama game; the clock was still ticking but everyone knew the outcome. With the Soviets were getting their pants pulled own in Afghanistan (I sympathize) and cutting back everywhere else, Latin America was deciding cocaine was more fun than marxism and Europe seemed as safe and smug as it ever was.

The menace at the time was Japan of all places. They were the evil(ish) foreign bastards on center stage when Trump first stepped into that sleazed-out celebrity he wears with such élan. We weren’t scared that the Japanese would take another swing at Hawaii or California, we were afraid they’d just buy the pair with all those dollars we were sending them. It was the dread Trade Deficit - which is econo-speak for what happens when you buy more from someone than they buy from you.

Americans were so rich by the middle of the eighties that we were buying damned near everything. And after enduring the 1970s – we wanted stuff from pretty much anyplace else. Not only had the golden age of labor unions and general complacency made US manufactures expensive, they were shoddy as well. German cars were still a luxury item. I’d heard of Hermès Birkin bag, but the concept baffled me. It still does. In a world where every app on your iPhone was a different electronic device, it was Japan that brought foreign stuff to the masses: radios, stereos, cameras, TVs, watches, portable cassette players. So America sent heaps of cash to Japan and they sent us… gizmos. Then came a certain buyer’s remorse: the gnawing fear that we’d run out of dollars if we kept it up.

This was nothing new. Trade deficit panics have been around about as long as economics itself. They are generally displaced and you don’t need a spreadsheet or a quant to see why. Adam Smith – a grumpy Scot and one of the first economists worthy of the name – wrote in The Wealth of Nations (1776): "But though so great a quantity of gold and silver is sent abroad, we must not imagine that it is sent abroad for nothing, or that its proprietors make a present of it to foreign nations.” He was right then. He still is.

Stoking the alarm was that Japan didn’t have the decency to “buy American” in return. What it bought was chunks of America itself: domestic real estate bought with US greenbacks. At the height of the scare, Japan was only the third largest foreign buyer of US assets behind Great Britain and Germany. They didn’t spook us because the average American can’t tell a Brit or a German from the home team unless they open their mouth. Or in the case of Germans, start dancing. As it was, all that money ginning up the price of real estate made the whole sector “bubbly.” When it blew, Uncle Sam wound up with the gizmos, the real estate and most of the money and Japan got a “lost decade” or two.

Not a bad trick until you remember that we did it to ourselves in 2008.

The Date Night Balance of Trade

If you slept through Smoot-Hawley in high school, you probably didn’t fare too much better in college-level economics. It isn’t that economics is hard, its not. It’s pretty simple. And even if you live in a hippie communist commune, just try to walk out the door without being surrounded by practical experiments and lessons in the field. Karl Marx was always going to lose to being a drug dealer. No, economics isn’t complicated but when you try to put it on paper it gets really, really boring. Real world examples – if you are playing with your own money – can get pretty lively.

When it comes to economics, politicos and journalists are very good at glossing over the boring bits (the practical parts) and leaning into the jazzy notes (there aren’t any). To make things simple, they conflate the trade deficit with personal finances and debt because these are concepts with which most us are familiar. Given the soaring rates of credit card, student and car loan delinquencies - a lot of us are a little too familiar. The main problem with the analogy is that it is useless. A better one would be your wife’s favorite bistro.

You spend dollars to purchase overpriced food and cocktails from a fashionable eatery called Le Prétention and in return you sell the restauranteur... nothing. Now we have a trade imbalance. This isn’t to say you aren’t getting something in return: a decent meal and the wife gets into a lovely mood that your cooking generally fails to trigger. It still doesn’t change the fact that you aren’t getting that money back.

The argument about trade deficits, and the tariffs used to correct them, fail to understand the essential engine behind the markets: That any freely conducted trade is a balanced trade, almost by definition. The restauranteur had some Veuve Clicquot in the cooler, along with eggs, sugar, and cream. He also had the skills and the mini-blow torch needed to move those cheap materials up the value chain to something else. That champagne absolutely shoots up the value chain between the fridge and your table without doing much of anything.

On the other end of the trade, you got something you wanted for a price you were willing to pay. No, you won’t ever see that money again, but you got a crème brûlée and a bottle of bubbly that will go a long way to putting the lady of the house in a humor to help you out with some activities that you’d otherwise have to, ehem, handle alone.

Money v. Wealth

The disconnect with the trade deficit maps onto our disconnect between the concepts of money and wealth. For all its wonders, evolution hasn’t really prepared homo sapiens to be modern humans. We understand the concrete much better than the abstract. Money appears concrete because we mint it and print it can hold it in our hands. This is misleading. Money essentially an accounting gimmick we’ve all agreed on because that is obviously a much better option than not agreeing on it. Wealth, on the other hand, is what really matters. If you are an American or European you are (hopefully) surrounded by so much wealth that you mistake for part of the natural environment. It’s not, people had to be create it. If you are from Zimbabwe you are likely to notice wealth more by its absence. You may have a wallet bulging with Zimbabwean dollars, but it will hardly get you a cup of coffee. Wealth, on the other hand, feels abstract.

Money is currency and currencies are complicated. So let’s strip things back to a world with no central banks, only money - defined as gold and silver if you planned to get anywhere in life. In 1545, while some intrepid Spaniards were in what is now Bolivia on the trail of some healthy gold deposits, they stumbled on a literal, not figurative, mountain of money called Cerro Rico de Potosí. It wasn’t the only mountain of silver they found either. The Spaniards pulled out every bit they could and sent it home. Strictly speaking, this wasn’t a “trade deficit” issue for the Americas because a) the locals had no concept of money and therefore no handy accounting gimmicks, and b) they didn’t get anything out of the arrangement other than human misery and a vaguely apologetic Catholic Church that somehow made it worse.

For the Imperial Spain, it was the perfect positive balance of trade scenario - all the cash is coming into your economy in return for your excess priests and the oily second sons of the nobility - two groups not known for their contributions to the GDP. If the current balance of trade hysteria gripping the White House were sound, then the trade surplus would have made Spain a wealthier, stronger flan powerhouse. What happened was that the sudden increase in the money supply, without increasing the value of goods said cash was chasing, led to an astronomical explosion in both bling and inflation. There were some attempts at economic stimulus - in the 1580s the Spanish Crown built an enormous armada of ships for the British navy to sink. For its part, Great Britain - a nation of shopkeepers and tinkerers with their piddly North American farms all just doing their thing – was wealthier of the two.

This difference between money and wealth even affects the way that one is saved and the other is created. Even in relatively rich and stable places - like China and Europe - people save a lot more money than Americans. The US is a low savings, high investment republic. That is not as bad as it sounds. We are pretty vapid and materialistic as a rule, true, but we also have a very large and dynamic economy with lots of investment options that will throw off better returns than just squirreling your money away. That alone will ensure a dread trade deficit as money comes in from abroad to finance all that  investment.

Essentially, the abstraction of money won’t create wealth unless used to purchase things that we either a) consume or b) use to move up the value chain by making something even more valuable: from huge cars, zippy gizmos or crème brûlée. Even c) the way we save moves our nest eggs up the value chain. Although, you’ll want to keep an eye on it.

Mutually Assured Bankruptcy

Money, then, is what we use to make concept of wealth fit onto a spreadsheet. It may well be an abstract accounting gimmick, but it does make the world go round. Trying to walk around town with oil futures in your pockets and you’ll ruin your pants. So money matters, currencies matter, and the US greenback matters more than the rest. Despite what most earthlings think about America, they do seem to agree that the US dollar is the abstract accounting gimmick that we can all agree on.

Here I feel compelled to point out that while tariffs are a pretty blunt instrument, they do have their moments. They can shift sourcing away from unfriendly countries. Sure, China is playing dirty pool on free trade. Not only is it blatantly breaking the rules, Beijing is actively using the rules against the rest of the world. They’ve done bad. And they’ve done bad it very well, skyrocketing up the manufacturing value chain from flip-flops, through it’s “sweatshop of Pintrest” phase, onto EVs and throttling the green transition and - as piece d’ resistance - developing a better AI model at a tenth the cost of American models. Now they are the evil(ish) foreign bastards. And they are holding a lot of dollars.

What dollars we didn’t send to China, they bought up themselves. There is the fashionable alarm that the Beijing - holding all the US dollars as it does - could cripple the US economy or the dollar with a massive currency or debt sell-off to erode the power of the dollar. Maybe... in theory… if you close one eye. Practically speaking, that would be a tricky maneuver. First of all, a massive sell-off anything requires a massive buyer, or at least hordes of little ones acting in concert (good luck with that). The only buyer large enough to move the needle on a sell-off of dollars is the US itself, and they are our dollars. If Beijing tried a piece meal sell off, it would crater the Chinese economy a lot faster - and more thoroughly - than the harm it would do us.

Yet, for whatever reason, the Chinese clearly have more faith in American debt that we do. Perhaps we know something that they don’t, perhaps its the other way around - either way, firing hypersonic nukes at California is a piss-poor way to collect on an IOU.

If the concept of Mutually Assured Destruction helped us thread the needle of nuclear Armageddon during the first Cold War, then the prospect of Mutually Assured Bankruptcy just might get us through the reboot.

For Most Americans money is a quick transaction and wealth is a long game. If for no other reason no one wants to spend their twilight years eating cat food in their children’s basement. And if the kids haven’t moved out of your basement, you’re really screwed. That is what makes the American economy the powerhouse that it is. It also causes a trade deficit and probably always will. Protectionism won’t do much for the trade balance, but it will be a drag the global economy.

Tariffs against a rival make a certain amount of sense, true, but with an economy almost as large as ours, levies on Chinese goods will only work if Europe on board for the squeeze. Until this year, the average EU tariff on US goods was 5%, compared to the reciprocal US tariff of 3.4% on EU goods, hardly a rip-off. Trying to blow up NATO and our largest trade partners seems unhelpful or, less charitably, asinine. Now someone is threatening a 200% tariff on Scotch, and that alone is enough to make me vow to never vote Republican again.

Richard Murff is the founder of 4717 Insights. For more insight to tear things up, head to the 4717. Murff is the author of Haint Punch, Drunk as Lords, and the revised and updated Pothole of the Gods: Holy Wars, Proxy Wars & Fake News - available in the spring.