At a time when politician’s talk freely (not well, of course, but freely) and many ideas and ideologies are bantered about, let us try to provide some clarity on two important topics on the current pulpit pitches;
- Trade
- Central Bank and Monetary Policies (and effective limits therefore)
The above subjects may seem boring or stuffy but let us assure you they can be understood and they need to be understood.
All politicians and presidential candidates espouse taking care of the U.S. worker. Some of them (all stripes by the way, lest you think we’re picking on one side or the other) also espouse restrictive trade practices. The concept is that other nations are unfairly enriched while we (USA focus) are unfairly beggared. Thus, there is talk of trade wars and ‘making the other guy pay’. Let’s be clear; We already saw that movie once, and the ending didn’t look very good. It was one of THE primary contributors to the Great Depression.
In the 1930’s, President Herbert Hoover signed the Smoot-Hawley tariff law into action. The financial result was unmitigated disaster. Our friends and neighbors (Canada, France, Britain, etc.) were enraged that we would smack their goods with high taxes (tariffs by any other name) on goods that American consumers wanted to buy. Conversely, they responded in kind. Economic historian Charles Kindleberger showed in his classic book (“The World in Depression; 1929-1939”) that the U.S. tariff cascaded into a global beggar-thy-neighbor war of tariff retaliations and currency devaluations. It was an epic fight to the bottom of the barrel and became a disaster.
Some context; A Chinese city by the name of Xintang currently produces 800,000 pairs of jeans – PER DAY! If you want higher tariffs, you’ll get higher priced jeans for you and your family. Thus, you buy fewer jeans (there is, after all, only so much money in that barrel). Thus Levi sells fewer jeans and, naturally, employs fewer workers. Fewer workers getting bi-weekly checks means they buy less, and pay less taxes to our government. The cycle continues and it spirals to no good place. Thus, on trade, you better watch what you ask for (and I’m NOT talking about anti-dumping rules, which ARE good, but are already in place). Statement #1.
Statement #2; The Central banks of the world are mostly held responsible for keeping inflation in check. They use interest rates to accomplish that end. That’s good. However, to make monetary policy alone responsible for a country’s high growth is ludicrous. Witness the low interest rates we have had for 6 years in the USA…and still businesses are not borrowing sufficient amounts to stimulate high growth. The reasons why are many…but let me say that the current background discussion to have monetary policy do more by making interest rates negative is ludicrous on steroids (as they presently are in Denmark, Finland, now Japan). Sooner or later you need FISCAL policy joined with monetary policy. You want jobs? Fix a few thousand disintegrating bridges in this country. There is simply a limit to what monetary policy alone can do.
Growth is good. NO question. How you get there? You better use your brain, not just the populist pulpit.
P.S. Smarter bi-lateral trade does grow other countries too (thus, the Win-Win). If you are an investor in companies in those economies (all wise investors…like you…are), it also pays off in stock performance and portfolio returns. Please see the attached article for insight on that long-term reality and the wisdom of diversification. In a recent study, a globally diversified portfolio yielded an annualized return of 9.3% vs. the S&P 500 index of 4.2%. That’s an amazing 5%+ yearly swing to your favor, which is a Win-Win-and Win[i].
[i] Dimensional Fund Advisors (DFA Equity Balanced Strategy and Standard and Poor’s Index Services Group, January 13, 2016)
