The Big Picture
You’re a farmer. Every year, you plow your fields, sow corn, and harvest it. You sell most of the harvested corn, reserving part of it to sow for next year’s crop.
But suppose one season, you decide to live a little better than usual. You sell part of the corn you usually hold back for next year’s crop. This might cover a vacation, a new big screen TV, or a boat. Maybe you have even higher aspirations and sell off some of your land. From the point of view of a casual observer of your lifestyle, you’ve become more prosperous.
Of course you haven’t. You’ve just taken out a loan, borrowing your apparent bounty from next year. Next year’s crop is a bit smaller. Your balance sheet shows your net worth has declined. Despite superficial appearances, you’ve grown not richer, but poorer. You’ve traded some of your seed corn – your capital – for consumption. If you keep doing this, you’ll go broke.
Welcome to America.
Let’s tie this into global trade. When the US runs a “trade deficit”, that means it’s consuming more than it produces. It sends dollars overseas in exchange for things like vacations, big screen TVs and boats. But those dollars don’t just pile up in the seller’s coffers. They spend them on US assets like stocks, bonds and real estate. Economists call this a “capital account surplus”. Consumer goods flow in, capital flows out.
What happens if you wake up one morning, realize you’ve gotten yourself into an unsustainable situation, and slam on the brakes? It’s going to end either way … the only choice is whether deliberately or catastrophically.
What happens is something a lot like the opposite of how you got into it. From the point of view of a casual observer, you will appear less prosperous. The first thing that happens is the price of your assets falls. Why? All those dollars you were sending overseas, coming back to buy your assets, drove up their prices. Your stocks and bonds became very richly priced. Reducing the dollars flowing out to buy goods means fewer dollars coming back in to buy assets. But as before superficial appearances are misleading. Your balance sheet stops shrinking and you’ve stopped growing poorer.
The initial cost falls heavily on the sellers of assets. Who sells stocks and bonds to overseas buyers? Wall Street. And it’s a very lucrative business. So any attempt to stop the bleeding is going to raise howls of protest from Wall Street. Domestic sellers of goods may gain, but at the expense of domestic sellers of assets. And if the media primarily present the voices of asset sellers, the media are going to vehemently oppose it.
Trade deficits have become a very big, very lucrative business, and it doesn’t like to be disrupted. Don’t expect the beneficiaries of trade deficits to be objective about their impact on “the economy”. It’s their economy they’re worried about.
Overall, lower bond prices mean higher interest rates … lower returns for today’s sellers but higher returns for today’s buyers. Lower stock prices mean the same for sellers and buyers of stocks. And it means more affordable housing, as US asset prices retreat from bubble levels.
As you might have already suspected, the real world America is a bit more complex than a farm. America has not only seed corn, but a printing press. To the dollars it receives for selling capital, it adds many more produced from nothing. This drives US purchases of foreign goods and foreign purchases of US capital; because the production of currency far exceeds the production of the economy, the excess overflows to buy production overseas. It’s not mere consumer avarice at work.
RIA’s Michael Lebowitz looks at the same big picture from another angle:
Trumps Economic Revolution: Unraveling A Blessing And A Curse
The investment implications of a rebalancing of trade are, in the big picture, bearish for US assets. Fewer dollars going overseas to buy consumer goods mean fewer to coming back to buy stocks, bonds and realty. You will hear dramatic declarations of the “end of US exceptionalism” and “sell America”, in protest to unwinding of the financialization bubble by those who have been benefiting.
Is this good news or bad news? It’s a bit like asking whether the sun coming up tomorrow is a good or bad thing … it’s going to happen regardless. One of the few economic certainties is that if something is unsustainable, it will end.
Those selling inflated assets aren’t going to be pleased with lower prices. But whatever burden sellers may bear is a boon to buyers. Those buying stocks and bonds for their futures will, for the first time in years, have the prospects of earning returns more like previous generations earned. Those who have found themselves priced out of the housing market may find opportunities returning. As the financial economy shrinks, the real economy can grow.
I’ve been writing in these pages for several years that XS (foreign) stocks were a better value than their overvalued US counterparts, offering better prospective returns. And for most of that time, it’s stayed that way. Valuations foreshadow long term returns, and valuation discrepancies can go on a long time. It usually takes a catalyst to get the ball rolling. This may be it.
It not very much info coming though now, yes there was a push back but nothing like i expected.
Not much news, Gold treading water…….boring day 🙁
Lebowitz’s discussion of Triffin’s Paradox is illuminating. It highlights the unsustainability of the previous path.
But Triffin’s Paradox is a man-made problem, not a fundamental law of economics. It only applies to a world in which there is a “reserve currency”. Take the notion of a “reserve currency” out of it and the problem evaporates. It’s just one of the ills of fiat money; it would be meaningless in a world that used only real money.
The adjustment will be disruptive, and Donald Trump will be blamed. After all, the most disrupted control most of the media. To find the source of the problem, though, you have to go back at least to 1913, when, against the counsel of the likes of Thomas Jefferson, the US permitted the creation of a central bank and allowed it to issue its currency.
– Thomas Jefferson
Tom was spot on………………..but its happened.
Not much to discuss, think i write another chapter in my Lesbian Vampire detective story……..no you cant read it…………well may be…for money
Ukraine:- The Green Goblin has just said “NO” to elections & NO to talks with Russia. US arms are about to run out. If the ECCP/City of London are going to do something, they going to do it now.
Mike
AU $3273.56
https://www.gold-eagle.com/
$3288.64
Bear Market Warning:
“It remains to be proven whether this is indeed a bear market. That will come if and when the anticipated rebound rally falls short of the February top before turning lower again.”
Just in case you haven’t been following, the stock market has passed this test with flying colors.
Bear market confirmed.
How much more? If the length and depth of the preceding yield curve inversion is any indication, quite a bit.
In previous disinflations/deflation didn’t the USD and trzasuries gain strength vs everything, gold, other currencies, stocks, commodities, esp oil.
Are the Fed’s hands tied this time? Deflation is staring them right in their eyes and they are sitting on their hands Why?
Yes, though it was messy. In the 2008 crash gold briefly sold off and so did treasuries. In the 2020 crash it happened too. We’ve seen it repeated this time as well … gold sold off earlier this month and treasuries a bit later.
Keep in mind the term deflation has some limitations. I use it to refer to an increase in the value of currency. This is partly to avoid confusion with movements in forex markets, where only relative movements between currencies are recorded.
There are no absolute units in finance, so when we say things like gold or treasuries went up or down, we have no way of knowing whether they “really” went up or down, or whether it was the currency we priced them in going the other way. The best we can do is look at a wide range of assets, and if they overwhelmingly seemed to go in the same direction, infer that it was the pricing unit doing most of the moving.
This year’s deflationary crash has some remarkable similarities to 2020’s. One is that in both instances, the underlying cause was forgotten by the media. In both cases the yield curve had been inverted the prior year, a notorious recessionary omen. In both cases, media focused on only the catalyst; then covid, now tariffs. But in both cases a recession and bear market in stocks was already developing. I couldn’t have forecast this one last December if it were caused by tariffs in April.
It’s really hard to explain the Fed’s behavior if you assume it is simply acting on the data. If you allow for the possibility it’s being political, it gets easier. It’s very easy if you recognize that Trump is disrupting the political and financial establishment and it’s fighting back. It has been trying to neutralize him ever since he first appeared on the political scene. You may recall during Trump’s last term when former NY Fed president Bill Dudley openly urged the Fed to remain tight in order to hobble Trump politically.
The Fed eagerly cut rates last fall, before the election, when inflation was higher. Now it frets about inflation when it’s plainly in retreat.
I think it will ultimately ease though.
The bond market may force it.
I’m wondering if it’s to Trumps and America’s advantage if there is a bigger deflationary episode which is counteracted with fiscal stimulus.
It could be … I don’t know. This is one of those things that you just kind of have to see how it works out. I can only say it looks like a mistake to me … not the baseline 10%, but all the extras. Besides making it difficult for businesses to plan, it’s unnecessarily ticking off trading partners and handing the opposition talking points … they will blame anything that looks bad on Trump. The Fed blew this bubble, made this mess, and should be taking the blame for it.
That said, geopolitics isn’t my bailiwick. I was appalled when Reagan challenged Gorbachev to “tear down this wall”, but when the wall actually came down he wound up looking pretty good.
Far as fiscal stimulus goes, it’s already been overspent. Uncle Sam is $37T in the hole and digging deeper fast. He may get some monetary stimulus out of it though. That’s something else that we’ve already had too much of, but in the midst of a deflationary squall it’s actually appropriate.
The Fed’s usual error isn’t in initiating stimulus, but in continuing it long after it’s served its purpose. After 2008, the Fed still was running emergency policy into the late teens. And after the 2020 crash, over in about six months, it took the Fed nearly two years to withdraw.
And those errors left the country deep in debt and with the worst consumer price inflation in decades. Not to mention the currently deflating bubble.
The Fed is like a doctor who, upon diagnosing appendicitis, removes your appendix every week for years.
$3305 !!!!!
Just a thought…
Is this the Ka before a big Poom like in EJs old theory? And the Poom this time will be the US printing dollars to invest in itself moving forward?
$3307 right now, its been as high as $3315
Mike
Some good news, the British high court has ruled that Trans women are NOT legally Women!
So, all this shipping men in dresses to women jail or Men going into women’s sports are now out!
Also the UK is about to sign up to ECCP food standards thus ruling out letting US foods into UK.
Just wait till Trump hears that!
https://financology.net/2025/04/11/bls-reports-deflation/#comment-4870
$3321
They going to print!
The pace of this advance is making it look dodgy. Slow trends are sustainable, fast ones not so much.
I think you are right though that gold is sniffing out another round of dollar debasement. The Fed has nursed a Frankenstein monster of debt into existence and now has to feed it.
Yes its sudden climb worries me, but may be “They” know something or some fundamental shift is taking place?
Mike
BTW £3325
There is a fundamental shift, prompted by years of monetary debasement, exacerbated by weaponization of the dollar, and now being catalyzed by erratic trade policy. This pretty well sums it up … see the link at the bottom of the comment:
https://financology.net/2025/04/10/volatility-2/#comment-4848
Technically speaking, the biggest risk for gold could be a stock market rally. Of all the physical commodities, gold is by far the most uncorrelated to stocks. Hence its great value as a portfolio diversifier.
Another hypothetical selloff trigger: Suppose China has been dumping US Treasuries and buying gold as a trade war tactic. Then a deal is announced. That trade abruptly disappears and gold drops and treasuries pop.
The fundamental shift is a long term one … there’s still plenty of opportunity for sharp setbacks. In my experience they nearly always come after a big move and when everyone is convinced it has more to go.
In dollar terms, gold has doubled in barely 2½ years, topped off by over 12% – more than an average year – in just the last nine days.
IMO the balance of risks favors a healthy allocation to gold while maintaining diversification and discipline.
Almost $3340
Got a cold/off to bed
Mainstream financial news has become almost intolerable. No story is agenda-free; most can’t pass up the opportunity to tar tariffs. Here’s one:
US import prices ease, but tariffs casting shadow over inflation
Notice the determination to make a story about import prices a tariff inflation story even when the actual news is falling prices. Another story on Bloomberg did the same with falling house prices.
The inflationary tariffs theory will not be interrupted by mere facts!
In Bed, $3342
Has Trump over played his hand?
https://x.com/Megatron_ron/status/1912621762459963903?ref_src=twsrc%5Egoogle%7Ctwcamp%5Eserp%7Ctwgr%5Etweet
Just woke up. its just after midnight here in Blighty……$3355
More perspective on the trade war. Until recently, the phrase “trade war” was hyperbole … not any more.
https://www.zerohedge.com/markets/bessents-grand-strategy-use-tariff-negotiations-isolate-china-rest-world
This a bridge too far. Trade speed bumps are one thing, brick walls are another. The notion that China has to be defeated for America to prosper comes from … ? Sure, trade has gone too far out of whack, and broad, modest tariffs are an appropriate way to both raise revenue and help nudge it back into whack, but a trade “war” means losses on both sides. From the extreme of aggressive globalism to the opposite … you would think there’s something in between.
Meanwhile other drivers of trade imbalance need to be addressed too … easy money and out of control federal deficits.
There is also talk of delisting China stocks in the US:
https://www.zerohedge.com/markets/nuclear-option-heres-what-will-happen-when-trump-orders-delisting-chinese-stocks
Removing Chinese stocks from US exchanges would be another big mistake. While it’s not at all clear that world domination means anything to the average American, to the extent US global competitiveness is a priority, the best thing the US can do it to clean up its own act. Exploding federal debt and the easy money that fed it is just one example of a Made in the USA threat more serious than any posed by Chinese economic success.
Maybe Team Trump has an end game and path to it I haven’t seen, but if some evidence of a positive outcome doesn’t start coming into view soon, it may not get the chance to see its trade strategy through. That would also imperil its domestic agenda, including some much needed reforms.
Trump Triples Down: A New Warning For Chinese Stocks
The Grandest Game of ‘Chicken’ Ever Played
IRS making plans to rescind Harvard’s tax-exempt status
“The administration already has blocked more than $2 billion in funding from the nation’s oldest university, which is fighting the White House’s policy demands, citing the constitutional right of private universities to determine their own teaching practices.”
You can’t both be on the federal dole and be “private”. Taxpayer money isn’t string-free.
Mike Maharrey nails it:
Who Pumped Up This Bubble Economy?
If it bursts the Limey Econ is TOAST over night.
We just had a song & dance over a “Revolutionary” solid state battery from a British company. This “World beating” design promises “NNC power levels @ LFP costs”.
Dig a little deeper they mean 230 Wh/kg, the latest LFP battery can do 205 Wh/kg.
Car producers are already testing SSB with 450 wh/kg!…….China close to production & 600 Wh/kg soon as 2026!
Small Beer Limey…….& these guys have been sucking off the tit of the British tax payer for more than 20 years!!!!
The London economy is probably toast overnight, and the New York one too. The rest might get singed a bit but could very well be better off before long…
From the Telegraph-
Donald Trump launched an attack on the chair of the Federal Reserve after his warning that the US president’s tariffs risked pushing up inflation.
Trump said the departure of “Too Late” Jerome Powell, who he appointed during his first term in office, “cannot come fast enough” as he pushed for the US central bank to lower interest rates.
The President said Powell was always “too late and wrong” and urged him to lower borrowing costs, as the European Central Bank (ECB) is expected to do at its meeting later today.
The Fed chairman had told the Economic Club of Chicago on Wednesday night that the US administration’s tariffs meant “inflation is likely to go up”, adding that the revenues from the tariffs would partially “come to be paid by the public”.
Trump said Powell had issued a report “which was another, and typical, complete ‘mess!’”
He posted on Truth Social: “Oil prices are down, groceries (even eggs!) are down, and the USA is getting rich on tariffs.
“Too Late should have lowered interest rates, like the ECB, long ago, but he should certainly lower them now.
“Powell’s termination cannot come fast enough!”
The Fed is chronically late and wrong; it follows lagging data on one hand and wrong forecasts on the other. But Trump is probably wrong to get into a public tussle with Powell at the same time he’s in one with China, and having the president make monetary policy is no solution.
Whatever energy Trump wants to expend on the Fed would be more productively aimed at reforming it. Strip it of its powers to target interest rates or end it. Put Ron Paul in charge!
Armed Forces ban electric vehicles from high-security sites on China fears
Britain’s Armed Forces have banned electric vehicles (EVs) from some high-security military sites over fears that Chinese software embedded in them could be used for spying.
The Financial Times reported workers at RAF Wyton, which is home to the National Centre for Geospatial Intelligence, have been told not to park EVs near the base.
In a written Parliamentary question, Lord Coaker, the defence minister, said: “Our policies and procedures take account of the potential threats from all types of vehicle, not just those manufactured in China, and we have issued appropriate internal direction to all drivers and passengers.”
It comes as China ramps up its sales in the UK market, with Auto Trader predicting the Chinese-branded models could win up to 25pc of the British EV market by the end of the decade.
A Ministry of Defence spokesman said: “Protecting national security is the foundation of everything we do. We have strict security procedures in place to ensure all sensitive information is protected.”
Criminal that you can’t buy those cheap Chinese electrics here.
In the “Land of the Free”.
Meanwhile, they do realize that cars are packed with software regardless of what propels them?
https://www.carscoops.com/2025/04/new-campaign-aims-to-help-with-tesla-regret-syndrome/
The Fed and Wall Street (if there is a difference) continues to maintain its unsupported claim that tariffs will be inflationary. Never mind that the latest readings on both PPI and CPI were outright declines. Opinion trumps fact.
But regardless of the merits of the Fed’s argument, it is obviously disingenuous because, even if it were correct, and the latest drop in inflation below zero were to prove, uhm, transitory, there is nothing to prevent the Fed from tightening later when the data support it. It couldn’t be simpler. If the data show deflation, ease, if they show inflation, tighten.
But by putting theory over reality, a little creative rhetoric can justify just about anything for just about any reason, economic or otherwise.
A Fed attempting to defend its independence can ill afford to serve up such helpings of forked tongue. But it can’t very well tell the truth either, because admitting it was playing politics would be admitting it’s already not independent. At this rate, the questions could soon be not about its independence, but its existence.
https://www.youtube.com/watch?v=2izUuL7DxTA
My god…………gold just flat lined!
Good Friday?
https://www.youtube.com/watch?v=0-nzOJ01Fkc
Warp core breech?
https://www.youtube.com/watch?v=bYok-YUJkwA
Trade Wars and the U.S. Dollar
Nations in the post-Cold-War era – including allies bolstered by NATO security assurances – have been able to prioritize savings and investment over national security spending, often funneling dollars into American financial assets. These international capital inflows have bolstered the dollar’s reserve status, a cornerstone of U.S. economic exceptionalism.”
This passage references the inflow of goods and the outflow of capital my post discusses. But note the economic terminology makes it sound like capital is flowing in. It’s the opposite. Dollars spent on foreign goods are flowing back in, buying domestic capital … the dollars are flowing back in, but the capital is flowing out.
The author isn’t making an error; it’s the standard backwards terminology of conventional economics. Though it may sound like the opposite, the author is referring to the same trade of capital for consumer goods my post does. No wonder economics is confused.
Here’s another good article on trade:
Why Tariffs Won’t Solve Our Trade Problem
I agree with most of what Brightman says here. The exception is in Brightman’s failure, like many such analysts, to recognize that there is no such thing as free trade. Government either taxes trade between you and a guy in another country or you and the guy across the street. Tariffs do the former; the income tax does the latter. Trade doesn’t become fundamentally different just because you draw a line on a map between the parties.
The economics is the same. Only the politics are different.
The upshot is that every indictment of taxes on international trade applies equally to taxes on intranational trade.
That doesn’t justify some of the aggressive and extreme tariffs imposed by the Trump administration; Brightman’s criticisms are valid. Aside from the all-too-common blind spot, I respect Brightman’s views and his plain-spoken analysis.