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“The best way to destroy the capitalist system [is] to debauch the currency.” 

— Lenin (attributed)

Inflation in the time of Trump 2.0

The Subaru BRAT was a niche hit in the early 1980s, its quirky design somehow capturing the zeitgeist of those post-inflation, consumerist, Ronald Reagan times.

Subaru did not, however, add the BRAT’s defining feature — its rear-facing, open-air seats — because they thought it was a good idea to ride in the back of a moving pickup truck.

(PSA: It’s not.)

Instead, the fun-but-life-threatening seats were added to avoid the 25% tariff imposed on vans and trucks imported to the US — putting seats in the cargo area reclassified the BRAT as a car, on which the tariff was only 2.5%.

Ford later used a similar trick, installing unwanted seats in the back of the Transit Connect vans they manufactured in Turkey (making it a passenger car for tariff purposes) and then taking the seats out when they arrived in the US where they were sold as work vehicles.

(I’d like to report that Ford’s surplus van seats were sent back to Subaru to be installed into BRATs, but the BRAT was discontinued in 1987 and the Transit Connect began production in 2002.)

Such are the creative workarounds corporations find to avoid paying tariffs that most economists believe are inflationary. 

We may soon need them to get much more creative.

Economists at JP Morgan recently estimated that Trump’s tariffs could add as much as 2.4% to US prices, nearly double the annual 2.6% rate of inflation reported this morning.

More worryingly, today’s data showed that prices have been rising at a rate of 3.6% over the past three months — add 2.4 percentage points to that number and we’re right back to the levels of inflation that so enraged the American electorate.

Perhaps most worryingly, economists also estimate that Trump’s tariffs could reduce US GDP growth by as much as 1.4 percentage points.

Those kinds of numbers would normally put the market in a stagflation panic — of which there is no sign.

The euphoric reaction to Trump’s election instead suggests investors have chosen to bury their collective head in the sand and not worry about it. 

That might prove to be exactly the right thing to do.

Tariffs didn’t seem to have much effect on inflation in Trump’s first term, in part because his administration granted exemptions to sensitive products and favored nations.

We can “expect similar exemptions now,” according to the Wall Street Journal, and that could leave room for corporations to seek inspiration from Subaru and creatively avoid tariffs.

If so, investors would likely enjoy a best-case scenario of lower taxes, fewer regulations, moderate inflation, and robust global trade.

I’m not sure that’s what the President-Elect has in mind, though.

Trump’s advocacy for tariffs dates back to at least when the BRAT was still for sale and his reported intention to make Robert Lighthizer his “trade tzar” suggests he means it: Lighthizer has “openly advocated for cutting off nearly all of China’s access to America’s markets,” the Wall Street Journal reported.

Trump’s advisers have also been preparing to close trade loopholes with blanket tariffs and much tighter controls on goods coming over the Mexican border. 

If so, investors will have to hope that Trump is right that tariffs on China are paid for by China and not US consumers.

He might be!

I began this newsletter comment intending to write a cautionary tale about tariffs debauching the US currency (hence the dramatic quote at the top).

But after taking a procrastination break to watch this morning’s episode of Forward Guidance, I am now questioning a few of my biases — Steven Miran makes a compelling case that the cost of tariffs really might be borne by China (if they choose to devalue the yuan) and also that, contrary to conventional wisdom, Trump’s economic policies (in aggregate) may prove to be disinflationary. 

If so, the US economy would likely have a 1980s-style boom to look forward to.

(Down with safety-ism! Bring back the BRAT!) 

Both stock and bond markets seem to agree with Miran, which is hopeful (although far, far from conclusive) and it shouldn’t take too long to know if they’re correct. 

We’ll likely know Trump’s intentions almost immediately after he takes office in January because tariffs (weirdly) are one of the policies that US presidents can impose unilaterally, without the consent of Congress. 

And it shouldn’t take too long to parse their effects, either, so we’ll soon know whether markets are right to be sanguine about inflation during Trump 2.0.

Let’s hope they are.

— Byron Gilliam

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