Recently, I saw a message from President Trump stating that U.S. revenue from tariffs has reached record levels, and almost all product prices are declining, including gasoline and groceries. Inflation has decreased.
This may involve two aspects: one is that the tariff war is successful; the other implies that there is evidence proving the success of the tariff war, such as the U.S. achieving record levels of tariff revenue (specific revenue data is still lacking), and at the same time, contrary to what everyone says, tariffs have not caused U.S. prices to rise. On the contrary, prices for gasoline and groceries have fallen, and inflation has decreased.
As the tariff war transitions to a financial war, with the U.S. negotiating led by Treasury Secretary Bessent rather than the 'erratic' Navarro, discussing some deeper tariff economics is a very interesting thing, of course also for casual conversation.
Regarding Trump's claim that tariff revenue has reached record levels, this certainly exists. The discussion about tariffs is not whether the U.S. can gain tariff revenue, but rather who ultimately bears the costs of the tariffs. Gaining tariff revenue itself is not proof of the success or failure of a tariff war.
So, does the drop in gasoline prices prove that in the tariff war, the tariffs have not been passed on to American consumers, but instead allowed them to enjoy lower consumption prices?
In fact, even before the tariff war began, international oil prices had already started to decline. In the past three years, international oil prices have dropped from nearly $130 to about $60, due to global economic growth and demand expectations not supporting rising oil prices. Especially after the tariff wars began, consumer expectations were further weakened, and oil prices fell below $55. As for food prices, we will temporarily not consider comprehensive inflation data. According to data released by the U.S. Bureau of Labor Statistics on April 10, the prices of 'meat, poultry, fish, and eggs' rose by 7.9%, with egg prices skyrocketing by 60.4% year-on-year. The comprehensive CPI data rose less than expected last month, but this is precisely a very misleading piece of information, as there are two very heavy costs behind it. The first is that after three full years of interest rate hikes by the Federal Reserve, as well as the overall weak global demand leading to falling oil prices, the nominal inflation data in the U.S. has been kept below 3%. Moreover, maintaining such a high interest rate of 4.75% is extremely rare among all developed countries, which causes harm to the entire economy everywhere. Almost all enterprise financing and consumer credit bear huge interest costs. The second is that the anticipation of the tariff wars caused various distributors in the U.S. to start stockpiling goods about a month in advance, and thus, for one or two months, supply was relatively sufficient, which suppressed the rise in comprehensive CPI. This can be reflected in the export data from China in the first quarter.
What's the point of discussing this?
From a realistic perspective, if an oversized consumer-driven economy like the U.S. requires extremely high interest rates to restrain prices, the economic operation itself faces huge risks. If we look at other major global economies like the EU, China, and Japan, none of them maintain high interest rates, which makes the costs of corporate financing and consumer spending completely different in significant markets outside the U.S. In the long run, they are more sustainable in production and consumption, while the U.S. can only rely on capital markets to support the entire economic cycle; once capital inflows slightly decrease, domestic asset prices will decline, significantly impacting the corporate and consumer markets (the rise in the U.S. stock market and housing prices has offset the suppression of consumption by high interest rates).
Moreover, the decline in oil prices is not entirely favorable for the U.S. economy because the U.S. is not only a consumer of oil but also the largest oil producer in the world, with output exceeding that of Saudi Arabia. Recently, many energy companies in Texas have expressed dissatisfaction with the Trump administration because the decline in oil prices has significantly reduced the state's primary energy revenue.
The impact of the tariff war on domestic prices in the U.S., according to my analysis, will likely go through three phases. The first phase is 'controllable prices,' which is the current phase, characterized by a decrease in overall economic expectations, as people begin to prepare for recession. At this time, due to previous stockpiling by distributors, supply is relatively sufficient, and prices are in a relatively controllable stage.
The second phase is 'rapid price inflation.' As the costs of tariffs begin to gradually spread, not only will commodity prices cover the costs of tariffs, but also due to rising import prices, distributors will cut back on imports of non-essential goods and reduce imports of low-priced products (which have low profits). This will lead to a phase where prices are high, but the variety of products will also decrease significantly, with a large reduction in available choices, while high-value-added products will increase (otherwise, they cannot cover costs like tariffs), further driving up irreversibly rising overall consumption prices.
The third phase is the 'stagflation' period, where prices are very high, yet sales are very weak, leading to serious inventory issues, and consumption is very sluggish, while prices cannot decrease due to weak consumption demand, resulting in a bizarre phenomenon of a stagnating economy with high prices. By the time we reach the third phase, the best outcome would be to stimulate domestic production, bring back manufacturing, enrich the domestic product market, create new jobs, increase supply, strengthen the working class, stabilize prices, and increase consumption, thereby warming the economy. In fact, the ultimate goal of most tariff wars is to achieve this, but the real situation is not like that. When the economy and goods begin to experience stagflation and poor sales, it is not simply a price issue or a supply issue, but rather the entire society's income and other economic expectations are front-loaded. The more products are produced at this time, the more apparent the inventory issues will become.
This is also why the Great Depression that began in the U.S. in 1929 did not begin to improve until the outbreak of World War II, as war is demand without concern for cost. Only such demand without regard for cost can drive production without concern for cost, thereby bringing business to assembly lines, improving employment, and creating expectations of economic growth.
Whether Trump's tariff war can stimulate domestic or external demand for U.S. products without regard for costs, thus driving domestic production without regard for costs, is highly questionable and can be said to be almost impossible (is a third world war going to break out?).
Recently, there has been very important information: Trump has started attacking Federal Reserve Chairman Powell, saying it would be better if he left as soon as possible. It should be noted that Powell himself was appointed after Trump forced Yellen out of the position of Fed chair, and now Trump is pushing for Powell to resign to expedite interest rate cuts.
The Federal Reserve maintaining low interest rates and the U.S. pushing for decoupling from China cannot coexist. In other words, decoupling from China and low prices in the U.S. cannot coexist.
During Biden's administration, although he maintained some of Trump's tariffs on China, he did not push for a larger scale decoupling and tariff war. This is hard to say about other aspects, but the issue of prices alone is very important. If Biden were to emulate Trump’s tariff war, the Federal Reserve's current interest rate would not be 4.75%. To control U.S. prices, the Fed's interest rates would have to rise to at least 20%, and U.S. Treasuries would immediately collapse, not waiting for today's discussion. This is not alarmism; based on this logic, we need to make a prediction (just casual talk): if Trump pressures the Fed to cut interest rates to save the expected asset prices in the U.S., then the tariff war with China would be unsustainable, as prices would soar to unimaginable levels (caused by severe shortages, and smuggling would run rampant).
This is why the Biden administration can only adopt a 'small courtyard with high walls' strategy. This does not mean that the Biden administration is unwilling to accelerate decoupling from China or become more friendly toward China, but rather that the passive increase in prices and interest rates brought about by decoupling will likely destroy the foundations of the U.S. economy.
So what is the foundation of the U.S. economy?
This relates to the core issue of how the current trade war has shifted from a tariff war to a 'financial war.' We can elaborate and discuss how to conduct this financial war.
For a superpower like the U.S., any industry figure or performance can reflect its overall scale and comprehensive strength. However, if we look at it from the perspective of the 'tariff war' and 'all-out financial war' to find the most likely sources of systemic financial crisis, we will find the 'foundation' (vulnerabilities). Since it's a financial war, the first thing that comes to mind may be the dollar and the U.S. debt issue. The strength of U.S. finance relies on the support of the dollar as an international currency. Meanwhile, both domestically and globally, various research areas believe that the rapid growth of U.S. Treasury bonds makes its debt issues a time bomb, the fuse of the crisis.
Understanding this from the perspective of economic research is fine, but this is not the logic of discussing a 'financial war.' The dollar and U.S. debt are a vicious cycle. When the U.S. itself says there is a crisis, it has a sense of crisis, but that doesn’t mean the crisis is imminent (this refers purely to the dollar and U.S. debt crisis).
Why do other countries experience sovereign debt crises? Because their sovereign currencies are not world currencies, which leads to situations where, when debts are called in, they can either sell national assets or borrow money from the World Bank and International Monetary Fund, which were initially dominated by the U.S., still borrowing in dollars.
The U.S. does not have a direct 'default' problem. It's like the Roman Empire, where in the last couple of hundred years, the gold content of Roman coins decreased, but this process can last a long time, just like the depreciation of the dollar's purchasing power and the expansion of U.S. debt, which has been ongoing for over half a century, not something that just emerged today. For instance, in the past decade, the dollar's purchasing power has been depreciating relative to gold (the price of gold has risen from $1,300 ten years ago to now $3,300), while U.S. public debt has increased from $14 trillion to $34 trillion. But has the American economy completely collapsed in these ten years? It seems not. Therefore, discussing this from the perspective of the dollar and U.S. debt is a self-accumulation and explosion process, not a field that will give rise to a huge crisis in the short term.
Please note, the key point is coming.
If we review the last two significant technical crises in the U.S. that triggered an entire systemic crisis, it is quite evident: one was the burst of the Nasdaq tech bubble in 2000, which led to a series of economic issues; the other was caused by the real estate market, namely the subprime mortgage crisis in 2008, which caused a rapid collapse of the economy and subsequent series of problems. In other words, if we are to engage in a financial war with the U.S., the real key point is not the dollar and U.S. debt, but rather the stock market and real estate. To put it bluntly, you can look at a timeline: from the bursting of the Nasdaq bubble in 2000, to the 9/11 terrorist attacks in 2001, to the U.S. giving up on preventing China from joining the WTO, it can be said that the entire turning point began with the bursting of the Nasdaq bubble in 2000. Similarly, after the 2008 subprime crisis (the collapse of U.S. real estate), the entire U.S. manufacturing sector was completely devastated, while China's economic output quickly surged to the second largest in the world, with a clear change in export data, thus rapidly expanding. This is not to say that we wish for a similar crisis in the U.S., but if we want to truly escalate trade issues into war, engaging in a tariff war and financial war with China without regard for various costs specifically targeting China, we must find the most important and fragile systemic areas in the U.S.
This is also why Trump, in fighting a tariff war with China and fully blocking the Chinese industrial chain, then declaring 'war' on the world, immediately surrendered (suspending high tariffs on other countries, indicating failure to block). Because that day, the U.S. stock market collapsed completely. After being scared, looking at the current situation, the U.S. has begun to actively negotiate tariff issues with various countries (such as the EU, Japan, the UK, etc.), and their attitude has suddenly softened, which is quite embarrassing.
Because the U.S. had to raise interest rates to control prices during the tariff war, and high interest rates are like a sword hanging over consumers, to hedge against the risks brought by this sword, asset prices (capital inflow) must be continuously driven up. This mainly involves the stock market and real estate; otherwise, the economy cannot operate (there is no incremental growth).
Among all the 'new policies' of the Trump team, the only one that may have a positive effect on the U.S. economy is a seemingly ridiculous policy: the $5 million sale of permanent residency. The other 'new policies' almost all lead to self-contradiction (killing a thousand enemies and injuring two thousand of your own). Selling permanent residency for $5 million is beneficial for attracting capital to the U.S., which can support the U.S. stock market and real estate market.
So, in the stock and real estate markets, are there any focal points? Of course, there are.
To create a system similar to U.S. Treasury bonds, the U.S. stock market has actually gradually moved toward a complex superstructure model. There are various sovereign funds from all over the world in the U.S. stock market, from Middle Eastern tycoons to European private equity, from Asian funds to Latin American oligarchs, almost all involved in the U.S. stock market. Their common interests have become more widespread, making the U.S. stock market actually follow the same logic as U.S. Treasury bonds. Unless a landmark event occurs, such as one of the tech giants in the U.S. completely collapsing due to a major risk, leading to a market crash and triggering global panic selling, the probability of consistent risk recognition is quite low.
However, the U.S. stock market has a characteristic: if it does not progress, it will retreat. Many other global stock markets often actually find it easier to remain flat for a long time, but the U.S. stock market is different. If there is no higher growth and returns, it quickly begins to enter a major adjustment cycle. The reason is simple: if the gains cannot cover the Fed's interest rates and consumption spending rhythm, it becomes very difficult for stock investors to sustain.
Due to low savings rates in the U.S., in addition to credit card (credit) consumption, a large part is also dependent on stock funds and other asset income. Once that income is gone, people will sell their principal to maintain consumption, causing a chain reaction in the stock market. However, this transmission mechanism is still slow.
In fact, from the perspective of future tariff wars and financial wars, I am more inclined to believe that the systemic risks in the United States will come from the real estate market, which is currently not receiving much attention. Looking at sales over the past five years, the total sales in the U.S. real estate market have averaged over $30 trillion, growing too quickly (doubling compared to the previous five years). Assuming there is no real estate market averaging over $3 trillion each year and the scale and speed doubling over five years, it is absolutely impossible for the U.S. to sustain over $6 trillion in retail sales. More importantly, most local government revenue in the U.S. comes from property taxes, which are taxes paid annually after purchasing a home, used to maintain local public facilities, education, safety, and other spending systems. Additionally, since over 90% of homes sold in the U.S. are single-family homes, the consumption stimulus brought by their dispersion and large space has also supported continuous secondary consumption in automobiles, home appliances, and various services. This means that the majority of the bottom-level economy in the U.S. is actually maintained by real estate, which seems quite different from the dollars, U.S. Treasury bonds, U.S. stocks, and American technology that we see every day. However, the market has significantly underestimated the support that the U.S. real estate market provides to the American economy.
Please note, a new key point is coming.
As the Trump team madly employs tariff wars and financial wars, along with a series of other attacks on immigration and racial tendencies, the high interest rates in the U.S. will likely remain and will not be effectively mitigated by Trump’s threats to Powell. This is because high tariffs leading to high prices require high interest rates to curb them. High interest rates not only harm consumption and the stock and bond markets, but more directly will continue to suppress real estate consumption. Meanwhile, various internal attacks on specific targets will significantly reduce the attraction of the U.S. for immigrants and settlers. Both the investment costs (high interest rates, high property taxes) and the demand for immigration and settlement have lost their allure during Trump's era.
Recently, countries like Canada, France, and other European nations, as well as Australia, are introducing various policies to attract talent from the U.S. tech and education sectors to leave. Australia has even shouted slogans saying this is a once-in-a-lifetime opportunity. Therefore, compared to the dollar, U.S. Treasuries, and U.S. stocks, shorting all financially leveraged financial assets in the U.S. real estate market, that is, comprehensively shorting U.S. real estate, is likely to be a financial warfare strategy worth trying in the near future. Once this causes a sell-off of such financial assets, various holders of other types of assets in the U.S., including financial institutions, will panic, and the entire U.S. consumption and fiscal system will face severe blows. The financial war initiated by the U.S. may only end in crisis. The fact is, a fly does not bite a seamless egg. Given the current context of high interest rates, tariff wars, immigration crackdowns, and the rise of racism, the U.S. real estate market is likely to become a huge dam (prices are already high). Even if no one actively shorts, it would be very difficult to maintain, and it's hard to say how many $5 million golden cards can be sold; there aren’t many buyers at this level.
In stark contrast to the U.S., several other major global markets are in the best era for asset investment. The European Central Bank continues to cut interest rates, China maintains low interest rates, and Japan is gradually emerging from deflation. This amplifies the disadvantages of high interest rates and high-cost assets in the U.S.
As the one orchestrating the future financial war for the U.S., Bessent can also be seen as a helper for Soros, who once attacked other global markets. Global investors are just hitting back with their own methods. Of course, I am only discussing the market and 'battles' from the perspective of financial war and the inherent risks in the U.S. Let's temporarily forget about the dollar, U.S. Treasuries, and U.S. stocks, and focus on shorting U.S. real estate (related financial assets) to see what happens.
To emphasize, the above opinions do not constitute investment advice, we are not responsible for your investment outcomes, it is for casual discussion and thinking, purely personal opinions.
