Yesterday was a second straight session of gains for equites. The S&P 500 is now back up to 5,405, still well off the 52 week high of over 6,100, but recovering nonetheless. Over in fixed income land, Treasury selling pressure eased with the 10Y yield falling back to 4.38% and the 2Y falling to 3.86%, a refreshing decline in yields. Nevertheless the move lower in the dollar index, DXY, which is now under 100 for the first time in 3 years, has left questions around the future of the dollar’s ‘exorbitant privilege” to linger.
Over in Fed land, we had the NY Fed’s Summary of Consumer Expectations which showed expectations for unemployment rising to the highest since April 2020. Year ahead inflation expectations increased to 3.6%. On team Powell-Rangers, Waller did the whole ‘data-dependent’ thing.
On the tariff front, I think word was that we’re going to make auto parts here. Sure. Definitely not mercantilism, right?
Definitely Not Mercantilism For Cochrane
As readers of this blog know, I enjoy reading the work of economist John Cochrane and appreciate his contributions to the Fiscal Theory Of The Price Level. Cochrane’s latest substack post “Tariffs, Savings, and Investment” is a refreshing addition to the tariff discussion.
We talked yesterday about mercantilism. Cochrane picks up the thread by reframing the trade deficit not as a failure of trade policy, but as a mirror to a deeper imbalance: a mismatch between savings and investment.
The U.S. consumes and invests more than it saves. China, on the other hand, saves more than it consumes—and doesn’t want to invest all of it domestically.
But hold on, doesn’t China build tons of stuff at home already? Factories, roads, ghost cities? Yes, but maybe it’s not enough to absorb their savings glut. So instead, China saves in the U.S. which pushes up the dollar and leads to a trade deficit.
As Cochrane puts it:
“China as a whole cannot accumulate US assets without putting goods on boats (proverbially). China, in effect, wants to send us factories. But China doesn’t make portable factories. It’s great at making consumer goods. So China sends us consumer goods so that we can build our own factories without lowering consumption.”
“an increase in foreign demand to save in the US rather than at home will push up the dollar, and cause the trade deficit, which is in effect how foreigners send us factories which they would rather build here than in their own countries.”
The problem isn’t that China wants to sell us stuff and park their savings in Treasuries. The problem is what we do with the money. Instead of building productive capacity, we mail out checks.
“the federal government is not building a trillion dollars a year of productive investment with the money. The federal government is, by and large, sending checks to its citizens to support current consumption. The federal government saw an amazing opportunity to borrow cheaply, sometimes even at negative real rates of interest. Borrow it did, and sent checks to happy voters.”
It turns out that in the future those who lent money to the U.S. will want to be paid back - ultimately they expect real resources to go back to them.
The problem as Cochrane sees it is not one to be solved by tariffs, it’s one to be solved at least partly by reforming the U.S. “pro-consumption” policy.
“Cure the disease, not the symptoms. Reform taxes to tax consumption, not saving and investment. Stop funneling borrowed money to consumption. Cure the nightmarish cost, regulatory, and permitting bloat making investment so difficult, especially public investment.”
A Smithian might nod in approval.
Give Cochrane’s post a read. What do you think?
XTOD’s:
XTOD: Avoid these 9 mistakes 👇
1. Losing sight of dreams and falling into work for work’s sake (W4W).
2. Micromanaging and e-mailing to fill time. Set the responsibilities, problem scenarios and rules, and limits of autonomous decision-making—then stop, for the sanity of everyone involved.
3. Working where you live, sleep, or should relax. Separate your environments—designate a single space for work and solely work—or you will never be able to escape it.
4. Not performing a thorough 80/20 analysis every two to four weeks for your business and personal life.
5. Striving for endless perfection rather than great or simply good enough, whether in your personal or professional life. Recognize that this is often just another W4W excuse. Most endeavors are like learning to speak a foreign language: to be correct 95% of the time requires six months of concentrated effort, whereas to be correct 98% of the time requires 20–30 years. Focus on great for a few things and good enough for the rest. Perfection is a good ideal and direction to have, but recognize it for what it is: an impossible destination.
6. Blowing minutiae and small problems out of proportion as an excuse to work.
7. Making non-time-sensitive issues urgent in order to justify work. Focus on life outside of your bank accounts, as scary as that void can be in the initial stages. If you cannot find meaning in your life, it is your responsibility as a human being to create it, whether that is fulfilling dreams or finding work that gives you purpose and self-worth—ideally a combination of both.
8. Viewing one product, job, or project as the end-all and be-all of your existence. Life is too short to waste, but it is also too long to be a pessimist or nihilist. Whatever you’re doing now is just a stepping-stone to the next project or adventure. Any rut you get into is one you can get yourself out of. Doubts are no more than a signal for action of some type. When in doubt or overwhelmed, take a break and 80/20 both business and personal activities and relationships.
9. Ignoring the social rewards of life. Surround yourself with smiling, positive people who have absolutely nothing to do with work. Happiness shared in the form of friendships and love is happiness multiplied.
https://x.com/tferriss/status/1911871736733118763
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