Tariffs/Markets
President Trump’s Tariff Formula Makes No Economic Sense. It’s Also Based on an Error. I’m thinking I shouldn’t hold my breath until the Administration fixes this.
But even if one were to take the Trump Administration’s tariff formula seriously, it makes an error that inflates the tariffs assumed to be levied by foreign countries four-fold. As a result, the “reciprocal” tariffs imposed by President Trump are highly inflated as well.
However, the elasticity of import prices with respect to tariffs should be about one (actually 0.945), not 0.25 as the Trump Administration states. Their mistake is that they base the elasticity on the response of retail prices to tariffs, as opposed to import prices as they should have done. The article they cite by Alberto Cavallo and his coauthors makes this distinction clear. The authors state that “tariffs [are] passed through almost fully to US import prices,” while finding “more mixed evidence regarding retail price increases.” It is inconsistent to multiply the elasticity of import demand with respect to import prices by the elasticity of retail prices with respect to tariffs.
Correcting the Trump Administration’s error would reduce the tariffs assumed to be applied by each country to the United States to about a fourth of their stated level, and as a result, cut the tariffs announced by President Trump on Wednesday by the same fraction, subject to the 10 percent tariff floor.
Learning from Smoot-Hawley. Even after his hedging today, I still firmly believe that Powell will cut upon the appearance of any weakness in employment.
Some people are surprised that the effect of the tariff shock appears to be somewhat deflationary. That’s not to suggest that tariffs will cause the overall CPI to decline (import prices really will increase), rather they are surprised that the GDP deflator seem likely to be negatively impacted. (Recall that the GDP deflator does not include import prices.) Falling commodity prices (especially oil) are one obvious indicator, but recessionary shocks tend to reduce many domestic wages and prices.
Today, we are no longer on the gold standard, but it remains plausible that a trade war could have a deflationary impact on the price of domestically produced goods. A trade war makes the economy less efficient, and also increases economic uncertainty. This reduces investment and lowers the natural rate of interest. The Fed may cut rates, but central banks generally fall a bit behind the curve in this sort of situation.
The Fed may also be a bit reluctant to cut rates for other reasons. Central bankers are only human, and may be reluctant to “bail out” Trump for what they see as a policy mistake. Perhaps they believe that by refusing to cut rates they put more pressure on Trump to reverse course.
How to Think About the Tariffs
Traders have responded by placing a “moron risk premium”—to borrow a term from the U.K.’s minibudget misadventure—on U.S. assets, as well as marking down global growth forecasts. That helps explain why the U.S. dollar fell in response to the tariffs along with stocks, when standard theory (and prior experience) had suggested that an appreciating dollar would offset some of the impact.
I have three basic points:
—Tariffs are bad mostly because (but not only because) they are a form of fiscal tightening
—Trade and current account deficits are not inherently bad, but that does not mean they are always benign, either
—These specific tariffs are the product of exceptionally weak analysis
With High Tariffs, Has Trump Ended Or Revived Neoliberalism?
Trump’s plan reminds me of how the national security world and foreign diplomatic community responded to Biden’s messy withdrawal from Afghanistan. They had heard for years it would happen, acknowledged that it should happen, but simply didn’t believe it could happen, and were furious when it happened badly. When Biden withdrew American forces, his approval ratings never recovered, because he never turned his withdrawal into a coherent worldview of how to reorient U.S. policy.
Taking on a very big problem like imbalances in our global trading arrangements is already very difficult and quite risky. The haphazard manner and lack of consensus building, and refusal to bring in allies, makes it even riskier. Without some significant shifts, I think it’s quite likely that this plan fails, Trump’s Presidency is shattered, and American living standards decline. But at the same time, trying to tackle this problem is not outlandish.
Howard Lutnick is a loose cannon. My Top Ten list above is taken from just one 7-minute interview that was conducted this morning on CNBC. Go to the Commerce Department website and you can see for yourself that this was not an outlier in terms of Lutnick’s penchant for misinformation and his concomitant failure to understand basic economics. If he was still a Wall Street executive, this would not be a problem — I used to deal with such loose talk all the time in my Morgan Stanley days. But Secretary Lutnick is now a senior official of the United States government, with far reaching responsibilities for data integrity (Bureau of Economic Analysis), trade policy (US Trade Representative), and export controls sanctions policy (Bureau of Industry and Security). What he says in public matters.
Great Powers Can Have Tariffs Or Die
America was to England a far friendlier trading partner than China would be to us in times of war, yet we rely on it even more than England relied on us. As shown by COVID, everything in America is dependent on China, from pharmaceuticals12 to missiles.13 That wouldn’t last long in the case of war…particularly with China as an enemy, and even if it did, we’d find ourselves bankrupted as England was. Industry matters, and economies of scale of the sort presented by China’s population, when paired with tariff regimes of the sort it has, are disastrous for those left open to them.
Why Trump's "Liberation Day" Tariffs are Illegal
In sum, Trump's new tariff policy is not only horrifically awful, but also illegal on multiple different grounds.
As I have previously noted, the Liberty Justice Center and I are looking for appropriate plaintiffs to challenge this grave abuse of executive power in court (which LJC will represent on a pro bono basis, with me providing assistance, as needed). We have gotten a number of potentially promising contacts, and are guardedly optimistic we will be able to pursue this issue soon.
Private Equity Shares Tank Based on Trump Tariffs; Private Equity and Credit Crises Coming?
And remember, private credit, which are debt funds, often managed by big private equity firms, have private equity debt (“leveraged loans”) as a substantial portion of their assets. Private equity firms already have a wee problem with bankruptcies among their portfolio companies. Unless there is a big U turn on the Trump tariffs, defaults and bankruptcies look set to rise, which have the potential to deliver losses to credit fund investors….who again have public pension funds, life insurers, private pension funds, foundations and endowments, and sovereign wealth funds as their big holders.
Apropos of nothing, here is a paper by investment consulting pioneer Richard Ennis predicting “the demise of alternative investments”. Or to put it in a more nuanced way, the inevitable decline of the alternatives-heavy “Yale Model” of institutional investing pioneered by the late David Swensen.
The ticking time bomb inside the proposed stablecoin legislation
The current bill creates an escape hatch that allows a single motivated person—one human being—who happens to occupy one of they crucial positions in federal or state government to permit stablecoin issuers to undertake whatever adventures that will please them. This we cannot do. If we do, the entire virtue of stablecoin inclusion in the banking perimeter will be lost.
AI 2027. Remember AI? A prediction of AI development.
Dwarkesh podcast with the authors—2027 Intelligence Explosion: Month-by-Month Model — Scott Alexander & Daniel Kokotajlo
Three hidden fault lines beneath the financial system
The current environment amplifies these connections. A heavier Treasury issuance and a potential withdrawal from sovereign buyers from the Treasury market increases market volatility and the risk on the hedge funds’ basis trades, creating more leverage risk. Increases in risky rates push more CRE loans underwater, intensifying pressure on mid-sized and regional banks. Non-banks, starved for liquidity, place bigger demands on pre-committed credit lines from large banks. Together, these elements form an under-appreciated web of exposure.
Senate Budget Could Enable Unprecedented Deficit Increase and The Senate’s Latest Budget Resolution is a Fiscal Train Wreck
Together, the Senate’s amended resolution would add $5.8 trillion in new deficits over ten years. Per the Committee for a Responsible Federal Budget, that would double the growth of the debt-to-GDP ratio, with public debt reaching an astonishing 211 percent of GDP by 2055. To offset new tax cuts and spending, the Senate proposes a paltry $4 billion in spending cuts. Shameful.
Galaxy Digital and the $200 Million Tattoo
The full Luna story is truly bonkers. In early 2023, I wrote, produced, and directed a 4-part documentary podcast on the fraud called “Lunacy” for CoinDesk, and I think it’s still very worth a listen. We correctly inferred at the time that Kanav Kariya and Jump Crypto were also party to the fraud, and though we didn’t know exactly what shenaningans Novogratz had gotten up to, we made his general complicity clear.
While Galaxy admits no wrongdoing in the settlement, it was effectively part of a massive, multi-party fraudulent conspiracy. Galaxy received “18 million [Luna] tokens over the course of a year, in monthly tranches, at a price of $0.22, representing a 30% discount on the market price,” as part of deal with Terraform Labs to promote the pyramid scheme. And boy did they promote it! Novogratz’ infamous tattoo was on the occasion of Luna reaching $100 per token, a more than 400x return for Galaxy theoretically totalling $1.5 billion.
So Mike Novogratz is either a) a complete idiot in charge of a huge crypto fund, or b) a shameless market manipulator in charge of a huge crypto fund, or c) both.
Foreign
Is The U.S. About To Go To War With Iran?
…make no mistake that a U.S. military buildup now underway in the Middle East is tangible and fitting to what we would see in a contingency situation like this. Moving in B-2 stealth bombers, fighters, support aircraft, another carrier strike group, air defenses, and more all fit the bill of a limited air operation and enhanced abilities to defend key interests in the aftermath. Deterrence — or intimidation — on this level is the strongest card to play at this time, but the hope is that you can achieve a favorable outcome just by posturing, not by actually using the forces you have flowed into the region.
We can only hope that peace will prevail and that Iran and the Trump administration will work something out to avoid all this. It’s also possible that they could call Trump’s bluff and be successful in doing so if, subsequently, he chose not to act militarily. But considering there are so many other international crises, or ones brewing, that are running in parallel to this one, not doing anything of major consequence would be a big credibility hit for still a very young second Trump administration.
The Economic Consequences of State Capture
To most Americans, this kind of corruption will seem unfamiliar. Never in modern U.S. history has a businessman president partnered with the world’s wealthiest man to seize control of the federal government. But globally, it is part of a worrying pattern. In struggling democracies around the world, small cliques of politicians, business elites, and politicians with business interests—what political scientists call “poligarchs”—have warped the state to serve their interests. Together, these unholy alliances change rules, fire bureaucrats, silence critics, and then eat up the country’s resources. The politicians commandeer banks, rewrite regulations, and take control of procurement contracts. Their friends in the private sector, meanwhile, provide kickbacks, donations, and favorable media coverage.
Germany’s Lithuanian Base Complicates a Grand Russian-US Deal Over European Security
Germany just opened its first permanent military base abroad since World War II amidst the competition for leadership of post-conflict Europe between itself, France, and Poland. Located in southeastern Lithuania near the Belarusian border and in proximity to Russia’s Kaliningrad Region, it’s strategically positioned to imbue Germany with outsized influence in shaping Europe’s future security architecture.
Putin’s late-2021 request for the US to return to the 1997 NATO-Russia Founding Act by withdrawing Western troops and military infrastructure from the former Warsaw Pact countries now can’t be achieved without Germany.
Greenland’s Military Possibilities for the United States
Greenland is a strategic linchpin in the Arctic, offering the US significant opportunities to enhance security and power projection. Peace through strength around the world requires creating a broader geostrategic vision with an Arctic framework connecting the Pacific and Atlantic. Greenland is important terrain which should be integrated into this framework. Establishing autonomous air and maritime surveillance, improving infrastructure, and leveraging Greenland’s position for force deployment will bolster America’s and NATO’s security. These improvements do not require altering Greenland’s political status and could be supported through partnerships with Denmark.
American judges will soon decide the fate of Argentina (again)
It’s not only a matter of saddling Argentina with an unjust, crushing burden. As numerous — powerful — amicus briefs filed by the US government, four other sovereign nations, and legal scholars make clear, the credibility of US courts, and the US legal system is at issue.
Obscurity By Design: Competing Priorities for America’s China Policy
The Mysterious Sinking of the Bayesian
a boat that was supposed to be unsinkable — equipped with the most comprehensive safety systems — sank in a matter of minutes. Meanwhile, a smaller and older sailing vessel that was just over 100 yards away did not suffer any damage at all.
Just hours earlier, Lynch’s right-hand man and co-defendant was hit and killed by a car while jogging in the English countryside. And for the quarter-century leading up to these events, the British billionaire’s activities had been intertwined with the evolution of intelligence apparatuses on both sides of the Atlantic, first in the hunt for jihadist militants and then in the cyberwar against Russia and China.
US Politics and Culture
Kakistocracy as a Natural Result of Populism
Trumpism can be seen as identity politics for alienated white people. It is not a coincidence that the right has been becoming more accepting of corruption at the same time it has become implicitly ethnonationalist. Morality based movements care about the ethical standards of politicians and more intellectually inclined movements care about ideas. Populism is about blaming others for problems, so it has less mental energy to put towards policing the behavior of members of its own movement. Often, it makes tribalism into a virtue.
MAGA Communism and the End of America
The actual effect of the tariffs will be to halt the American economic juggernaut, discredit the anti-woke movement, pave the way for a left-wing populist like Alexandria Ocasio-Cortez, stop the right’s momentum in other countries, and bring an end to Pax Americana, which is the masking tape holding the pieces of the world together.
Historically, the American right was better than the left on economics. But as the Republican Party degenerated into a low-IQ cult of personality, this was unsustainable. The benefits of free trade are counterintuitive, and require a certain degree of intelligence to understand. On average, people who believe in capitalism have higher IQs. If you chase all the smart people away from your movement, your economic policies will come to reflect the intuitions of below average people who think that trade is inherently exploitative and only workers who make physical objects add value. The base will demand that we return to a simpler time when Americans worked in factories, life was easier to understand, and we didn’t have so many vaccines.
Cave-man brain vs. global economy
we dislike markets because these do not jive with the social emotions that developed to help us survive and thrive throughout our evolutionary history. Most of that history was spent as hunter-gatherers in small tribes, hence, these emotions are best suited to surviving as individuals and groups in that context, not for managing interconnected hypertechnological global economies. As E. O. Wilson said:
“The real problem of humanity is the following: We have Paleolithic emotions, medieval institutions and godlike technology. And it is terrifically dangerous, and it is now approaching a point of crisis overall.”
Christopher Caldwell: The Right Since Reagan
Peter Slezkine: …The American Empire, for example, is a project that many on this New Right or whatever we want to call it seem to disapprove of. And there are some people like your colleague, Tucker Carlson, from The Weekly Standard, who have made this turn from, sort of, neoconservative to now leading voice of the New Right, who is against the various appendages of the American Empire. So, is that the crux of the transformation?
Christopher Caldwell: I think there are, actually, a lot of things going on here. And you’ve described a couple of them. One is the centrality of Reagan on the American right. I mean, Reagan appeared to be set to become a figure, kind of, on the right, like FDR was on the left. And indeed, you could argue that, in a minor way, he did become that.
I think that the end of the 1970s was probably the most reactionary period since the turn of the 20th century. And Reagan certainly got the country on its feet again, but not in the way that people had expected. All of the cultural experimentation of the 1960s that people were uneasy with, racial, sexual, cultural, those all went on full steam ahead. The economy was fixed, but not in the way that people thought it would be fixed, and at a high price.
It was fixed in a highly inegalitarian way. I would say the inegalitarianism of the economy, which is one outcome of Reagan, and the kind of muscular assumption that America is the global paragon, those two things have really come back to damage the United States in the 21st century.
The College Essay Is Everything That’s Wrong With America
Many teenagers no doubt genuinely enjoy sports or playing the violin or participating in the math Olympiad or helping little old ladies cross the street. But the admissions system makes it impossible for them not to pursue those activities with one eye to their future advancement. The central role the college essay plays in admissions forces even genuine and well-meaning kids to have “one thought too many” as they go about activities they might otherwise undertake for the pure pleasure of it. It is the first of many steps in shaping a social elite that is willing to put its own advancement ahead of any authentic engagement with the world—a social elite that has proven to be so unpopular and dysfunctional in part because those over whom it reigns smell its inauthenticity from a mile away.
Science/Tech/Health
Using a Shotgun to Fight Drones
Aside from blasting a drone out of the air, there are other related technologies. One of them is an ammunition that shoots tethers and fragments that wrap around the drone's propellers, causing the drone to be forced to the ground. If a round misses its target, it’s designed to safely parachute to the ground, minimizing any risk of unwanted damage or injury. Called the Skynet A-4 round, it works with most 12 gauge shotguns but is most effective on guns with a rifled choke.
Asian immigration and the signaling model of education
The chief implication of the signaling model is that investing in education is individually rational, but collectively destructive. You, personally, can greatly increase your lifetime earnings by getting more education than your peers. Yet if everyone does the same, the signal degrades and to stand out you need even more education. There’s no upper limit: the amount of education required can keep increasing and consume ever more money and time. This is analogous to an arms race (or if you prefer evolutionary biology, a Red Queen’s Race). Hence more investment in education makes everyone worse off.6
In the long term, the only beneficiaries of expanding education are people within the education apparatus itself.
But Ramon’s vaccines were far from ready. They didn’t provoke strong immune responses to the anatoxines, and his animal subjects produced too few antibodies. This prompted him to return to the curious finding that he had abandoned twelve years prior. Did horses with an abscess at the site of toxin injection make more antibodies because of the infection or the inflammation?
In 1925, Ramon determined that inflammation was key, and an infection, such as the ones in the horses’ wounds, wasn’t necessary to cause it. He created sterile abscesses by making superficial cuts in a horse’s skin and applying various chemicals, such as calcium chloride, cholesterol, or glycerin. Some substances created inflammation and heightened antibody levels more than others. Ramon dubbed these immune-helping stimulants “adjuvants,” from the Latin word adjuvare, meaning “to help.”
Drug For Rare Disease Turns Human Blood Into Mosquito Poison
The drug in question is nitisinone, and a proof-of-concept study led by a team from the Liverpool School of Tropical Medicine in the UK found that it could be deadly to mosquitoes at a low dose in human blood.
When mosquitoes fed on the blood of three people who were already taking nitisinone to treat a genetic disorder, the insects died within 12 hours.
Nitisinone already has regulatory approval for treating certain rare, inherited diseases. It works by blocking the production of a specific protein, which leads to reduced toxic disease byproducts in the human body. But when mosquitoes drink blood with nitisinone, they quickly die.
The Johnson & Johnson cancer drug scandal that encapsulates corruption in health care
Lies, feckless government oversight, and the participation of nearly every oncologist and cancer hospital in the country are all part of this story. Indeed, EPO’s history demonstrates just how unscrupulous one of America’s most important companies and the nation’s educated elite truly can be, helping to explain why President Donald J. Trump and his health secretary, Robert F. Kennedy Jr., get so much support for their claims that the system is corrupt.
The EPO disaster in many ways exceeds that of prescription opioids. The two have cost a similar number of lives, but opioid makers never ensnared as many doctors and revered medical institutions into participating in such blatant and systematized greed. Opioids relieve pain in ways no other drugs can match, so patients can benefit from treatment. By contrast, since simple blood transfusions are far safer and more effective than EPO, the drug’s only offering for cancer patients is injury and death. And because EPO is so much more expensive than any opioid, the scale of the theft of tax, insurance, and patient dollars has been vastly greater.
A natural experiment on the effect of herpes zoster vaccination on dementia. Unclear why, but the shingles vaccine reduces the incidence on dementia by 20% in folks over 80.
the vaccine reduces the probability of a new dementia diagnosis over a seven-year follow-up period by approximately one-fifth. Third, we show that the herpes zoster vaccine did not affect the occurrence of any other common causes of mortality or morbidity other than shingles and dementia.
Skeletons from ‘green Sahara’ offer genetic peek at a lost human population
The site yielded pottery sherds impregnated with milk fats, the oldest evidence of dairying in Africa, and some of the first signs of wild cereal domestication on the continent. Nearby caves are richly decorated with rock art depicting hunting and herding scenes. It also concealed the remains of 15 women and children who were buried between 8000 and 400 years ago.
the DNA suggests their ancestors were distinct from sub-Saharan Africans. Another clue revealed they didn’t come from the Levant, either. The genomes of people from that region—and much of the world outside Africa—contain DNA derived from Neanderthals, acquired when modern humans began to move out of Africa and swap genes with our close cousins, some 50,000 to 60,000 years ago. But the genome of the woman with the best preserved DNA had only a vanishingly small amount of Neanderthal ancestry, 10 times less than people living outside sub-Saharan Africa today.
Introducing EthnoGuessr—An online game to test your knowledge of human biodiversity.
RIP Val Kilmer