Fire and Ice

Central planning is always a mistake, in the sense that it makes most people worse off. It is not a mistake for those who do the planning. The feds and their cronies get more money and more power.

A cocktail with ice cubes, on fire. Source: Getty Images

Monday, August 4^th, 2025

Bill Bonner, from Poitou, France

Last week, the US began Crackpot Financial Experiment Number Two. CFEN2.

CFEN1 was the move, in 1971, to a ‘paper’ currency…with nothing to connect it to real output. It greatly increased the amount of credit available, leading to a long (but largely fake) boom from 1982-2021 and to $37 trillion in government debt.

CFEN2 should have an almost opposite effect. It discourages trade and should depress the world economy.

Today, we take a guess about what happens next.

As we closed out the week, we got this. From Spencer Hakimian via X:

My friend is in the business of buying wholesale steel rebar, steel beams, steel sheets, etc. from inexpensive overseas producers and then selling it downstream to American homebuilders who build budget homes.

He got an email from his customs broker this afternoon that their order from Hanoi, Vietnam will be subject to either 50%, 70%, 110%, or 135% tariff tomorrow.

50% penalty for foreign steel.

Another 20% penalty for Vietnam.

Another 40% transshipment penalty if U.S. customs believes the steel is not truly Vietnamese.

And another 25% fentanyl penalty if CBP thinks China is involved with this steel in any way whatsoever.

The customs broker told him to assume he’s paying the full 135%, just to be safe.

They won’t know for sure for a few months, and the penalties of being wrong are too severe.

Central planning is always a mistake, in the sense that it makes most people worse off. It is not, however, a mistake for those who do the planning. The feds and their cronies get more money and more power.

The latest trade deals are counted as a ‘win’ for Mr. Trump. They show he can get what he wants. He’s a deal maker par excellence, after all. And he can prevail against almost the entire world. Against the English, the French, the Swiss, the Brazilians, South Koreans, Japanese...etc. etc. Didn’t he win everywhere...against everyone?

Maybe.

But in a trade dispute, the real winner is usually the loser -- the one whose borders remain most open, not the one who has raised the drawbridge and closed his doors.

Imagine that we live on opposite sides of a river. On our side, we raise chickens. On your side, you raise wheat. We trade. But then, we notice that we are buying more of your wheat than you are of our chickens.

“Unfair,” we shout. We impose a tariff of 30% on wheat imports.

“We won!” we say. ‘We won, too,’ you say, ‘cause it could have been worse.’

But in this world of winners, on our side of the river we pay 30% more for bread. You may not pay more for the chickens, but now you have less money to buy them; your wheat now costs us more, so we can’t buy as much.

And you, with less income from your wheat sales, buy fewer chickens. We are both poorer.

But wait. There’s more to the story. On our side of the river, our government collects the 30% tariff. It is the only real winner...having taken its ‘tax’ out of the chicken/wheat trade.

As to what happens next, in today’s real-world economy, we were put the question by a young woman at a wedding reception. Over the noise of a blaring band, we answered as best we could:

“There are two possibilities — fire or ice...a whimper or a bang.

“The US stock market is now in a bubble. We’re talking 1929 or 1999 levels. Something is going to happen to bring those prices down and crash the whole bubble economy. Tariffs could do the job...just as the Smoot/Hawley tariffs sent the whole world into a depression in the ‘30s. Sharp price increases for consumer products, for example, might panic investors. Or, since none of these ‘deals’ is actually final...we could still see a trade war break out...which might cause a stampede out of stocks.

“Or, maybe there won’t be a panic. The economy will simply slow down as consumer prices rise. Some form of stagflation, in other words. Over a number of years, adjusted for inflation, real stock prices would go down, as they did in the 1970s. GDP would go down. People would earn less real money...and have less to spend. But it would be less obvious what was going on.

“Either the fragility and complexity of the tariff regime tip the economy into a major crisis. Or, economies adapt without fireworks, absorbing the tariffs as they would any other tax hike. The going rate for tariffs was less than 4%; now, it will be about 18%. One way or another, the economy must adjust to the much higher taxes.

“Was that helpful,” we asked?

She looked doubtful.

Regards,

Bill Bonner