Epitaph for Trump II, Part II

Tuesday, May 27th, 2025

Bill Bonner, from Buenos Aires

‘I had been imagining what war was like – everything on fire, children crying, cats running about, and when we got to Stalingrad it turned out to be really like that, only more terrible.’

—A female Soviet soldier

Here we go again. Reuters:

Gold falls nearly 1% after Trump extends tariff deadline on EU goods

Trump threatens tariffs... and gold goes up. He backs off... and gold goes down. (Is someone close to the White House frontrunning POTUS?)

Yesterday, we watched the old newsreels. Hundreds of thousands of soldiers, trucks, tanks, guns, and tons of supplies... all sloshed through the mud to the gates of Leningrad. Then, they could go no further.

By August 1941 the attack had stalled.

Meanwhile, another prong struck to the South. It was designed to tap into the rich oil fields of the Southern Caucasus. If he didn’t get that oil, Hitler remarked, he’d have to call off the war. As it turned out, he never got the oil... and never called off the war.

Every ambitious government program seems to have three major parts — the ‘Relief, Recovery and Reform’ of the New Deal... Japan’s ‘Three Arrows’... and Donald Trump had three prongs to his MAGA attack too.

“Reciprocal” tariffs were meant to be the second thrust of Donald Trump’s campaign. “Cooler heads” had prevailed during Trump’s first term in the White House, preventing him from applying the steep tariffs he wanted.

But in his second term, Trump II, the cool heads were replaced with hot heads...and a few plain numbskulls. Thus was launched the ‘Trade War’ that was supposed to be ‘easy to win.’

On Friday, Donald Trump seemed to forget that he had already lost that war. He told Apple CEO that if he didn’t make his phones in the US his customers would have to pay a 25% tax.

“I don’t want you building plants in India,” wrote America’s chief of state.

Then, he sent a message to Europe, threatening a 50% tariff:

“Our discussions with them are going nowhere,” he lamented.

But what else did he expect? Everybody now knows that a real trade war would bring down the stock market. Trump can still make threats. But nobody believes that he can follow through on them.

From the very beginning, few economists thought raising tariffs would be helpful. The real problems were monetary and structural. The US had a ‘credit-based dollar’ that it could ‘print’ at will. Americans could spend dollars...sending them overseas in exchange for goods and services...but never have to bring them home in exchange for goods and services of their own.

Instead, the dollars sat in foreign bank vaults for decades, as ‘reserves,’ even as inflation eroded their value. This was the ‘exorbitant privilege’ that French finance minister, Valery Giscard d’Estaing, had famously identified. But it was a ‘privilege’ that came at a high price. It undermined US manufacturing.

Normally, money printing causes inflation. But with the foreigners cutting prices... and the new money resting comfortably in foreign vaults...inflation remained subdued. But it was relentless. Over time, it made American labor much more expensive than labor in Mexico, Vietnam or China, for example. Chinese wages rose in real terms, but American wages only went up in fake, inflationary terms.

The result was that US workers tread water as US products became less competitive on world markets. And along with environmental rules, child labor and other restrictions, these ‘non-tariff’ barriers couldn’t be easily addressed by raising prices on imported products.

Nor would US exporters reap a clear advantage from higher tariffs on imports. By this stage, hardly any complex product is 100% American. The Wall Street Journal:

Almost half of new passenger vehicles sold in the U.S. in 2024 were assembled outside the country, according to data from S&P Global Mobility. And nearly all of the smartphones sold in the U.S. are made overseas. Companies often try to tout their American-made bona fides, even if they make only a small share of their goods in the U.S.

Nevertheless, Donald Trump went ahead with his trade war, announced to great media fanfare as ‘Liberation Day,’ on April 2, 2025. But ‘reciprocal’ tariff rates were set at levels that seemed to have little to do with the actual trade situation. Some countries were subjected to export tariffs, even though they had no exports. And with Great Britain, for example, the US enjoyed a trade surplus, not a deficit. Yet it was subject to a tariff anyway.

China did not take the tariffs sitting down. Within two days it came out swinging. And soon, US-China tariffs were over 100%, both coming and going. Now, we had a real trade war on our hands, one that could easily set off a worldwide depression. The stock market (the Dow) fell nearly 5,000 points over the next five days. Secretary of the Treasury Bessent had to admit that Trump’s high tariffs were ‘unsustainable’ and the administration backed off...suspending its tariffs and proposing ‘negotiations.’

In just a matter of days, the Trade War was over. Like a burnt-out tank, ‘reciprocal’ tariffs were abandoned. The new tariffs would be negotiated in traditional give-and-take discussions. They would be low enough to still impose a big tax burden on US consumers, but not cause a catastrophic economic collapse nor a major ‘reset’ in global trade. By late May, negotiations were settling around an average tariff of 18% — much like Europe’s high VAT taxes on consumer purchases.

And yesterday, as expected, came another ‘pause.’ Forbes:

Trump Delays European Union Tariffs To July—Latest Big Tariff Flip-Flop Since ‘Liberation Day’

Returning to the Soviet steppes in the early ‘40s, the Germans poured more and more men and resources into the battle for Stalingrad. But by this time in the war — late 1942 — the Soviets were gaining strength while the Germans were having a hard time replacing their losses.

A surprise Soviet advance encircled most of the exhausted German, Hungarian, Romanian and Italian axis troops in the ‘cauldron.’ At first, the Luftwaffe promised to keep the bottled-up army supplied from the air. But this proved largely fanciful...and soon, Friedrich Paulus, the German commander, had to defy Hitler’s orders and surrender.

By the time the battle was over, in February 1943, more than three million people had died.

Of course, there is no comparison in the suffering caused by the Battle for Stalingrad...and Trump’s campaign to re-organize world trade. The ‘Trade War’ was more farce than tragedy. But a president — like a general — only has so much time and resources. If he concentrates his forces on the right objectives... he might be able to make real progress.

Trump’s campaign to recast global trade, however — set amidst mass deportations and on-going battles with Harvard, the press, Jerome Powell, conservative Republicans, and many others — was a strategic mistake. It was the wrong target... which he couldn’t hit anyway. After expending an enormous amount of political and diplomatic capital, he was forced to retreat.

Peace negotiations will continue...

And tomorrow, we will look at the third and last major initiative...the only really important one. That battle is playing out, day to day, on nationwide media.

Tune in tomorrow for an update.

Regards,

Bill Bonner

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Market Note, by Tom Dyson

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