On Thursday, March 22, 2018 and Friday, March 23, 2018, the Dow Jones fell over 1,100 points. U.S. stocks suffered their worst week in over two years.
This happened to coincide with news of tariffs being imposed by Trump. Since the anti-Trump establishment media will blame anything on Trump, it was easy to blame the stock market plunge on Trump’s tariffs. It is a precarious position to see the Keynesians, along with a few self-identified socialists, all of a sudden defending free trade. Of course, they aren’t really defending free trade, but just being anti Trump.
From a libertarian standpoint, there is no question that Trump is an economic idiot. He either doesn’t understand basic economics, or he is playing on the lack of economic competence of part of his base. It is probably both.
On the one hand, Trump will propose sanctioning countries such as North Korea. In other words, he wants to cut off trade to certain countries to teach them a lesson. On the other hand, he proposes reducing trade (in the form of tariffs) for the U.S., which he claims will be economically beneficial. How can he have it both ways?
Regarding tariffs, we can also see the major abuse of power. How did Trump get the power to single-handedly slap tariffs on aluminum and steel? He can cite national security all he wants, but it doesn’t make it legal according to the Constitution. Just as people who try to sell war will keep changing the reasoning, so does Trump with his tariffs. He will cite national security one minute (which is a farce), and then he will cite jobs the next minute (which is also a fallacy).
The bottom line is that tariffs are a tax on imports, and they make life more expensive for most Americans when there are additional tariffs on American imports. It may temporarily provide a benefit for certain industries, but it comes at the expense of everybody else’s standard of living, including employment in other sectors.
Overall, tariffs are bad economically. However, we can’t say that it is new tariffs that caused stocks to plunge. Stocks weren’t taking a nosedive when Bush and Obama enacted new tariffs. We also didn’t hear much about these tariffs when they were enacted. Bush and Obama were more quiet about them. Trump is trying to take credit for the tariffs, so he will also take the blame. And with the hostile media towards him, he will definitely take the blame.
Still, we don’t really know what caused stocks to plunge. The buyers and sellers were meeting at a lower price than what was previously the meeting point. It probably had little to do with tariffs. A little extra taxation on a few products doesn’t put everything into a tailspin.
We don’t know the reason for the stock plunge, and we don’t know if it will continue. If it does continue, I would argue it has far more to do with the Austrian Business Cycle Theory than anything about tariffs. It is the policies of the central bank that drive the artificial booms and busts more than any tariffs could do.
The Federal Reserve had an extremely loose monetary policy from 2008 to 2014. This is when we saw a five-fold increase in the monetary base with QE1, QE2, and QE3. And even since October 2014, despite no more QE, interest rates have stayed historically low. The Fed’s willingness to step in and support the bond market has helped prop up bond prices (keep interest rates down), even though the Fed has not been actually buying assets on net.
But the Fed has been very slowly increasing its target federal funds rate by increasing the interest rate paid on bank reserves. It raised its target rate another one-quarter of a percent last Wednesday. But instead of examining the Fed, the media is quick to blame Trump and his tariffs for the market selloff.
If you want to blame anyone for the market selloff, you can point to Ben Bernanke, who presided over the greatest monetary expansion in history. Even though he has been out of office for four years, he largely owns these bubbles that will eventually go bust. He owns the massive misallocation of resources that happened under his watch.
Sure, most of the other Fed members, past and present, would have taken similar actions as Bernanke. But there is no question that a potential crash in stocks is because it is an unsustainable bubble that was blown up by the policies of the central bank.
Trump was politically stupid for taking credit for the booming stocks in 2017. He was also politically stupid for enacting tariffs, which only enables further blame to be placed on him when things go bad. If stocks continue to fall, he is going to take the blame, even if he wasn’t primarily responsible for it.
The bust was already baked into the cake because the bubbles are unsustainable. But Trump doesn’t understand this, and the average voter doesn’t understand it either.