A FEW WORDS ABOUT ECONOMICS

A lot of people are airing thoughts about economics these days, many with the minimal knowledge I have about it, much of it gleaned from experts like Thomas Sowell. But as many of us have begun to try to understand what matters and what doesn’t, it is time to get a better feeling for the terms themselves, so we can understand what Trump and the Federal Government are trying to do.

Tariffs

Whenever Trump makes you feel confused, always go back to what he has always been best at—negotiation. He will use every tool at hand to negotiate for the goals he desires. You can’t think of him as a politician, which he is not, nor wants to be. He defines the ends he wishes to achieve, then figures out how to negotiate with others to get there. He also is keenly aware that there has to be a win:win nature to it. If the other side always loses, they won’t deal with you again. These behaviors are uncommon in political circles, so they cause people some distress.

Yet, this is exactly how his Abraham Accords worked so well, and hopefully, the Middle East will continue to embrace Israel in trade. Israel is the most successful country in the Middle East, not the least due to the diligence of the people who started out working hard on the Kibbutz, then creating successful companies and innovating in IT and medicine. To my surprise, this arid land also is innovating in wine; who knew?

At the end, I don’t believe he expects to keep the high tariffs in place. Rather, he wants more fairness, which is reasonable. In fact, the biggest factor on America’s side is that our wealth makes us the most desirable export target. People want to sell us goods; we are happy customers. In the end, I expect most countries to cave, at least to a more reasonable/equitable tariff and prices will come down.

China is a tougher sell, but in reality, the country’s economy is in shambles. They need us as customers; their own people’s purchases cannot save them. There will have to be a deal; it just won’t be quick or immediate. Xi has ransomed the future of his people with the huge costs of his ramped-up military, but he can’t continue this way.

Trade Deficits

A lot of noise had been made about trade deficits, but in reality, it is much ado about nothing. We are a big, populous country with a lot of money. We buy more stuff than other countries, so we are always going to import desired objects at a higher rate than we send our own goods to other countries. Ask yourself, when did you last “buy American” rather than a cheaper thing from another country? You may do it some of the time, but you won’t always do it.

In one way, a trade deficit is a good thing for the US. We are much more a service economy, which means better jobs and wages. While we may wish to rearm our country with production of pharmaceuticals currently only made in China, that is a prudent strategy with a country that could rob us of antibiotics overnight. But we have to consider carefully which industries make sense. We won’t find people willing to sit in factories sewing clothes. We just won’t. Ignore this “leading indicator.” It means nothing.

National Debt

This is the only number we really need to worry about, as the cost of the interest IS likely to destroy our economy. As of January, our debt is at $36.16 trillion. We make payments on interest only, and probably not enough of that. This puts us in debt to the holders of that debt, where China is a key figure. The interest we paid in 2023 was $695 billion, which is expected to climb to 4.1% of GDP by 2035. That’s scary.

Imagine that every year, the amount you owe on your house grows and your have a variable rate, so the cost per month may go up a lot. You don’t really own your house, do you? That’s the state we are in with our debt now. We sell bonds and pay interest on them to try to make ends meet.

You want to compare debt to GDP--gross domestic product—which is a measure of the value of goods and services a country produces. Sadly, not only does it include valid measures, such as consumer spending, net exports and business investment, but also government spending. This gives you an unfair look at the value of the US economy, because government spending doesn’t translate to real value for us. It’s our taxpayer money funding it. In Q4, 2024, GDP measured $23.5 trillion. Of that, 34.4% was due to government spending. This is not a good position to be in. Our debt to GDP ratio last year was 97%, which seems high to me.

While few countries actually pay down ALL of their debt, those that start failing to pay the interest find it impossible to get more loans. We also have about $7.6 trillion in bonds set to mature next year. That’s money the government needs to pay out.

Perception is Reality

What matters more than the actual numbers is the perception of other countries. Increasing numbers of economists see the dire situation in China, where over-valuing assets and the yuan make things look a lot brighter than they are. We don’t want to become China.

What needs to happen is what Trump is making happen. We need to spend less as a country. He’s starting out with low-hanging fruit to make cost-cutting more palatable, but we need real changes in every area of government. If you compare the Constitution regarding federal responsibility to what the government has become, you can see the rapid growth in the cancer of spending. What the government runs is rarely the most efficient, cost-effective and best way of doing things. We need them out of many areas, but that takes time. And when you have an agency doing bad things with out money (USAID) or just doing nothing worthwhile (Dept of Education), we can bring our government costs down.

Give Trump a chance. He’s on the right path, even as people are getting nervous. But we will all be a lot happier if taxes can be brought down, so that each of us can control more of the wealth we earn.