The Strategy Behind the Stupidity

Unpacking the origins of Trump's disastrous tariff plan

After so much talk about the tariffs being “priced in,” it turns out the markets had radically underestimated Trump’s commitment to the bit. And while I was astonished at the stupidity of the “methodology” the White House used to calculate the tariffs announced last week, I was less surprised than many by their sheer size and scope.

As I tweeted a month earlier on February 2:

This is not an endorsement, but I think the "Trump just likes tariffs"-take is missing the forest for the trees.

I think there's a p(=30%) chance that we are instead witnessing the first (albeit somewhat clumsy) phase of a deliberate strategy for controlled de-dollarization.

People will dismiss this as 5D-chessing Trump's economic ignorance, but I've been in or around this world (libertarian-populist fusionism) for over a decade, know many of the relevant thinkers and theories, and have a reasonable track record at interpreting the context clues.

Naturally, many people read this and immediately concluded that I endorsed the tariffs and thought Trump was playing 5D chess. Sigh… As I made clear then and many times since, this was my attempt to issue a warning — a kind of public service announcement — that Liberation Day could have much farther-reaching implications than somewhat more expensive imports.

We all know Trump loves tariffs and believes trade deficits are intrinsically bad. We also all know that the man’s grasp of public policy is vibes-y at best. This makes it hard to ascribe any strategic planning or intent to the tariffs, but a plan there was. As the Washington Post reported, plans for using tariffs as a lever to restructure the global trading system had been in discussion since the transition. Scott Bessent indicated as much on the various podcasts he appeared on in late November, right around when the first talks were taking place as part of his vetting:

I also felt very strongly that we're in the midst of a great realignment and of a Bretton Woods realignments coming in terms of global policy, global trade. There's a lot of what I taught at Yale and studied my whole life. I'd like to be part of it, either on the inside or the out.

My reviled February tweet essentially pointed at statements like this and asked “Guys, what if they’re serious?” For one, you might expect them to go unreasonably and indiscriminately big on tariffs to engineer something akin to the Nixon Shock; not simply impose reciprocal tariffs for the sake of immediately negotiating them away.

Of course, Trump only has vague concepts of his own administration’s plan, and is thus an X-factor in how this all plays out. But there really is / was a grander plan, or at least a Big Idea, and so far they seem to be sticking to it. Understanding this matters because “Trump just likes tariffs” and “the administration wants to restructure the global monetary system” in addition to Trump just liking tariffs have radically different implications. The former suggests the market should correct for the direct impact of tariffs on company profitability. The latter suggests that the floor could soon fall out of the stock market and U.S. assets more generally, as asset managers awaken to what’s entailed by a global financial reset. If Trump doesn’t reverse course soon, margin calls, capital flight, and cascading retaliatory measures could spur a dollar crisis and global Great Depression. While I don’t think this is the most likely outcome, these are the sorts of fat tailed risks we are now flirting with, and the tails keep getting fatter.

The fact that the stock market first rose on Trump saying there’d be a universal 10 percent tariff only to plunge immediately after the full tariff schedule was unveiled was a function of both the tariffs being larger than anyone expected, but also because of what it signaled about the administration’s underlying intent. The smart money failed to take the murmurings of a grander plan seriously, in part because they correctly assessed it would spell economic disaster.

The plan as best I understand it looks something like the following: First, Bessent hoped the tariffs and recession fears would lower yields, just in time for trillions of dollars in Treasuries to roll-over. Then, as part of extended, year(s)-long tariff negotiations, they intend to force foreign creditors to swap short-term U.S. bonds for long-duration bonds that lock in those lower rates. Why would foreign creditors ever agree to hold long-term, low yielding treasuries, you might ask? In theory, for tariff relief, but that bargain only makes sense if the tariffs in question start out as punitively large.

There were early warning signs that this was the direction the administration was heading. At his confirmation hearing in February, U.S. Trade Representative Jamieson Greer said Trump’s goal was “to restructure the global trading system to better serve American workers and businesses.” This comported with the views of Trump’s CEA Chair, Stephen Miran, who published a widely-discussed “User’s Guide to Restructuring the Global Trading System” in November of last year. The plan outlines options for how a graduated tariff policy could provide the U.S. with the negotiating leverage needed to induce countries to appreciate against the U.S. dollar, allowing America to retain its reserve currency status while locking-in a new regime of balanced trade and burden sharing. This would culminate in Bretton Woods-style conference called the Mara-Lago Accords. To his credit, Miran’s plan studiously explored strategies to avoid “adverse market reactions,” and in that sense the specifics of his plan were utterly ignored. However, it remains a relevant datum for understanding the administration’s fuller ambitions.

The notion that the dollar’s reserve currency status is less a blessing than a curse has been percolating in the New Right Zeitgeist for years. In 2023, I commended JD Vance for arguing that the dollar’s role in absorbing global savings represented a “resource curse” that contributed to deindustrialization. And back in 2019, Senators Josh Hawley and Tammy Baldwin proposed implementing a “market access charge” on foreign investment inflows to enable current account imbalances to be managed directly. The Hawley staffer behind this latter proposal is JD Vance’s current chief of staff.

I’ve long been sympathetic to these ideas, and even think a version of the “market access charge” is worth pursuing. At the same time, I’ve been warning that Trump’s personal obsession with trade deficits risks becoming a dangerous distraction. Persistent U.S. trade deficits are an epiphenomenal mirror to our persistent capital account surpluses, which are in turn downstream of the beggar-thy-neighbor industrial policies of countries like China and Germany. Thus, as I put it in a 2023 memo for American Compass, “Capital Flows Are the Core Concern”:

[T]he modern era of financial globalization is typified by enormous trade and financial imbalances—imbalances that will eventually come due. These imbalances are largely the responsibility of our foreign trading partners, particularly countries like China, which have engaged in one-sided industrial policies designed to suppress their domestic consumption. America’s role has simply been to absorb those imbalances with no questions asked. Until the global economy rebalances, efforts to rebuild American industry are fighting economic gravity. … While our trade deficit with China gets significant public attention, trade per se is largely a red herring. Investment flows matter much more.

Even if you believe the U.S. trade deficit is a problem, in other words, it’s unlikely to be resolved directly through the trade policy channel. Nevertheless, large universal tariffs can function similarly to an indirect “market access charge” — just at an enormous and unnecessary cost to U.S. consumers and producers. The only real advantage of imposing a market access charge through the trade channel is that the President has unusually unilateral authority over tariffs. Evidence that the administration is thinking along these lines can be found in the transcript of Trump’s Liberation Day speech, in which he declares that “Foreign nations will finally be asked to pay for the privilege of access to our market, the biggest market in the world.”

The administration’s approach thus represents an incoherent blend of Michael Pettis-thought, neo-protectionism, and supply-siderism. Judy Shelton, an old school supply-sider, even visited the White House in November to pitch Trump on issuing 50-year Treasury bonds backed by gold. More recently, Bessent went on Tucker Carlson’s show and revealed that he too is a “gold bug”:

Bessent: Gold cannot have a gigantic budget deficit. Gold cannot have a war, so just the fact that it is this isolated thing makes it very interesting. And the fact the entire global trading system until Richard Nixon took us off was tied to gold.

Carlson: So you're not anti-gold?

Bessent: Oh no, no, when I had my fund, I think people might've called me a gold bug.

The purpose and contours of the forthcoming Mara-Lago Accords are thus becoming clearer.

The supply-siders’ desire to move the U.S. dollar off a fiat standard onto a gold or commodity-backed standard is long-standing. For example, in 2020, I wrote a piece opposing Trump’s nomination of Judy Shelton to the Federal Reserve Board titled, “How Judy Shelton’s Call for a New Bretton Woods Duped Pro-Worker Conservatives.” Shelton’s nomination ultimately stalled out, but the duping has continued.

In the popular imagination, supply-siders are simply tax-cutting, Reaganite, “trickle down” conservatives. While not exactly wrong, this misses the extent to which the supply-siders represent a specific and quite weird heterodox school of economics. Consider that the OG supply-sider, Jude Wanniski, once wrote an ode to Karl Marx, declaring Das Kapital a “supply-sider text.” This is because Das Kapital focuses on the hard, materialist aspects of economic production to the neglect of consumption or other “demand side” factors. Marxist economists thus historically attributed recessions to a “crisis of over-production” rather than seeing excess capacity as simply the mirror to a negative demand shock — the core insight of John Maynard Keynes. These same Marxian blindspots animate China’s industrial strategy to this day, as seen in their relentless focus on expanding industrial production at the expense of domestic consumption.

In essence, the supply-siders believe the U.S. should adopt a market-driven version of the Chinese economic model. Slashing social programs, busting unions, and cutting taxes on capital gains are all in service of redistributing household consumption into corporate savings and investment. As a final step, converting the U.S. dollar into the basis for a hard-money currency union would allow America to be to the world as Germany is to the Euro Zone — the producerist core to a debt-saddled periphery.

The supply-siders are nonetheless free traders who abhor tariffs, and thus only begrudgingly accept Trump’s tariff agenda to the extent it leads to the establishment of a U.S.-centered, balanced free trade zone. Then there are Austrian economists like Josh Henderson who favor ditching the Treasury Standard for gold as a way to discipline budget deficits and curtail U.S. hegemony (a running theme of this administration, from the deletion of USAID on down).

That Trump has only the faintest understanding of these dynamics has turned him into a vessel for multiple vicarious and mutually-incompatible policy agendas. Oren Cass and the kind folks over at American Compass, for example, abhor the idea of union busting and would much rather see worker power rise — not be suppressed for the purposes of global competitiveness. Yet the disastrous roll-out of Trump’s tariff agenda has done little to advance American Compass’s brand of “pro-worker” conservatism. On the contrary, Cass’s efforts to defend the tariffs against the backdrop of $6 trillion in wanton wealth destruction has likely set his project back indefinitely. This is a shame, as Cass’s — and Vance’s — preferred policies are actually quite different from what Trump has pursued in practice. Cass supports the CHIPS Act, for instance, as well as spending large sums of money on programs for families and industrial development — a stark contrast to Trump’s slash-and-burn austerity.

Thus even if Trump makes an about-face on the tariffs tomorrow, irreversible damage has already been done, not least to his supporters’ reputations.

---

A note to subscribers: I launched this Substack for longer essays with no other home, but there’s so much crazy stuff happening in the world and so quickly that I’ve decided to start writing shorter, more frequent posts reacting to things as they happen. Whether it’s AI or U.S. politics, the context now shifts radically from week to week. My normal methodology of thinking for awhile and then zero-shotting a 10,000 word treatise thus has an impedance mismatch with reality. At the same time, I’ve always felt awkward using Substack as a short-form blog, so going forward I’m going to experiment with different formats and likely bundle shorter takes into longer newsletters. I welcome any feedback along the way.