By Michael O’Neill
President Trump declared Wednesday April 2, as “Liberation Day.” That’s the day “the Donald” liberates America from decades of what he calls unfair trade practices of other nations. It is also the end of “Pax Americana.”
Brief History Lesson
Pax Americana (a nod to Pax Romana when Rome ruled the world) refers to the post-World War II economic boom dominated by America’s outsized clout. (at the time the US accounted for almost 50% of global GDP.) President Roosevelt set the stage for the 1944 Bretton Woods Agreement, and President Truman made it a reality. They pegged gold at $35/oz, and since the US held about 20,000 metric tons—nearly 75% of the world’s reserves—Washington promised to redeem dollars for gold at that rate.
Being the world’s reserve currency gives the US a huge advantage over other nations. A few benefits include:
1) lower borrowing costs due to global demand for dollar-denominated assets,
2) geopolitical leverage which amplifies US sanction power,
3) global demand for dollars because as the US dollar is the reserve currency, it allows the government to run huge trade deficits.
A succession of US governments championed globalization, and if nominal GDP is a good measure, America has been well-served. In 1970, US nominal GDP was $1.07 trillion, and in 2023 it was $27.3 trillion. In Canada, 1970 GDP was $88.19 billion and in 2023 $2.14 trillion.
As good as it looks, President Trump is unhappy.
Delusions from the Oval Office
The President is convinced that America is being ripped off by all its trading partners. He believes that countries are taking advantage of the lower tariff regime in America while imposing high tariffs on US imports, and he wants to put a stop to it. His weapon of choice is tariffs. He believes that trading partners should pay to access the largest, wealthiest consumer market on the planet.
US Commerce Secretary Howard Lutnick compared tariffs to a Costco membership, saying, “It’s like joining Costco—he’s got to pay to come in.”
Reportedly, Trump’s big picture strategy is to eliminate income taxes for people earning less than $150,000 per year (although Trump has not said as much). Howard Lutnick claims that is the goal, once the budget is balanced. They believe that tariffs would raise more than enough revenue to offset lost income tax revenue.
On March 21, the Committee for a Responsible Federal Budget (CRFB) estimated that cost at around $10–$15 trillion over 10 years. If other nations impose matching tariffs, the odds of recouping all the lost tax revenue are slim to none.
The Trump Version of DEI
Under Biden, DEI stood for Diversity, Equality, Inclusion. Under Trump it starting to look more like Delusions, Egos, Inexperience. That was on full display on Tuesday when the Secretary of Defense Pete Hegseth hosted a top-secret call on a public messaging app to discuss a planned air raid on targets in Yemen. He denied it ever happened but looks rather foolish when the journalist inadvertently invited on the call posted the transcript.
Mr. Hegseth’s actions prove Trump made a massive error when he replaced Lloyd Austin, a highly decorated four-star General, with Pete Hegseth, a TV host and second lieutenant in the United States Army.
That’s like a teller at JPMorgan Chase being tapped to replace Chairman and CEO Jamie Dimon.
It’s Going to Get Worse
The US government appears to be suffering a mid-life crisis. For over 70 years they were the “big dog”—top of the heap. The generosity of their taxpayers left an indelible mark on the world stage. Whenever a disaster struck, anywhere on the planet, Americans were first on the scene, providing food, water, and money to rebuild. They were there so often, that they were taken for granted, except by those receiving the aid. Europeans were massive beneficiaries of US largesse, yet they showed the most disdain.
The new Trump administration decided “enough was enough.” Trump and his sidekick JD Vance made it perfectly clear when they embarrassed Ukraine President Volodymyr Zelenskyy in the Oval Office, berating him for not saying “Thanks” for American weapons and money. Zelenskyy got the grief, but it’s not a stretch to believe that the outrage was aimed at the European Union. Donald Trump has decided that the “free lunch” is over, and friends and foes need to pay or go away.
Handbags at Dawn and Tariffs on Wednesday
Global markets seem a tad blasé about the looming tariffs. The CBOE Volatility Index (VIX) suggests traders are starting to get nervous but not overly so. The S&P 500 is down 4.25% since the beginning of March but still up 9.3% from this time last year. The US Dollar Index (DXY) is almost unchanged from this date in 2024. USDCAD has rallied 0.6% y/y and the bulk of that move is due to CAD/US yield spread differentials widening out sharply. The 10-year CAD/US differential was -71.6 on March 30, 2024. It is -119.9 today.
And Canada gets special treatment. The White House is reportedly announcing tariffs on cars later today with levies of 25% talked about. That is not good news for Canada, Ontario or the Canadian dollar.
Get strapped in, as Wednesday has a lot of things that can go off the rails when Trump’s Liberation Day arrives.
