The Road to Chaos

The 1940s saw a series of movies with Bing Crosby and Bob Hope, starting with the Road to Singapore in 1940. The plot was always similar. Bing and Bob, two fast-talking con men or song-and-dance partners, would find themselves in a scrape in some country, and Bing would get out of it by selling Bob as a slave (Morocco in 1942, where Bing promises to buy him back) or committing him to be sacrificed in some pagan ceremony, and so forth. Bob always goes along with the plan, and there’s always a happy Hollywood ending where they escape together – with Bing always getting the girl.

In the past few years we have seen a series of similar diplomatic stagings with the United States and Germany (standing in for Europe as a whole). We could call it the Road to Chaos. The United States has sold out Germany by destroying Nord Stream, with Germany’s Chancellor Olaf Scholtz (the hapless Bob Hope character) going along with it, and with European Commission President Ursula von der Lehen tplaying the part of Dorothy Lamour (the girl, being Bing’s prize in the Hollywood Road movies) demanding that all Europe increase its NATO military spending beyond Biden’s demand for 2% to Trump’s escalation to 5%. To top matters, Europe is to impose sanctions on trade with Russia and China, obliging them to relocate their leading industries in the United States.

So, unlike the movies, this will not end with the United States rushing in to save gullible Germany. Instead, Germany and Europe as a whole will become sacrificial offerings in our desperate but futile effort to save the US Empire. While Germany may not immediately end up with an emigrating and shrinking population like Ukraine, its industrial destruction is well under way.

Trump told the Davos Economic Forum January 23: “My message to every business in the world is very simple: Come make your product in America and we will give you among the lowest taxes of any nation on earth.” Otherwise, if they continue to try and produce at home or in other countries, their products will be charged tariff rates at Trump’s threatened 20%.

To Germany this means (my paraphrase): “Sorry your energy prices have quadrupled. Come to America and get them at almost as low a price as you were paying Russia before your elected leaders let us cut Nord Stream off.”

The great question is how many other countries will be as quiescent as Germany as Trump changes the rules of the game – America’s Rules-Based Order. At what point will a critical mass be achieved that changes the world order as a whole?

Can there be a Hollywood ending to the coming chaos? The answer is No, and that the key is to be found in the balance-of-payments effect of Trump’s threatened tariffs and trade sanctions. Neither Trump nor his economic advisors understand what damage their policy is threatening to cause by radically unbalancing the balance of payments and exchange rates throughout the world, making a financial rupture inevitable.

The balance-of-payments and exchange-rate constraint on Trump’s tariff aggression

The first two countries that Trump threatened were America’s NAFTA partners, Mexico and Canada. Against both countries Trump has threatened to raise U.S. tariffs on imports from them by 20% if they do not obey his policy demands.

He has threatened Mexico in two ways. First of all is his immigration program of exporting illegal immigrants and permitting short-term work permits for seasonal Mexican labor to work in agriculture and household services. He has suggested deporting the Latin American immigration wave to Mexico, on the ground that most have come to America via the Mexican border along the Rio Grande. This threatens to impose an enormous social-welfare overhead on Mexico, which has no wall on its own southern border.

There also is a strong balance-of-payments cost to Mexico, and indeed to other countries whose citizens have sought work in the United States. A major source of dollars for these countries has been money remitted by workers who send what they can afford back to their families. This is an important source of dollars for families in Latin American, Asian and other countries. Deporting immigrants will remove a substantial source of revenue that has been supporting the exchange rates of their currencies vis-à-vis the dollar.

Imposing a 20% tariff or other trade barriers on Mexico and other countries would be a fatal blow to their exchange rates by reducing the export trade that U.S. policy promoted starting under President Carter to promote an outsourcing of U.S. employment by using Mexican labor to keep down U.S. wage rates. The creation of NAFTA under Bill Clinton led to a long line of maquiladora assembly plants just south of the US/Mexican border, employing low-wage Mexican labor on assembly lines set up by U.S. companies to save labor costs. Tariffs would abruptly deprive Mexico of the dollars received to pay pesos to this labor force, and also would raise costs for their U.S. parent companies.

The result of these two Trump policies would be a plunge in Mexico’s source of dollars. This will force Mexico to make a choice: If it passively accepts these terms, the peso’s currency exchange rate will depreciate. This will make imports (priced in dollars on a worldwide level) more expensive in peso terms, leading to a substantial jump in domestic inflation. Alternatively, Mexico can put its economy first and say that the trade and payments disruption caused by Trump’s tariff action prevents it from paying its dollar-debts to bondholders.

In 1982, Mexico’s default on its tesobono bonds denominated in dollars triggered the Latin America debt bomb of defaults. Trump’s acts looks like he’s forcing a replay. In that case, Mexico’s countervailing response would be to suspend payment on its US-dollar bonds.

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