(The following was first published on The Kotok Report website and via LISTSERV. For details, visit https://kotokreport.com/.)

On the day after the election, Kathleen Hays was kind enough to invite me to interview with my initial thoughts about the election outcome as we knew it to be then. I subsequently published a transcript of the interview and the link to Kathleen’s Substack. You can find it here: https://kotokreport.com/my-interview-with-kathleen-hays-on-november-6-2024/.

Let’s start today’s missive by paraphrasing the quote attributed to famous Chinese diplomat Zhou Enlai. He was asked by Henry Kissinger, “What was the impact of the French Revolution?” The reply is usually quoted as “Too early to say.” (“Zhou Enlai (Chou En Lai) 1898–1976 Chinese Communist statesman, Prime Minister 1949–76, ”https://www.oxfordreference.com/display/10.1093/acref/9780191826719.001.0001/q-oro-ed4-00018657)

Today we can ask the same in the context of coming US–China relations. I certainly expect them to change. And no one knows how this evolves or where it leads. 

Will there be Trump administration tariffs coming, with Chinese firms as targets, whether they ship directly to the US or transship through Mexico? It appears we are heading in the direction. And Trump has now included Canada in the mix. Will there be Chinese reactions as a quid pro quo tariff contest unfolds? It seems that the answer is already “yes”. Will the tariff war raise prices in the United States? Most economists say yes. I agree with them. Tariff wars raise costs. And tariffs are a form of sales taxes on consumers whether you call it what it is or you want to name it something else for political purposes. The fact is, a cost goes up, not down. 

Will a tariff war result in a mass movement of competitive manufacturing into the US from China and elsewhere.? Maybe. But that would take years at best and may never happen in any significant way. We don’t know. But we do know that any expansion needs labor and that deporting workers and potential workers is not the way to add to the labor force. We will save more on the labor force topic for another time.

How good are American negotiators at dealing with their Chinese counterparts? That is going to be quite a test. Both sides have learned experience from Trump 1.0 as they commence Trump 2.0. Styles are different on the two sides, and interpretations are, too. In my lifetime, I have had personal experiences negotiating with Chinese counterparties in the US and in China. Style, and cultural differences, including “saving face,” are nuanced but critical to achieving success.

Let’s look at the famous Zhou Enlai quote for a history lesson. Many Americans took his answer to Kissinger as a broad historical comment on the uncertain long-term outcome of the French Revolution. But was it so intended or was Zhou Enlai much more focused on the events of the day? Here’s an interpretation for you to consider: “The infamous Zhou Enlai quote on the French Revolution that made him sound like a Zen Master or Yoda is BS derived from mistranslation,” https://historum.com/t/the-infamous-zhou-enlai-quote-on-the-french-revolution-that-made-him-sound-like-a-zen-master-or-yoda-is-bs-derived-from-mistranslation.197160/. 

More on the post-election outlook is coming. Just two things strike me now. The claimed Trump-mandate sweep mentioned at the time of the Hays interview is now shown to have been inconclusive. We now have the final vote counts. Trump’s opponents, combined, received more votes than Trump did. He did not sweep the popular vote. At the same time, Harris’ vote totals were far below Biden’s of four years ago. This is quite different than what we thought we knew at the time of the interview with Kathleen. 

Secondly, The House of Representatives outcome was an unknown at the time of the interview. It is known now, and the margin in the new House will be razor thin. We will have more on the House in future missives. Right now, the Gaetz affair and the Hegseth affair have sucked the oxygen out of the room. Reminder: Speaker Johnson still must contend with the “motion to vacate” threat from those remaining miscreants who used it against Speaker McCarthy.

Moving on, we will offer some readers’ comments on our interview with Kathleen Hays. We thank all those who responded. 

And I’ll end with a paraphrase of the famous Kissinger-Zhou Enlai question: What do you think of the American Revolution now?

Reader responses

Greg W. wrote:

Thank you, one of the best interviews I’ve heard about where things stand. The peak pricing in CDS’s was new to me. Just a couple of questions:

1. Re the Fed balance sheet. Isn’t it somewhat concerning that as it grew, the strength of monetary easing (QE) became less and less effective? Shouldn’t this be managed to create more dry powder for the unexpected? Hasn’t the low (negative real) interest rates levels that excessive QE produced served as an “enabler” for the irresponsible fiscal behavior, compounding the problem?

2. Regarding defense spending. It’s been severely neglected at the same time deficit spending has reached (ironically) WW2 levels. As you certainly recall, ADM Mullen said, “the most significant threat to our national security is our debt.” What has to give (already high debt/deficit level, domestic spending, monetary debasement) to restore our defense capability?

Liz and I will be getting our copy of “The Fed and The Flu”.

Albie wrote:

Your discussion with Kathleen Hays was excellent. I was hoping you would have included something about the other Russian border, Georgia, and Georgian Dream’s cozy relationship with Russia. Do you see this as another Rhineland-type walkthrough?

Jack B. wrote:

Ah, yes. But, I am not aware of any previous president with a Supreme Court that kowtows to him and a Congress that may be putty in his hands, wants chaos as he does, and in my opinion is both evil and unhinged, as he appears to me. This is what frightens me.

Jeff H. wrote:

The issue of how the existing Federal debt is being financed didn’t really come up. My belief/assumption is that the Treasury has chosen not to use longer-term debt because of its concern that interest rates would rise too much. I am then left wondering about the ultimate impact of using T-bills. As we try to refinance existing debt and issue more (which I am afraid is inevitable), what might the limit or impact of so much short-term paper being issued be? Is it just a way of providing liquidity without QE? Oil drilling: Assuming the Trump administration encourages enough additional drilling to force prices down, will it impact current production levels, especially for shale? Looking forward to a hard-cover copy of your book. I am pretty sure I’ll want to write in it.

Fred wrote:

David sees the rising CDS rate to insure US debt as frightening. I see the same thing in spreads. Despite having NO gov. in Berlin at the moment, market yields on 10-yr German bunds are now 209 bps less than 10-yr Ts, benefitting Germany by 59 bps since Sept. THIS cannot be “good” for the U.S. We have shrinking spreads between Ts and Corp bonds. Normally, that’s good. The rises in the prior par., however, suggest that is NOT due to better U.S. business prospects, but rather to announced Trump people and policies, combined with lack of certainty about future policy (as Stiglitz says). In short, private businesses seem better protected relatively than our gov. Sounds like a “boom before a bust” problem. As Bill Cohen (R—ME) said of the 1997 Asian Tiger crisis: “Stability attracts investment.” Our stability prevented the crisis from hitting us (until SEC screwed up Rule 2a-7 in April 1998 creating the LTCM crisis. That means (by the converse of the inverse rule of logic) instability repels investment. That is what scares me. We have all the tools we need to handle a looming crisis, BUT WHO’s WILLING TO TRUST FOOLS WITH THOSE TOOLS? Stiglitz does a very good job applying basic professional economics to show the luck and skill that got the U.S. to today. The path to the next crash, however, is in place. It may come in two months or several years—too long to hedge against. But nobody can throw as many cannon balls in the air as Trump has tossed up already without a few crashing on our head. On the other hand, nobody wants to say it for fear of becoming “the trigger.” When a guy as seasoned as Stiglitz is giving this quiet “whisper” to SELL NOW, it cannot be “good” news. Perhaps one should buy underperforming defense stocks (to get ahead of “buy on the sound of the cannons”).

A retired economist also named David wrote:

Not sure the stock market is the best judge of what is to come from Trumpian Economics. I think they are more like a herd than a bunch of ‘smart’ guys acting independently. Wall Street economists, yourself and company excluded, tend to know that there is safety in doing what the others are doing, so if the expectation when the Fed raises the rates irrespective of the real economy on a hiring binge, they go with there will be a recession in 2021, then 2022, then 2023, now happy days are here again with Trump, to hell with their gut. Trump has declared war on the world economic system. He thinks America is calling the shots, but the shots will all be directed back at just one country, the USA. 

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And this final note:  On Nov. 17th, Bloomberg Markets reported that “House Speaker Mike Johnson said Donald Trump’s plan to end income tax on tips would have to be paid for, injecting a note of caution into one of the president-elect’s key campaign pledges.” (https://x.com/markets/status/1858194000710078919?s=12)