The Fake Crisis Behind Trump's Tariffs

the Supreme Court ruling from a few weeks ago. So Trump had been claiming the ability to do tariffs under the International Emergency Economic Powers Act, an act that famously never says the word tariff, and the Supreme Court was like, no, actually, that the International Economic Powers Act does not give you the power to levy tariffs, a thing that it does

not say that you can do. So Trump got extremely mad about this, and he imposed a ten percent tariff across the board using a different law, as he said he was going to do. Now, this ten percent across the board tariff was run through section one twenty two of the Trade Act of nineteen seventy four. We're going

to get into that, okay. So he imposes a ten percent tariff using this like different authority from Section one twenty two and the next day he goes, I'm going to raise the tariff right to fifteen percents and this is the terriff rate on the entire world. But then he just forgot to do it because he got distracted by i think invading Iran. So he has never actually, you know, raised the teriff rate to fifteen percent, which

he said that he had done. So it's now just at ten percent on the entire world instead of you know, all of the sort of individual country teriffs that had been in place before. And that's sort of the focus of today's episode is about these tariffs, because these tariffs are already being challenged in court, and I think that that challenge has a very very good chance of winning

fairly easily. And the reason that those tariffs have a very good chance of being overturned by the courts is that unlike the IEPA tariffs that he was using, where he was claiming illegally the authority to just do whatever he wanted. This is why you would wake up in the morning and there's like one hundred percent tariff on China, like seven hundred percent tariff of Vietnam. Blah blah blah blah blah. Trump was claiming that that act let him do whatever he wanted. It did not. The court found

that he did not. But that was how he was using teriffs, and he was the basis of how he was using terris for diplomacy, right. You know, he would put a tariff on someone at random, claiming this power, and then he would like enter negotiations with them. And he can't do that anymore. Now what he's done in its place is again imposed this terroriffs using Section one twenty two of the Trade Act. Now this authority is very,

very different than the authority Trump was claiming before. I'm just going to read it because it mostly explains itself. Do not worry about the international payment problems or balance payments deficit that it mentions at the beginning. We're going to go over that in a second. What's important for our purposes here is that in order to put tariffs into effect, quote, whenever fundamental international payment problems require special import measures to restrict imports one to deal with large

and serious United States balance of payments deficits. Two to prevent an imminent and significant appreciation of the dollar, in foreign exchange markets, or three to cooperate with other countries

in correcting an international balance of payments disequilibrium. The President shall proclaim for a period not exceeding one hundred and fifty days, unless such a period is extended by an Act of Congress, a temporary sarch charge not to exceed fifteen percent out of lorum in the form of duties in addition to those already opposed if any articles imported into the U s Okay, So let's look at the limits first, right, Instead of any rate of tariff on

any country, which is what Trump had been doing, Section one twenty two only lets you set an up to fifteen percent tariff on every country in the world and only lasts for one hundred and fifty days unless Congress votes to approve it. This sets up a giant fight in Congress that Trump is not going to win. Now. We may never get to that point because the same right wing legal group who funded the lawsuit that overturned the IEPA stuff is going after Section one twenty two

and they're going to win now. They're going to win because Section one twenty two has literally never been implemented before the tariffs specifically never been implemented. There is a reason for that, and the reason is that to even deploy Section one twenty two tariffs in the first place, you need quote fundamental international payment problems. One to deal with large and serious United States balance of payments deficits to the print dollar depreciation, and cooperation with other countries

to correct international balance of payments this equilibrium. So those are very specific conditions. What does that mean? What does it mean for there to be a problem with balance of payments? This requires us to understand what the fuck balance of payments is. And it is here where I am fulfilling my promise from that Executive Disorder episode where I said I will explain it in the full episode. All right, we're doing it, and oh fucking boy, are you in for it, because Jesus Christ, oh my god,

holy shit, this stuff is annoyingly convoluted. But it is also extremely important to how the global economy functions, how it's changed. And you know, it's not really relevant for the US at all, for reasons we will get into, but it is extremely relevant for the economies of a bunch of developing countries. So okay, let's start off with balance of payments. So what is the balance of payments.

I'm just gonna start off by quoting the Saint Louis Federal Reserve Balance of payments quote is a summary of all the transactions involving goods, services, and investments between one country and all other countries over a given time. Any transaction that causes money to flow into a country is a credit to balance payment accounts, and any transaction that flows out is a debt. So this is a record of literally every purchase in capital movement that goes in

and out of a country. Right, So it's goods services, debt payments, and things can either be credits or debts. This is the FED explains. You know things that are debts, right, things that like make your account go lower is you know, debt payments, capital transfer payments like buying imports. If you were importing stuff from China, that is a debit. And then there are things that are credits to make account

go up. So it's other countries paying for exports, capital transfer receipts, and you know financial acsets and that's other countries paying for your exports. So this is tracked in like two accounts. There's a capital and finances account. I'm just gonna call it the capital account because that's the

most common name for it, and it's shorter. So there's the capital accounts that is all movement of capital in and out of the country, and then there's a current account, which is like a trade record of all goods and services. Technically there's also stuff from like interest from an investment goes there, but we don't really care about that for our purposes. The current account is the account that's like trade, and then there's a capital account, which is the account

that's all of the capital moving in and out. Now, importantly, these two accounts, right, these two accounts compose balance of trade. Right, this record has two accounts in it. Those are the two accounts. If you line up all the credits and debts and then they cancel out and equal zero, the value of all goods being imported or exported as services and stuff like that too, is the same as the amount of capital moving in and out of the country.

The two accounts will cancel out. And this is what's really confusing about balance of payments, because why the fuck is that true?

and annoying. The Reserve Bank of Australia weirdly has like a readable one for people who aren't like engrossed and financial stuff however, come up, I'm going to try to explain it. So balance of payments is the record of everything that moves in and out of a country, you know. So that's goods, that services, that's money, it's stocked. When I say it tracks everything, right, was a record of everything. That means it's recording both sides of a transaction. So

what does that mean? Okay, imagine a receipt, right, it's a receipt for a burger. You have bought one hamburger. On the receipt is the thing you bought the burger and how much it cost, which is the money you pay for it. Balance of payments track both the burger and the money you paid for it. Because it tracked international trade, right, it's tracking international movement of stuff. And because both the burger and the money changed hands across borders, right,

it tracks both of them. And that is why when you put all the credits and debts from both accounts together, it adds up to zero, right, because you know, think about like the net transfer of funds on that burger. Right, on the one hand, there is the burger, and on the other hand there is you know, how much money you paid for the burger, and those two things are equivalent, right. The value of the burger is how much it's worth.

So okay, that means that in the accounting of it, right, the account on the receipt, which shows both of these things, is balanced because it's tracking both of them, right. And this is the same way it works for an investment. You buy shares of a company, So okay, there's the money for the shares and the shares themselves, and they're both being tracked and they both go into the record

that balance of payments keeps. So there are some convoluted things about this, and this is the reason why you need to combine both accounts instead of each account being balanced by themselves, because sometimes the record of the burger goes in one account and the record of the money for that burger goes at a different account. This is convoluted. It's because of how income is classified. It's a mess.

You can go read the Berserve Bank of Australia. But that's why you need both accounts together to get the balance of payments, right, because both the burger and the money for the burger are in the balance of payments somewhere, but they might go in different accounts, so you need to put them together. And that's how you get the balance of payments. And see, that's why it's called the balance of payments, right, they balance out. See now you're

getting it. Now you're getting it. This is why it always bounces out to zero because it's the balance of both the money and the object.

Why does this law exist? You will find out after these ads whoa cliffhanger A. So to explain what is going on here, we need to take a detour back in time to when this was written. This Act was written in nineteen seventy four, but we need to go back a little further to nineteen seventy one. Now, in nineteen seventy one, Richard Nixon makes probably the most consequential in a macro sense, change to like how currency functions on a global scale in probably half a millennia when

he pulled the US off the gold standard. So what does this mean. It means that Nixon ended what was called dollar convertibility, or the ability to go to the government and trade your dollar for a certain amount of gold. So this fixes the value of the dollar to the value of gold. So the value of your currency is sort of relatively constant in that like it's this much gold, right, But it means that your macroeconomic policy is constrained by your gold supply. So why did Nixon take the US

off the gold standard? And what does that have to do with balance of payments. Surprisingly everything, So okay, what I've been describing about balance of payments, I've been describing modern balance of payments. If you go back and read stuff from the FED from this era, when they talk about balance of payments or talking about flows of gold.

In this period, every dollar that leaves the country represents an amount of gold, and the more of it that leaves the country, the more pressure that puts on the US gold reserves, because you know, there's less and less of it. This is what they're talking about when they

talk about balance of payments. Right now. What's interesting here, and this is something that's important for our modern purposes, is that the problem that the US was facing in the fifties and sixties that causes Nixon to do this when they're talking about having balance of payments deficits, which they are in this period, right. And this is why this law is written, is because this is a period where this stuff is talked about. The problem isn't a

trade deficit, right, and this is very important. Trade deficits and balance of payments deficits not the same thing at all. In fact, in this whole period when the US is running these massive balanced payments deficits to become a problem. They have a trade surplus, right, they have a trade surplus, So like, okay, how are they like losing gold then, right, like,

how are dollars flowing out of the country. Well, it turns out that what's actually making this a balance of account deficit, where like dollars are leaving the economy, which means golds leaving the US's vaults, is that the US is spending too much of this military. It's always speaking military spending. It is always fucking military spending. Holy shit, it's the reason everything is broken. It it's literally just always military spending. We're spending too much gold on the damn military.

leaving the country. And you know, like technically speaking the balance of payments as we've been talking about it, right, like the account is balanced, but we keep spending dollars in order to obtain military bases, and then also in order to bomb Korea and Vietnam, and the dollars have to come from somewhere. Now, again, the dollar at this

point is goal. It represents a fixed amount of gold that the US has, and those dollars are coming from the US government, so that that's what the actual quote unquote deficit is in this case. Right, you will see this described as like, oh my god, they're paying for stuff from the current account from the Capitol count. No. No, no,

technically yes, but what's actually happening here is that the US. Right, it's gold leaving the country because the US is having to buy shit for a military basis, right, and it's not getting enough gold back from trade to replenish the amount of gold that the US is spending on these military bases. Now, in theory, this is fine because it's technically speaking, you're spending dollars, and as long as no one tries to actually convert those dollars into gold, you'll

be okay. Enter one Charles de Gaulle, President of France, who begins to unmass convert American dollars into gold in order to end the dollar's reign as the world deserve currency because it was pissed off at the US running the world. This is not like Charlos the gall Anti imperialists. De Gaull does not want like the end of imperialism. Degaull wants there to be equal footing or more equal footing between the different imperialist powers.

And that's why it's called the reserve currency. But I say all of the world's central banks have to hold it, except for the United States, which does not have to hold dollars because it's our fucking currency. And if we want more, we can just print more. Right. So this is time they called like seniorage privilege. But like that, the power of this right is enormous and the dollar status of the reserve currency is actually really important to us in terms of explaining these sort of balance of

payments deficits and crises. So, okay, here's a Saint Louis fed on why countries have to hold wood reserve currencies.

Quote governments and or es central banks keep you know, like reserve currency on hand for several reasons, including exchange management, insurance against sudden loss of ability to pay for imports caused by a halt capital inflows such as foreign direct investment to the domestic market, foreign purchases of domestic stocks or balls, or domestic borrowing from the rest of the world.

Insurance for other economic contingencies such as wars or natural disasters. Now, the second one is what's of concern to us, right, it's insurance against sudden loss of ability to pay for imports.

And that's what's commonly known as a balance of payments crisis in the current day, when you run out of dollars to pay for your imports or to pay for your foreign debt, which is a real issue too, right, Usually your money goes to the foreign debt and then you're out of currency and then you can't you know,

like import more shit. This is a bounce of payments crisis, and they're actually pretty common, decently common in a bunch of developing countries, and they are almost always completely catastrophic. It's one of the foremost causes of modern revolutions because when you have one of these bounds of payments crises, you can't afford to fucking import things because you don't

have enough dollars. You can't import oil or you know, fertilizer or food because you don't have enough dollars to do it, and your government has gone through all of the dollar reserves. As I talked about in the ED, Sri Lanka is probably the most recent example. The country, you know, just ran out of dollars to purchase shit with, and the ensuing unbelievably hideous shit that everyone had to suffer through cause people to burn down the president's fucking mansion.

You will know, and I said this is before you will know if the US has a bounce of payments crisis, because you will see the smoke and flames outside of your window, and it's such. It's like Sri Lanka, right,

like the revolution in Sudan. Like the reason that there's a civil war in Sudan now so some extent is because of one of these crises that set off a revolution, even though you know what usually happens in these cases, right, is that a country has one of these crises and then someone, usually the International Monetary Fund, will give them a loan, and so they will give them dollars in exchange for you know, like turning the entire economy of

that country into a debt servicing machine, which means, you know, like taking food out of the mouths of babies to pay that debt back. And this also often causes revolutions, right, like, so, like Sudan had a balance of payments crisis and in like twenty eighteen, late twenty eighteen, twenty nineteen, and they eventually got an im A bailout deal, but like the price of bread increased by two hundred and fifty percent

and people drove over al basher out of power. However, come you will note that I have been saying that these crises are caused because countries are run out of dollars. But we can't run out of dollars because those are United States dollars. We can just fucking print them. We literally cannot have this kind of bounce of payments crisis because it's all our own money, and we can just print shit in our own money. Jesus Christ, this is so silly, losing my mind, Like it's not possible, you

can't do it. Oh my god. Now, however, why is the law like this, right, Like, why why is there a law written talking about the US as if it could have a bouts of payments deficit? Again, Like, right up until nineteen seventy one, when Nixon took the US off the gold standard, it actually was possible to, you know, make the US run out of dollars because you could run out of gold. And this is what like the goal was trying to do, you know, by like making

the US convert all his dollars into gold. But Nixon just said, fuck it. The dollars of floating currency now, and since its value isn't pegged to a certain amount of anything else, right, And that's the way it's been ever since, we can't have these crises.

because it's dollars. We owe shit in dollars. And also, in order to have like a full on balance payments crisis where you can't pay for things right, it requires no one to be like willing to lend you money. And it's like, okay, like who is not going to lend the United States of America money? Like are you kidding me? This is this is the figgas crisis of

all time. This bill, however, was passed again in like nineteen seventy four, and it was only three years after the US was off the gold standard, and so people were like, Okay, we're gonna do this thing in case we ever go back to a situation where this stuff is possible. But right now, like we literally structurally cannot have a balance of payments crisis, like we can't have one. You can't have a balance of payment's deficits. If this

is not the same as a trade deficit. Trump is trying to argue that's, oh, we have a trade deficit. Our current account, which is like the trade account is like four percent below balance. But then if you look at the capitol account and you put them together at balances, because that's just how it works, Oh, that means we're

in trouble and nonsense, absolutely bullshit. He's also claiming that there's like fundamental international payment problems, which I know there aren't, because fundamental international payment problems means you can't pay for your imports or like your debt, and if we weren't able to do that, you would all know. So, ah, they're going to lose this lawsuit because this is the fakest crisis that has ever existed. And now you know how fake it is, and also what balance of payments

is you know? Okay, I'm going to close on a story about this, which is that there is a scenario in which this knowledge has actually saved countries before, and specifically, like the country that this safe was Cuba. There's like the Cuban Revolution, right and immediately after the Cuban Revolution,

the government it's not like clear of their communists. Yet there's this very very short window where it's like not quite entirely clear what the fuck is going to be going on with this new like Cuban government and the government sends chay Guevara to the US to negotiate with a bunch of American banks, right, and chay Guevara actually understands this stuff, right, he knows a balance of payments is, he knows he's able to like talk to all of

the sort of Manhattan bankers who are talking about this stuff on their terms, right, and like they literally literally the line they say about it was like, yeah, he talks like a banker, right, he understands balance of payments, He understands all of this stuff and what he's able

to do. And this is critically like why the nation of Cuba, like like why the Cuban Revolution succeeded was that he was able to get the US to give him all of his gold, like because he was able to convince these bankers because he understood what they were talking about out in their language, and the Uziplo convinces the US governments to get him all this fucking gold

because he understood how the shit works. And that's why, like Cuba was like functional as a country after that, because they had managed to get all of their gold reserves,

which previously had been being held in the US. So you know, you never know when you too might be at the head of a better revolution, or you might be the one person in the new revolutionary coalition who understands what balance of payments is, and you too can get your gold out of the United States before the government realizes that your communists and like would have like locked it down and frozen it and taken the gold.

So this has been It Could Happen Here, the podcast that helps you take your country's gold reserves like che guevara, Oh Boy.