*Everyone is standing on the sinking island of Hy-Brasil*
King of Hy-Brasil – “Now I know what some of you must be thinking -‘the day has come! We’re all going to go down, etcetera, etcetera… But let’s get away from the fantasy and look at the facts.”
King’s Advisor – “We do seem to be going down quite fast, your majesty. Not trying to contradict you, of course!”
King of Hy-Brasil – “No no. Of course you’re not, citizen. But let’s stick to the facts. The threat of total destruction has kept the peace here in Hy-Brasil for 1000 years. So whatever else is happening, you can rest assured - Hy-Brasil is not sinking.”
Last week we noted the reaction to the Trump tariffs have provoked a less that proportional reaction from targeted countries like EU and our neighbors in NAFTA. Therefore, conventional wisdom suggested that a full blown, devastating trade-war was unlikely. Surely the threat of mutual economic destruction would be enough to pull back friends and partners from continuing loops of reprisal and retaliation. Even in the face of Trump’s caustic remarks towards Canada, the G7, and India trade policies, the US markets have continued to advance steadily without skipping a beat. Investors discount the possibility of trade shocks. It’s just talk; he won’t do anything.
There is another theory: Trump won’t take even modest recriminations from US friends and allies. Even the smallest response will cause him to escalate a trade-war, which he feels is “easy to win” and probably a political winner from the US lower-middle class which feels disenfranchised by the competitive global trading environment. In other words, you can’t threaten an elected official with fire, when his platform was built on burning up the status quo.
The vision in my mind’s eye comes from a silly 1989 comedy-fantasy, Erik the Viking. In the movie, a promise of mutually assured destruction has kept the mythical island of Hy-Brasil safe for generations. If any blood is spilled on the paradise island, it will sink into the sea. All is well until chaotic marauders show up on Hy-Brasil shore and, wouldn’t you know it, spill some blood. It’s hard for the Hy-Brasil citizens to believe but sometimes disaster actually does strike.