Guest Post from Clint Siegner, Money Metals Exchange
Donald Trump’s trade policy is likely to spark higher consumer price inflation, and that has ramifications for gold and silver prices. Regardless of where investors stand regarding the president’s plan to make Mexico “pay” for the border wall, if he is successful in getting Congress to impose a hefty tax on imports it will mean higher prices for things. A tax on goods from China could be even more inflationary.
Saying that higher import taxes are inflationary may be a statement of the obvious, but it is worth making given Trump’s recent promotion of a tax on Mexican goods.
He implies Mexican exporters will “pay” for the wall by absorbing the 20% tax. They won’t. No competitive enterprise has that sort of excess margin.
Trump can punish Mexican exporters by making them less competitive, but he cannot make them pay. Because of Trump’s approach, the U.S. consumer will pony up, one way or another.
The true merits of taxing imports from Mexico and China are currently hotly debated, but no one should be fooled about who will bear the cost. The real question for Americans is whether it makes sense to pay significantly higher prices for goods in order to finance the wall and stimulate U.S. employment and manufacturing.
While on the subject, it is also worth noting that price inflation in the U.S. does not necessarily mean the dollar will weaken relative to other world currencies. In other words, the DXY index and the Consumer Price Index can move higher in unison.
Consider the proposed 20% tariff on Mexican imports. The dollar will weaken relative to Mexican tequila, but it may well strengthen relative to the peso.
Trump’s threats to renegotiate NAFTA and implement taxes on imports crushed the peso in the weeks following the election. Traders saw bad news ahead for the Mexican economy and dumped the currency.
This dynamic may explain why gold and silver prices aren’t yet responding strongly to the inflationary prospect of higher tariffs. Sometimes precious metals rally in advance of higher inflation rates, and sometimes they follow.
So far this year, the U.S. dollar has fallen versus most foreign currencies. Should we start to see a rise in the DXY index, it could exert modest disinflationary pressures in some areas of the economy. But regardless of where the dollar heads against other currencies, the inflation genie will be let out of the bottle if Trump successfully implements his trade policy and CPI numbers shoot higher.
Clint Siegner is a Director at Money Metals Exchange, the national precious metals company named 2015 “Dealer of the Year” in the United States by an independent global ratings group. A graduate of Linfield College in Oregon, Siegner puts his experience in business management along with his passion for personal liberty, limited government, and honest money into the development of Money Metals’ brand and reach. This includes writing extensively on the bullion markets and their intersection with policy and world affairs.
Thanks to Clint Siegner
From Zero Hedge and Ron Paul
Just one week in office, President Trump is already following through on his pledge to address illegal immigration. His January 25th executive order called for the construction of a wall along the entire length of the US-Mexico border. While he is right to focus on the issue, there are several reasons why his proposed solution will unfortunately not lead us anywhere closer to solving the problem.
First, the wall will not work. Texas already started building a border fence about ten years ago. It divided people from their own property across the border, it deprived people of their land through the use of eminent domain, and in the end the problem of drug and human smuggling was not solved.
Second, the wall will be expensive. The wall is estimated to cost between 12 and 15 billion dollars. You can bet it will be more than that. President Trump has claimed that if the Mexican government doesn’t pay for it, he will impose a 20 percent duty on products imported from Mexico. Who will pay this tax? Ultimately, the American consumer, as the additional costs will be passed on. This will of course hurt the poorest Americans the most.
Third, building a wall ignores the real causes of illegal border crossings into the United States. Though President Trump is right to prioritize the problem of border security, he misses the point on how it can be done effectively and at an actual financial benefit to the country rather than a huge economic drain.
The solution to really addressing the problem of illegal immigration, drug smuggling, and the threat of cross-border terrorism is clear:
remove the welfare magnet that attracts so many to cross the border illegally, stop the 25 year US war in the Middle East, and end the drug war that incentivizes smugglers to cross the border.
The various taxpayer-funded programs that benefit illegal immigrants in the United States, such as direct financial transfers, medical benefits, food assistance, and education, cost an estimated $100 billion dollars per year. That is a significant burden on citizens and legal residents. The promise of free money, free food, free education, and free medical care if you cross the border illegally is a powerful incentive for people to do so. It especially makes no sense for the United States government to provide these services to those who are not in the US legally.
Likewise, the 40 year war on drugs has produced no benefit to the American people at a great cost. It is estimated that since President Nixon declared a war on drugs, the US has spent more than a trillion dollars to fight what is a losing battle. That is because just as with the welfare magnet, there is an enormous incentive to smuggle drugs into the United States.
We already know the effect that ending the war on drugs has on illegal smuggling: as more and more US states decriminalize marijuana for medical and recreational uses, marijuana smuggling from Mexico to the US has dropped by 50 percent from 2010.
Finally, the threat of terrorists crossing into the United States from Mexico must be taken seriously, however once again we must soberly consider why they may seek to do us harm. We have been dropping bombs on the Middle East since at least 1990. Last year President Obama dropped more than 26,000 bombs. Thousands of civilians have been killed in US drone attacks. The grand US plan to “remake” the Middle East has produced only misery, bloodshed, and terrorism. Ending this senseless intervention will go a long way toward removing the incentive to attack the United States.
I believe it is important for the United States to have secure borders, but unfortunately President Trump’s plan to build a wall will end up costing a fortune while ignoring the real problem of why people cross the borders illegally. They will keep coming as long as those incentives remain.
Thanks to Ron Paul
The Deviant Investor