EMERGENCY POD: Are We Cooked?
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America, are we cooked to discuss? We have on Peter Harrell, former Biden official and host of the excellent new security economics podcast, Kevin Hsu of Interconnected and Matt Klein, who runs the Overshoot Substack. Welcome to China Talk, everyone. All right, Peter, how are we doing?

You know, I actually don't think we are cooked yet. I think that there are enormous underlying structural strengths here in the United States that make me quite bullish about the future of America. I should also acknowledge you have me while I am on a week of vacation out in southern Utah and the weather is gorgeous and the rocks are gorgeous. And so it's hard to sort of see us being cooked.

this week. You know, if you ask me next week when I'm back in the office, I don't know, I might then have a different view on the situation. Kevin, pulse check.

We're not cooked yet, but that probably implies that some cooking is happening as we speak. I think one of the lines I've been thinking about from Josh Wolf of Lux Capital, who runs that firm that I really like, from early in the pandemic days is, you know, the biggest failure is a failure to imagine failures.

and, uh, you know, we definitely, uh, for the sake of saving America or making sure we are not cooked, uh, it's definitely probably useful to at least really think hard about, uh, what does cook to look like and never go there, right? The aversion, a mental model of Charlie Munger, uh,

And that is something definitely I think about a lot these days more than before. That is certainly not to say that we are cooked. There's a bunch of things that I can cite in my personal anecdote and professional history that suggests that America is still very special, if not exceptional for all the right reasons. But that is certainly where my mood is at right now is a intellectual exercise to imagine failures for the sake of not failing.

While I agree that we are not yet definitively cooked, we are definitely cooking. And I agree with Peter, there are a lot of very long-term reasons or structural reasons why I would generally be optimistic about the state of the United States economy and society. But at the same time, we have an administration that seems to be doing its best to attack all of those strengths simultaneously. And we've only been there for about two and a half months. So if we were looking only at the question of the tariffs that were announced last week,

I would agree that while they have negative consequences and clearly being demonstrated in market reactions, that's not, I think, the main reason in and of itself to be concerned. One thing, I mean, this is something I published last week, but there's the way that the tariffs, the specific tariffs were chosen and rolled out, which I think is revealing of the overall situation.

governance process of this administration, which is, does not, you know, the days of seriously, but not literally, I think are clearly over. It's time for literally not seriously.

This is, you know, apparently the Corian in Washington posted a really good thorough reporting of how the process was actually occurred. There are a lot of different teams of staff work coming up with ways to come up with justifiable reciprocal tariffs, which again, you can argue whether tariffs are good or bad. But I mean, there was a lot of staff work done, different agencies, USTR, Council of Economic Advisers, Commerce, a bunch of different people coming up simultaneously.

A lot of thorough methodology. They were doing things like asking U.S. companies abroad what their challenges were, trying to do lots of research being done. Again, you can argue we don't know what that looked like. At the end of the day, the decision was made basically three hours before the announcement to go with the most simple-minded, least rigorous approach, which was a formula based on essentially two

two variables, um, you know, exports and imports, bilateral goods with each country, which is not justifiable, you know, theoretically or any other way. And then after it was, people were deduced independently that that's what was done. They then lied about it repeatedly before eventually admitting that that's what they did. Um, now what does that tell you about everything else? Right. And again, this is after already we've seen, uh,

The attacks on scientific research in this country, the extreme hostility to any foreigners coming in, and not just talking about like they're trying to increase deportations of people who are not here, who didn't come in legally, which that's a separate thing, but I mean, the extent to which people coming in from European countries have been significantly harassed at the border. There's a whole host of the approach to international relations that's changed in terms of threatening some of our closest allies, the tariffs that were imposed

quite capriciously and unjustifiably on Canada and Mexico, with which this same administration had negotiated and ratified a trade treaty with them just five years ago. So I think if we look at all of this in context,

The attacks on the rule of law, which I think, again, you can't put a GDP count on that, but if the rule of law and the fact that people can be confident historically that if you do things that are not harming other people in this country, you will be safe and allowed to prosper. That assumption is one of the structural strengths of the United States.

You add this up cumulatively, you can understand why people might be more concerned. And so is the market reaction purely on the tariffs or is it more on the realization that all these things are adding up and that there are sort of a potential serious cost? And I think that's kind of the big open question. Again, I don't think we've sort of crossed the point of no return by any means, but it's something I think to be very, very seriously concerned about in the question of cooked or not. And I think that's really the thing to be worried about here.

Matt, don't forget, they also tariffed the penguins. And then in addition to tariffing the penguins, we then saw Howard Lutnick go out and justify tariffing the penguins on the basis that maybe they would somehow get involved in rerouting trade from China or some other such place.

I have to say this whole story of tariffing the penguins and then claiming you had a rationale because you're worried the penguins will get into the transshipment business really doesn't inspire confidence in current trade policymaking out of the administration. Right, I mean, there's a decent chance they actually use, like,

a chatbot to come up with the, you know, the exact Terraform, because someone did a test, like, if you ask, like, the free version of ChatGBT or Cloud or whatever, like, how would you come up with it? They basically came up with exactly what they said, including, you know, based on, I think, internet domains as opposed to, you know, customs jurisdictions, hence, you know, the penguins.

So let's also keep in mind this is an administration that has canceled most of its paid subscriptions. So, you know, to major outlets. So presumably that is why they'd be using the free version of chat GPT rather than paying for at least something that might have calculated the formula correctly.

Yeah, if only we had a, you know, 03 mini, not a 40 doing our trade policy. But it feels like we have kind of two levels of questions. One is like, how weird can the next four years get?

And then, you know, to what extent is this reversible by a Democratic Congress two years from now or a new president four years from now? And maybe I'll throw this one to Peter because you were part of the like, let's make friends with our allies again team in the early years of the Biden administration. I don't know. What was that like experience like? And yeah.

And, you know, how do you how do you think that playbook would or wouldn't work if we've got four years of like an of a of an unreformed Trump coming down the pipeline?

Well, I should I should begin by saying, as I said at the beginning, I actually I do have a view that I think there are enduring long term American strikes. You know, we have a very entrepreneurial culture. We have a culture that, by and large, values education quite highly. We have a pretty hardworking, hardworking work ethic here.

even if the Trump administration is kind of cutting federal R&D spending and grants, there's a tremendous amount of private R&D in this country. So I actually do think we start with a number of very strong underlying kind of societal and business and commercial strengths. So the question is really, you know, against a bunch of these underlying societal strengths,

how much damage can things like the very chaotic tariff policy we are seeing do? And I kind of break that down into two different buckets. One is kind of economically, how much damage can it do? And here, I don't think we're at the end of the story. We're recording this on

Monday morning. Maybe there is still some sense in which the market reaction is still getting through to Trump and they will begin to change course. The other thing I keep in mind, particularly on the tariffs, and I've argued this for a couple of months now, I think this is all illegal. I think the statute that they are using for these tariffs simply doesn't authorize tariffs. We are, as of last week, now seeing litigation against

at these tariffs. And I think we are we are more likely than not above 50 percent scenario going to see the courts begin to curb some of these tariff powers. He's still going to have a lot of tariff power, even if the courts do curb them. But I think we are going to begin to see the courts insist on some rational order being brought to the the tariff agenda. But you actually asked me, OK, well, let's think about the global damage, like how

you know, because there's also a political, aside from the economic harm, there's also a geopolitical kind of set of actions here. It's really ticked off the Europeans. It's really ticked off the Japanese and the South Koreans. How does this impact our alliance structures? And here, I do think there's likely to be some durable damage to our alliance structures. I don't think...

that, you know, our Western European allies are going to pivot to China. You know, they understand that it is not in their economic or in kind of their social interest to fully join themselves at the hip to the Chinese. That would hurt their economy, too. I mean, they're going to need to raise some barriers of their own to China to prevent their own industries from being hit. But but I do think they are going to see us as Americans as less of a reliable ally.

going forward. That doesn't mean they won't cooperate. I mean, the analogy I've been using is I think that in four years, you know, post-Trump, whether it's another Republican, whether it's a Democratic candidate,

presidency coming in, I think a lot of our core allies are going to have a little bit of a view of, well, you just went through a divorce with us. Like we'd be happy to come up with a more amicable custody arrangement and see if we can kind of, you know, be on better terms at parties, but we're probably not going to move back in together. And I think that is going to be a sort of enduring hit.

hit to our alliance structures, though it does not mean that a future administration won't be able to get, you know, a good degree of cooperation on areas of mutual mutual interest. I would just add that this is happening at the exact same time, particularly with Europe, where we're on the purely on the foreign policy grounds, also doing a complete heel turn and essentially abandoning a lot of what they consider to be their core strategic interests.

So it's not just the, I mean, I agree that the economic approach also would be very offensive to them, but when paired with the approach to Ukraine and Russia and things, that whole, and the possible withdrawal of European, American commitments to NATO, and of course the threats to annex Denmark, excuse me, annex Greenland from Denmark, viewed collectively, I think also creates some of this long-term damage. And of course the damage to Canada too, which again, that relationship is something that has been historicized

historically very close for well you know 100 plus years and that seems to be uh very sustained severely damaged all right let's play our uh mark carney clip the canada the global economy is fundamentally different today than it was yesterday

The system of global trade anchored on the United States that Canada has relied on since the end of the Second World War, a system that, while not perfect, has helped to deliver prosperity for our country for decades, is over. Our old relationship of steadily deepening integration with the United States is over.

The 80-year period when the United States embraced the mantle of global economic leadership, when it forged alliances rooted in trust and mutual respect, and championed the free and open exchange of goods and services, is over. While this is a tragedy, it is also the new reality. We must respond with both purpose and force. Yeah, I mean, that seems like... Well, how do you guys read rhetoric like that?

Look, I think there is clearly both a tactical part of Mark Carney's comment that the relationship is over. And then there's also a strategic part to it. Right. Tactically, Carney is gearing up for. Well, it's not just gearing up is in the middle of a political campaign in Canada. And so there's a domestic political dynamic and he wants to send a signal domestically in Canada that,

that he is going to stand up to Trump and he's not going to take being frankly belittled the way I think Carney thought, uh, governor Trudeau was constantly belittled by Trump. So I think there is like a strong domestic, uh, political element of this. And he's also signaling to the Trump administration, uh,

Hey, guys, we are going to be prepared to push back. We're not just going to take this lying down. And while we would like to have a negotiated solution, it is, you know, we are going to stand up. So there's clearly a tactical piece of this politically and vis-a-vis Trump. But I also think there is a

Strategic, a deeper strategic point that he is beginning to make the case to Canada for that, hey, while the United States is very likely to remain our most important trading partner, while the United States is very likely to remain our most important security partner, while

We here in Canada do need to begin hedging our bets. We can't be dependent on the United States to the extent we have been over the last,

2025 or more years. And so I think he is kind of sending a message that not that we're going to cut everything off with the U.S. because he does want to get a deal, but that Canada is going to be, you know, for example, looking to increase its trading connectivity with Europe and not just rely on the U.S. market. That Canada probably,

uh, isn't going to be reflexively in favor of agreeing to many of America's asks when it comes to China. I mean, Canada is going to take its own interest with China. I don't think they want to be flooded by Chinese exports either, but you know, they might be looking for Chinese investment now all of a sudden, right? I mean, be in their interest if their trading relationship with the U S is weakened to sort of figure out where they can get some

I hope they don't go down that road, but I think Carney's beginning to figure out and beginning to signal he's got to figure out what their long-term economic interests look like in a world where they at least will see the U.S. as a less reliable partner.

takeaway is that's a long-term cost right that's a long-term cost to canadians the long-term cost to the us it's a long term i mean this sort of very standard textbook thing is you want to have the closest relationships with your immediate neighbors because distance is a is a challenge and so it's great that you have integrated manufacturing and finance and everything like detroit and windsor and toronto and all that and if if the conclusion is that it's better for canadians

that they think it's better to not do that, then that's, everyone's going to be worse off than the alternative scenario. Um, maybe this one's for Kevin. I'm curious for your take on whether or not China will play this well or play this poorly.

First of all, I think the context from the Chinese economic perspective, it's just that the Chinese economy still has a ton of its own problems that is still very much in the process of cleaning up right now. Whether it's the property bubble that has like maybe like fully inflated or started deflated, but it's still like in the process of being rescued or sorted out.

You know, it has a weak consumer economy that is trying to maybe re-stimulate. I think there are headlines coming out already of the stimulus measures, however you want to call it,

kind of sanctioned or ratified from the National People's Congress in March, now being accelerated from a deployment perspective, now that the tariff numbers from the U.S. and the Chinese side are both, you know, we know what the numbers are, at least. So there's a lot of things that China needs to do for itself in this very precarious situation. And I think there's always this reflexive tendency

narrative, right? Every time we think about whether the US is doing well or not doing well, we automatically think of will China immediately supplant that space and in that international space? I am personally very skeptical of any country being willing or able to fill the international space the United States has filled for the last 30, 40 years if the United States is quote unquote "cooked."

I think if there's anything that other countries have seen is that, you know, being the hegemon, being sort of the global power, superpower that does a lot of things can be a pretty thankless proposition. And if there's anything that the tariffs have really driven into for all countries is that retrenching to take care of your own national interests is kind of the fashionable thing to do right now. It's the in vogue thing to do right now.

it is very okay to have no hegemon for maybe the next 10 years. There's just no space to fill any international aid. Everybody takes care of themselves. Whether that's the economically optimal outcome, I think we all know what the answer is. That being said, politically speaking, that perhaps is the most preferable path to take for all countries' leadership, and that includes

China, you know, notwithstanding maybe there are a few anecdotal reasons or anecdotal evidence where China may be filling in, you know, spaces or programs where the USAID used to and no longer anymore. But I think from the Chinese perspective, they'll be very tactical about the way they fill those void or that vacuum and just let the rest of the world kind of order chips fall where they may if we are indeed entering this new world order or lack of order.

which I do think we are stepping into right now. I'm curious, would you make the fact that Xi Jinping appointed the, I guess, as the ambassador envoy to the European Union in Brussels, someone who had previously gotten a lot of trouble with Europeans for suggesting that the Baltic states didn't really have a legal right to exist. And

And it doesn't seem, I mean, it was interesting, one of which is you'd think this would be a great time for the Chinese government to try to improve the relationship with Europe relative, you know, given what the U.S. is doing. And yet, you know, what do you think was kind of the rationale for that? First of all, I think the Chinese foreign, Chinese, a lot of foreign policy making, we give them a lot more credit for what they deserve, as in like they figured this all out. This is part of a

20, 30 year plan. And they're just like step three of that plan. And they're executing, you know, masterfully. I think that's one spectrum of the narrative that often gets pushed out there. And I think it's just completely misinformed. Right. And a lot of this has to do. I mean, every foreign policy doesn't matter what kind of political system you're in, has a domestic mirror to it as well. Right. I think being strong,

Being very pro-China right now is still something that has a lot of room to play from a foreign policy perspective. We should be very careful about over-interpreting the strategicness of a lot of these moves. There could be some really random internal political dealings where the guy is up for something, and this is the thing that is available to this person. And regardless of what he used to have said, that may have not played into a grander strategic

preference from our perspective here in the United States. I think that the EU-China relationship is probably the most interesting and the most dynamic one to watch. And I don't think there is a very obvious trajectory there as in

because the transatlantic alliance has fallen apart, that there will all of a sudden be a Eurasian alliance, you know, on that part of the landmass, just because again, we're in this sort of era of we're just all going to look out for ourselves for the most part is what I think the other thing that it's worth recalling is that like, China also has a recent history of really bungling

sort of major policy tests with the COVID lockdowns. And as unstable as America's regime seems today, that is the dog that will bite at some point. And, you know, we're we're

you know like he's getting older he's a big guy smoker and there's no plan yet and the kind of the the downside risk of whatever that ends up manifesting as i think is something that you forget when you kind of just see china as this like ocean of stability the ccp track record for um

power transitions is not a particularly excellent one. And, you know, sooner or later, we're going to be witnessing that system try to work itself around it, which could have some really downside risks, which, you know, for all the jokes about Trump's third term, I don't think we're going to go that far. Another thing I keep in mind on our underlying strengths is, you know, it's sort of easy right now as we see all the market turmoil and the really chaotic tariffs for us to

dunk on all of Trump's policies. And I think the trade policy is clearly a policy that is not going to play well, either in the near term or in the long term. Although I also think that there is a kind of smarter way of redoing American trade policy. I mean, Matt has done some writing on this over the years. I think there's a smarter way of

of redoing American trade policy that would actually be good for the United States in a less chaotic way. But the other thing I keep in mind is, well, sort of right now we are kind of maximally chaotic Trump policy. There probably are some policies that Trump is going to enact and that Republicans in Congress are going to enact that will play to American policy.

strength and will actually benefit American strength. I do actually somebody who served in the Biden administration, and there's been a fair amount of criticism of our ability in the Biden administration to actually get things built over the last four years. And while some of that criticism, I think, is overdone, I also do as a takeaway from my time in the administration think there is some merit there.

to the idea we need a bit of a deregulatory agenda to actually be building more here in the United States. And I think that, you know, if Trump is successful in reducing at both a federal and a state local level, some of the barriers to physical construction, whether it is manufacturing facilities or whether it is physical infrastructure, that would be a good thing, right? I do think that would be a good thing. I also think,

while I am skeptical of tax cuts that skew heavily towards the wealthy in this country, I do think that some stability to our tax regime could be useful. We obviously have to do something on that this year. So while we are kind of, I have been quite critical of Trump's trade policy and of other aspects of his policy, including the approach they're taking on Ukraine, I do also think we are going to see, you know, potentially some, you know,

more valuable policies come out over the next over the next couple of months. Yeah, I guess the question then is like, given the tariff rollout and Laura Loomer being able to fire people like you do need staff work to make legislation and executive orders and regulations. And if we are just going full policy lobotomy for the next four years, like

does that mean that even the sort of like you know net positive for national flourishing type stuff that is in you know the Trump basket is just not going to be able to flourish setting aside the fact that like

you know, 2016 to 2019, there were sort of no crises. And then 2020 COVID, all things considered, I think we're going to give Trump like a B plus, maybe five years later, we're forgetting about the, you know, Drano and whatever. But if this is what we're doing in like a non-crisis moment, like four years is a long enough time for some

events to happen and the kind of ability of this administration to navigate and respond to external shocks, much less kind of like self-driven ones is something that I've kind of updated very much down to based on the past few weeks. Yeah. I mean, the thing I,

kind of want to maybe move or expand beyond the, the, the Loomer thing in particular, which I know you talked about in the previous episode. So I'm not gonna, and I feel like everybody has caught on to the drama at this point. So I'm not, and I don't really feel like belaboring the details to be honest, is that it actually goes back to what Matt said a little bit earlier, which I think is at least one of my personal indicators of the cooked or not cooked, uh,

Chasm is the arbitrariness of how we conduct our civic life, right? I think one of the most enduring strength of the American system is not just rule of law overall, but specifically due process, in my opinion, the fact that any decision, big or small,

has a process that is kind of impersonal, that is apolitical for the most part, you know, whether it's getting your social security check, whether it's getting your DMV driver's license renewed, which is inefficient, but at least they treat everybody literally the same.

to the other extreme of the arbitrariness of what can influence the firing and the hiring of very important people in our government. Now, you know, I've served as a political appointee. You know, Peter, I know you have. Yeah, we serve at the pleasure of the president, right? We get fired. It's not a big deal, right? But civic servants are different for very specific reasons.

And if there are institutions that used to really carry the mantle of due process in particular, that is being systematically diminished. That to me is more on the cook side of things than the not cook side. And I think what Laura Loomer has illuminated

as a, you know, circumvention of the process or due process is I think what is most troubling to me, not specific to who got fired or not fired, which I just don't have a personal read on. But that to me is the biggest warning sign.

And it's also very consistent with the way they've been rounding up people who are either in this country legally or maybe not necessarily, and then immediately sending them off to places like El Salvador before they can even prove, right. You can do that to a US citizen. And if you do it that quickly, you can't prove you're a citizen either. Right. So that, that's, you know.

Yeah. And, you know, they're like anecdotal evidence around me now of people who are just like they have to carry extra documents, even though they are perfectly good American citizens going on a cruise somewhere else. And they're like, well, I don't look the way that people may want me to look. I'm going to bring some extra documents just to make sure I can get back into my own country. Right. So on the very kind of ordinary people level, the lack of due process has seeped in.

i also think of the the layoffs i mean let's put aside uh put aside for a moment um

sort of how the recent NSC layoffs happen. But let's look at the kind of layoffs of career, career staff across the agencies. I think that is actually going to impact adversely the ability of the Trump administration to to to pursue goals that many of us on this podcast and listening to this podcast would actually agree with. I mean, I a couple of weeks ago, BIS Undersecretary Kessler, the guy at the Commerce Department who oversees

The export controls file was at a conference and he talked about how he wanted to ramp up export controls enforcement on China, which is something I at least would like to see more of. I think it'd be useful to ramp up export controls enforcement on China.

On the other hand, Doge has now laid off a large number of BIS export control staff. And it's very hard for me just as a simple minded American to understand how if you're laying off most of the staff, you also expect to ramp up enforcement. And so I think even not only are we going to see in some ways more important adverse impacts are

the impacts we're going to see on, you know, Americans who thought they would be entitled to some procedural rights who are not going to be entitled or going to find they don't have those procedural rights. I even think, you know, the Trump administration itself is going to find barriers to pursuing even broadly supported goals because it's not going to have the staff to do them. Matt, you got any leading economic indicators for us? Well, I mean, I guess the most leading one, right, is asset prices. Yeah.

But I mean, just reflecting, you know, there's both the, you know, the mirror and or camera and engine, I think is the phrase that academics like. So on the one hand, it's telling you that people are obviously less optimistic about outlook for various reasons and more uncertain about the outlook. And also the extent that, and this is something I'm less sure of, but I mean, the extent that

high and rising stock prices had been a support both to consumer spending and also to business investment. So if companies have a higher stock price, they feel more comfortable about hiring people and doing CapEx and all that stuff, and they're going to be less comfortable doing those things. And that's going to have real economic effects that could be self-reinforcing. They said that consumers, which again, I'm not sure how much of a

impact this is, but they're looking at their asset portfolios and saying, I'm doing well. I can afford to spend more out of my income. That's going to be less of a thing. It's always, of course, going to be fun when, I mean, we have a tax taxes due next week. And for people who do quarterly estimated payments, you have to buy the picture, whether you did a quarter less payments or not, you're writing a big check. And of course that's based on what you had last year. So, but you have to pay it out of what you have now. So that's going to be not pleasant for a lot of people.

You know, the hard data we've had on things like inflation and unemployment and stuff have been fine. But that stuff is all out of date. I mean, the most recent thing we had was employment data, which was as of mid-March. And that was fine. I mean, it was actually in some ways pretty good. But again, like, a lot's happened since mid-March. Most of the other data we have is from February. So...

Kind of hard to say. The survey data are quite pessimistic. Even then, there's like a range of something. Some surveys look worse than others. So, you know, you can certainly cherry pick to find things that look really bad. But it's hard to say what exactly this is going to the economic impact is going to be like as of now. Seems bad. But, you know, this is anecdotal. And like, well, it's easy to say that if like stocks are down, you know, 15 percent in three days. Peter, do you have a nuclearization take for us?

So I do think that the withdrawal. Well, I do think the perceived lack of reliability of the U.S. as a security partner is going to encourage a number of U.S. allies and partners to withdraw.

take steps of their own to increase their own self-defense capability across a number of different vectors. So we are already seeing, we've seen in the last couple of weeks, we've seen a couple of Eastern European Baltic nations begin to move towards withdrawing from the treaty that bans landmines, right? They are clearly sending a signal that they think in light of the Russian aggression and America's

potential pivot on Ukraine here. They need more defensive weapons, including ones that have historically been criticized, notably landmines. So I think we are already seeing evidence of countries revisiting aspects of their defense posture in light of these new geopolitical realities. I think it would be quite

rational for a country like Japan or South Korea to begin quietly thinking about what it would look like to develop an independent nuclear capability as a deterrent against Chinese or Russian aggression. I don't know if or when they will take that step, but I think it would be

rational for them to begin to think so. Similar, I think you're going to see a nuclear debate in Europe. I think it's going to begin quietly, but not pick up steam. I mean, already we are already seeing it. I think there's a question there about, you know, is the issue going to be expand sort of developing an independent British and French nuclear, you know, adequate nuclear umbrella that gets extended across Europe? Or does

Germany need its own independent nuclear capability. But I think, as you say, Matt, we are already seeing that debate. And whether they'll go nuclear in the next four years, I don't know. I don't know. But I think we're going to see progress towards nuclear capabilities in Europe. To come back to the economic indicators, one thing that at least perplexed me or something that is, again, on my own cook-not-cook indicator now is the value of the dollar, something that...

the post-liberation days, the value of dollar actually gone down. Not a whole lot, but it did go down, right? Which is kind of antithetical to the theoretical best case outcome of all of this policy, which is that, you know, trade bear will go up, but the dollar will also go up vis-a-vis other currencies that will shield some of the erosional purchasing power of American consumers. It also still puts us in a decently good situation as a government to refinance our debt to lower rates, which reduce the deficit, blah, blah, blah, blah, blah, blah, blah.

and that did not happen, at least not yet. And I'm curious to get your take on what do you think of that reaction of the value of the dollar? I have my own little takes on it too, but I want to get your thoughts on that. Yeah. Well, first of all, you're right. That is something that was unusual and different from what a lot of people had anticipated. And one of the things that the Trump administration officials had said before tariffs is, well, it won't be as inflationary as you think because

the currency will absorb some of it. And if you look, in fact, at what happened back in 2018, 2019, when they did tariffs, the dollar went up to offset some of the impact. You look at what happened earlier this year when they announced tariffs on Canada and Mexico, the dollar appreciated, and China, against the Canadian dollar and the peso and the yuan. And so that seemed to hold. And the rationale, the sort of textbook reasoning is that

If you put on a tariff, then investments in the United States become relatively more attractive for selling to the US market compared to investments outside the United States. And that's going to create a financial inflow into the United States that pushes up the dollar. That's how it's supposed to be.

And yet that's not what happened this time, right? Even with very large tariffs, which you think, oh, if you were to start naively look and say we're suddenly increasing our overall tariff rate from, you know, two-ish to 25-ish, which is basically what people are saying has happened, you know, you think that would make investment in the United States much more attractive. So you have big financial inflows in dollar, and yet dollar went down. So I think that's sort of consistent, you know, if we're thinking about Cook, right, or Cook-ing,

Clearly, whatever attractiveness, theoretically, of the United States from these trade barriers has been offset by something else. And I think there are a lot of things we can point to. We've talked about them. I mean, one of these sort of obvious ones is if the tariffs are not actually going to be permanent, right?

I mean, I'm not saying they should be permanent, but like if you think that they're not permanent, you're not sure what the level is actually going to end up being. Why would you make that kind of commitment to an investment? I mean, you could, there are arguments for tariffs and you could, there are arguments for saying protectionism could boost investment in states. I'm not saying we can talk about like the relative costs and benefits, but like,

I think everyone would agree that it depends on actually committing to sticking to the course on it. And if it's, if it has this level of uncertainty, that in and of itself is going to be very destructive to investment on top of the fact that tariffs themselves are going to be negative for a lot of existing investments. And so I think that is a big part of it. I mean, there's a,

Something that happened back in the UK in the fall of 2022, I think is instructed. There was a very different set of policies, but basically you had the very short-lived Liz Truss administration or premiership, I guess they would call it, and that they came up with what was called a mini budget. I don't know why they called it a mini budget, but basically they had a

bunch of big changes to taxes and spending and people thought it was kind of nuts. And part of the thing that they thought was nuts about it was that they bypassed the normal procedures established in the UK for presenting a budget. They have this office for budget responsibility that's supposed to put out an independent forecast. They basically kind of ignored all that.

And what happened was, in part for other reasons, but one of the things that happened was you had this big spike in British interest rates. Partly, as a lot of things going on, and also despite the fact that interest rates went up, you also had sterling go down. And so people were like, this is like an emerging market currency crisis going on here. And someone came up with a good phrase of, it's not about the inflation outlook or the deficit outlook, it's really about the moron risk premium. Where it's like, these are the people you have in charge here.

And I think there's a I think you could plausibly say something like that might have been happening here to an extent. Right. And I think, you know, we can think about why that would be the case. And so, you know, should is it all going to go down a lot from here? I have no idea. Right. But the fact that didn't go up is, I think, already indicative of something having happened.

Yeah, the whole America with like emerging market economy level policymaking, I think, is maybe the closest, you know, maybe the most succinct way to kind of tie all this together. But the problem is, like, we haven't had a lot of global hegemons who like.

went from being functional to being deeply dysfunctional. I mean, the trade policy, it is really striking to me, right? Because if, if the Trump administration had come out and said, uh, you know, a couple of weeks ago or a month ago, I actually, at the beginning, let's put aside the Canada, the Canada, Mexico chaos before all of that had come out and said, look, we are going to, uh, over the next six to 12 months, uh,

launch some investigations that will give us authorities to, you know, increase tariffs on Europe unless it gives our big tech firms better market access and, you know, brings down its car tariffs and things. And if the Trump administration has said, we're going to, you know, focus on some tariffs to, you know, re-onshore some sectors we really care about, you would have seen a lot of like e-commerce

economic kind of, you know, economists would have a lot of debate on pros and cons of this. This is good and cost, but you would, you would have seen an orderly process that would have at least had a decent shot of achieving some policy success. And even if

there might have been economic costs, you wouldn't have seen the kind of wild market reactions we are seeing. But for whatever, it's just not the approach they seem to want to take, right? They seem to want to take a, you know, kind of turn the world on its head overnight kind of approach and deal with the market reactions. And what I have been really struck by is

the rhetoric over the last, you know, kind of a couple of days or week about how this is, you know, medicine the American economy needs to adjust to. I would say, you know, historically when you see political leaders talking about medicine that an economy needs to adjust to, it's when, you know, there is some massive debt crisis or some, you know, the economy is in free fall and you have to make tough choices to turn it around. You rarely see politicians

political leaders talking about shock therapy for an economy that actually is growing reasonably strongly. You see gradual adjustments. So this has just been a kind of historically unprecedented approach to policymaking. That's true, although I think that some people in the administration actually legitimately do believe that there was either

a crisis already or an imminent one. So whether or not you or I think that, I think that that actually might be potentially informing that. But of course, you're right. There's this sort of Earth 2 possibility of what if you had a very sane, rational, logical approach that was very different from the actual one for thinking about restructuring trade relationships. But again, that's not the world we're actually in. Any closing thoughts? Not cooked.

I agree. We're not cooked. I'm going to be bullish. We're going to get through this. We're not done yet. You know, I will say here's an optimistic take. I saw someone else say this, so I have to give credit. I don't know who it was. But for all the things that we're doing to our international relationships and everything else, you know, if the U.S. is able to become friends with Vietnam by the 1990s, maybe, you know, it'll take a while. We can be friendly with Canada again.

All right. We'll find a Canadian song to take us out on, an olive leaf to our friends from the north. Peter, Kevin, Matt, thanks so much for being a part of China Talks. Thank you. Good to see everybody. Thanks for having me. You take me like a butterfly

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