Trump’s MAGA Policies of Wealth Destruction

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Originally posted by MN Gordon at Economic Prism:

“Practical men who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist. Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back.”

– John Maynard Keynes, The General Theory of Employment, Interest and Money (1936)

Practical Objectives

Is President Donald J. Trump a practical man? Is he a madman?

Does he hear voices in the air?

We’ll leave the answers to these questions to you. Certainly, Trump’s the slave of destructive decisions from the past. Many of these decisions were guided by dead economists.

For example, decisions made a century ago, such as the passage of the Federal Reserve Act of 1913 and FDR’s seizure of the private gold holdings of American citizens in 1933, are forcing Trump’s plans. Today, for fun and for free, we seek to better understand the great calamity he’s dealing with.

To begin, Trump’s tariff policies are intended to reroute the origins of production and the flows of global trade. Specifically, he wants to relocate the production of imported goods from foreign factories to domestic factories. The purpose is to revitalize American manufacturing and create new blue-collar jobs.

This sounds like a practical objective. Without question, America’s consumer economy has not been working for working Americans. Over the last 50 years, workers outside of professional services or without a technical trade have been left behind.

The reasons, however, are complex. Chaotically applying tariffs may not achieve the intended objective. And even if it does, this will take decades – not years – to accomplish. In the meantime, there will be chaos in America and across the globe.

If you recall, the reason America’s manufacturing base has been hollowed out over the last five decades is because foreign competitors could produce the same goods at a fraction of the cost. Approximately 32 percent of the nation’s total employment was in manufacturing in 1953. Today, it’s about 8.5 percent.

 

Consumption and Production

The gaping trade imbalance that has developed over the last 50 years is a function of fiat money and credit. In fact, Nixon closed the gold window in 1971 to break the natural relationship between money, credit, and international trade.

When international trade conforms to a gold standard there are natural limitations to trade imbalances. If one country consumes more than it produces it eventually runs out of money.

As its money disappears, its labor becomes cheaper. Then, with hard work and ingenuity, it can produce its own goods for less than it costs to import them. It may also be able to export its goods to other countries and run a positive balance of trade.

In addition, when the supply of money is anchored to gold, which cannot be created at whim, interest rates will naturally rise and fall as they adjust to the inflows and outflows of free market trade. This, in effect, self-regulates the capacity for overconsumption and overproduction.

In the late 19th century and into the early 20th century, it was America that had cheap labor and an emerging economy. As its population moved from the farms to the cities, manufacturing and industrial production boomed. America’s capacity to make and export goods dramatically increased its wealth.

Then, at the close of WWII, America was the only advanced economy whose industrial base remained intact. This advantage allowed it to operate for several decades with little competition.

As wealth continued to flow to America, wages increased, and workers became accustomed to overconsuming. They thought wealth and abundance was an American birthright. They joined labor unions and demanded wages over and above what their skills warranted.

However, by this time the money had become phony. Overspending by the federal government on guns and butter in the 1960s produced the runaway consumer price inflation of the 1970s. The U.S. had also started running consistent trade deficits; meaning, it was consuming more than it was producing with the difference being made up with debt.

 

Dollar Demand and Runaway Debt

Under the Bretton Woods agreement of 1944, U.S. dollars acquired by foreign governments through trade were convertible to gold at a rate of $35 per ounce. Because America was now consuming more than it was producing, foreign governments were converting their excess dollars into gold.

In 1971, Nixon had seen enough of America’s gold stock leave its shores. But instead of forcing Americans to tighten their belts and work for lower wages, he changed the rules of the game. On October 15, 1971, he ended the convertibility of the U.S. dollar to gold. From this point on debts and deficits have run unabated.

Another factor driving America’s runaway debt is the U.S. dollar’s function as the reserve currency for international trade. Henry Kissinger further cemented this with his petrodollar agreement with King Faisal bin Abdul Aziz at the end of the Arab-Israeli War of 1973.

The agreement required all oil transactions be conducted using U.S. dollars. By binding the dollar to the world’s most valuable resource, and creating a massive and continuing demand for dollars, the dollar’s value was boosted on the foreign exchange market.

Then as the economies of the China and the Far East opened for business at the end of the 20th century, U.S. debts and deficits jumped off the charts. Free from the constraints of gold, but with oil trade backing its value, credit in dollars could be created without limits.

Whenever American consumers or the U.S. government were running low on cash, new credit was extended. But as credit increases, its flipside, debt, also increases. Currently, the total of all debt (government, business, and consumer) in the U.S. is over $102 trillion. And much of this debt is used to consume foreign made goods.

For example, in the early 1970s, U.S. trade was balanced. But once it slipped into deficit it could not be reversed. In 2024, the U.S. exported $3.19 trillion in goods and services. Yet it imported $4.11 trillion in goods and services. This resulted in a trade deficit for the year of $918.4 billion.

 

Trump’s MAGA Policies of Wealth Destruction

Over the decades, America has transformed from a nation of savers into a nation of debtors. Over this time, as its manufacturing base was hollowed out and sent offshore, many of its cities were neglected and have fallen into decay.

The federal government also squandered the advantages of possessing the reserve currency by engaging in unnecessary foreign wars and intervening in foreign politics. Then, in February 2022 following Russia’s invasion of Ukraine, the U.S. and the European Union froze Russian central bank funds.

This signaled to the world that the U.S. and the EU could not be trusted to honor their debts. Moreover, it accelerated the efforts by the BRIC nations – Brazil, Russia, India, and China, among others – to conduct international trade outside of U.S. dollars.

As these efforts to move away from the U.S. dollar increase, the dollar’s value will decline relative to other currencies and all currencies will decline relative to gold. This will make imported goods more expensive for Americans and will drive consumer price inflation higher. But it should also make American exports cheaper.

This all seems to align with Trump’s plan to return manufacturing jobs to the USA. The question, however, that will not be answered for many years to come is the following:

Are Americans up to the task of working more for less and chipping away at the nation’s debts?

All bets are off. The country has dug itself into a gigantic hole over the last 50 years. It will take decades of hard work, ingenuity, and concerted determination to revitalize America’s industrial base.

Trump appears to understand the unfavorable realities of America’s debt problem better than past presidents. He’s also the first president to attempt to tackle the problem head on.

But instead of focusing on a return to sound money, Trump’s determined to MAGA through bending the will of international trade to his liking via tariffs. Alas, his tariff policies are policies of wealth destruction.