Transcript: "Trump's Trade Roadmap: From Hidden Plan to Radical Reality"

The text below is a transcript of the audio from Episode 46 of Onward, "Trump's Trade Roadmap: From Hidden Plan to Radical Reality".

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Cardiff Garcia: Hello and welcome to Onward the Fundrise podcast. I'm Cardiff Garcia. I'm here with Fundrise, CEO, Ben Miller. Ben, how are you man? We're back.

Ben Miller: Oh yes, we are Cardiff and there's a lot to talk about.

Cardiff Garcia: Is there really, you don't say, we gotta tell people, Ben, that we are recording not just on Thursday, April 17th, 2025. It's three 12 in the afternoon. I think it's important to be

specific about this.

Who knows what just happened? You just check the Wall Street Journal to make sure there were no updates right before we started, and I think that was good of you. That's really important.

Ben Miller: 12 Eastern.

Cardiff Garcia: As precise as possible. Let's do disclaimers and then let's get on with the show.

Ben Miller: Before we get started, I wanna remind you that this podcast is not investment advice. It's intended for informational and entertainment purposes only. I.

Cardiff Garcia: Perfect. And this is the we back because everything is falling apart. So let's go through it. Episode. I think you have a really interesting idea for what to discuss today. You wanna share with our listeners what we're gonna do.

Ben Miller: To me it was mind blowing, but I learned probably after you did it 'cause you're more in the know than me on this stuff, was that Steve Moran, who is the chairman of the council, economic advisors for the president, wrote a roadmap of how to restructure global trade. He wrote it and published it in November, 2024.

And I read that document and my God does it track what they have tried to do.

Cardiff Garcia: It's called literally a User's Guide to Restructuring the Global Trading System written in November 20, 24. Little did we know that the user that would be implementing the user's guide is literally Donald Trump. It's the Trump administration, and that is what they're doing. If you read through the paper, and you and I are now gonna discuss it, but if our listeners read through the paper, they'll see a lot of similarities between what's been attempted by the Trump administration in the last few weeks in terms of their tariff policies and what's in that paper.

However we should note what's really interesting is the predictions made by Steven Moran about what would happen in response to the implementation of this policy. And there there's a few discrepancies, I think it's fair to say. So we're gonna talk first about what's in the paper. What it said was a good way to go about implementing tariffs and the rationale behind it, and then what actually happened and its consequences.

So we're ready. Where do you wanna start? Do you wanna start by sharing what's in the paper in terms of like what specifically Stephen Moran thought was a good idea?

Ben Miller: The idea is if you realize that there was this document they're working off, if you'd wanna know what the document said they were gonna do, because I think they're not done doing it. And there's a few things in the document they talk about wanting to do that might still happen. And then I think you and I should also do some scenarios of how they might play out.

'cause I love doing scenario planning with you. I prepared to do three scenarios. So we'll sort of walk through what I'm calling Trump's roadmap and then we can do the scenarios, how we think it plays out. So, wow. I don't wanna bore people about this paper. It was 41 pages. It took me a while to get through.

It has a bunch of premises that I think are really interesting. The goals of rebuilding US manufacturing is a shared goal with Biden, but with a very different approach.

Cardiff Garcia: Radically different approach. That's actually a good place to start, which is what is the rationale behind this policy in the first place? And what Moran says is that essentially the US dollar has been persistently overvalued for a very long time, for decades. And the reason is that other countries have taken steps to undervalue their own currencies.

And this has had some trade-offs in terms of the problems that you just mentioned for manufacturing. It's had some benefits too. So maybe that's where we should start, which is sort of moran's slash trump's view of the world and what's happening right now.

Ben Miller: It's funny because most people have argued for 50 years that having the reserve currency is an exorbitant privilege. It's an asset. But here recently, they've reframed it as a liability and they say, because we have the reserve currency, other countries have to hold our currency. And as a result, it gets overvalued.

And that's bad for our exports. Our exports are not as competitive if our dollar is overvalued. And so they go about in this document explaining how they're going to try to level the playing field,

Cardiff Garcia: In other words, over time to gradually revalue the dollar so that American exports and specifically American manufacturing exports are more competitive with the rest of the world. And essentially what Moran sees as other countries undervaluing their currencies artificially. This is our attempt to issue a countervailing strategy to offset that.

Ben Miller: and that was to raise tariffs and thereby in their view, make it more fair for Americans.

Cardiff Garcia: That tariff policy effectively would be used for a few different things. One is, again, to make our. Products more competitive elsewhere, but also to be used as negotiating leverage. And I think what's interesting about this paper is that all throughout Moran tries to tie it to other things. He ties it to defense policy, where effectively he says, the US has been providing this public good for the rest of the world, where we've been defending Europe, Japan, and other parts of the world.

Essentially not for free, but basically for free. We've been giving it away and tariffs can raise revenues and in some senses offset the cost of providing that global public good. And it can be used as a negotiating strategy specifically against China, which is a focus of this paper. And which has also obviously been a focus of, I don't know the last, how many presidential administrations as well.

Not just Trump now, but the prior Trump admin, Biden, even Obama, that has been a part of it. So that is part of the goal. And in terms of the implementation, we should note it's a little different from the way they did it.

Ben Miller: Yeah, there seems to be two main problems with the paper. One is that some of the premises I disagree with. And then second, some of the predictions turned out to be very wrong. So the way I approached analyzing it was to look at the premises and walk through the premises, I think seemed to be incorrect.

And then we can talk about the predictions of how they thought their policy would play out and how that has been largely incorrect as well. So far

Cardiff Garcia: Yeah, let's do it. Let's go through the premises. Rapid fire edition almost. Go for it.

Ben Miller: the argument that the dollar has been strong because it's a global reserve asset is spotty in terms of the history. The dollar has traded within a large range. When I look at that range of when it's been strong, when it's been weak, it seemed to me very, very highly correlated with the performance of the US economy and the US stock market.

Cardiff Garcia: Yeah, and especially the outperformance of the economy relative to other economies throughout the world.

Ben Miller: Yes. And so you look at from 2010 to 2025, and it's been rallying, the dollar's been appreciating for that 15 year period. I look at that and say, well, during those 15 years, the US really outperformed the world. We had Mag seven fang and the foreign investors were pouring money into the US economy 'cause of the exceptional performance of US businesses.

Only a year ago there was this argument, US is the only game in town. And also you go look at when the US dollar collapsed, it collapsed from 2000 to 2004. It fell 30% from 2000, 2004. And again, that's when you saw the internet bubble collapse and the decline of the US stock market. So it seems to me it's much more correlated with performance of US assets than it is with the reserve currency argument.

Cardiff Garcia: There's a famous cover of The Economist magazine from last year, I think it was only somewhere four or five, six months ago that had the US on the cover. And it said The envy of the world in reference to the US economy because of how extensively it had outperformed all other advanced economies in the world, and especially given the renewed weakness in the Chinese economy last year.

So that speaks to your point that a lot of the reason behind the dollar strength. Simply had to do with the fact that the US was doing better than everywhere else. And so I think that somewhat gives a lie to the idea that Iran was saying that it's just because other countries crave the asset. There's something to that, but it's not as simple as that.

I think it's a little bit more complicated, and that outperformance certainly had a big role to play.

Ben Miller: We'll come back to this idea that people have to hold the dollar 'cause you're seeing that prediction not play out. Another one is that the US provides this global reserve currency. Benefit, which facilitates trade and stability to the world, and we provide it essentially for free. That's not true in particular, if you look at it from a almost pure quantitative point of view, there's about $10 trillion of foreign reserves and foreign holdings of US treasuries.

So if you think about it, approximately $10 trillion held by foreigners, and we tax them every year with inflation. When we print more dollars, that makes the dollars that foreigners hold worth less. So they pay an inflation tax when they hold dollars, and the US government prints money that has ranged as low as 2% a year, which is about $200 billion a year to as high as 20% during the inflation spike, which is 2 trillion, the foreign holdings of US dollar assets does result in a fairly large indirect payment.

To the US Treasury through an inflation adjustment.

Cardiff Garcia: The other point to make about. At that is that the dollar being persistently overvalued also means that people's standard of living inside the US is a little higher because they can afford more foreign goods. I mean, that is just a straightforward point to make. Simultaneously, if we're just going by advantages and disadvantages in a simple roster, it gives the US authorities the ability to sanction other countries.

And so in some sense, when other countries pursue a strategy where they have to hold US dollar assets, they are also strategically making themselves more vulnerable to, I don't wanna say the whims of US authorities, but the potency, the power of the US authorities to issue sanctions that are actually gonna be effective because so many transactions throughout the world are done in US dollars.

To your point, not totally free.

Ben Miller: There's another argument in the document, which is that trade deficits are bad. I feel like it implies that trade deficits cause budget deficits, but in reality, budget deficits, federal budget deficits cause trade deficits. Because when you have to borrow more money to finance the government, it raises interest rates.

If the US has a higher interest rate, more attractive to foreigners. And so what ends up happening is that the budget deficit actually drives the trade deficit because it attracts more foreign investment into treasuries.

Cardiff Garcia: On the trade deficit is bad or good issue. I think this more exists on like a spectrum of trade-offs. This is one where I can understand if the trade deficit gets really, really big, that effectively what that means is that we lose a little bit of control over monetary policy. And the rationale, and we saw this before the 2008 crisis, is that because there's such a demand for treasuries, it can lower their interest rates, you know, on the long end at least.

And so what that ends up doing is that the Fed, which controls directly short term rates. We'll control those rates, but then the long end won't respond the way the Fed might want. And you don't lose total control over monetary policy. There's the expectations channel and all that stuff, but it does make it a little bit harder to conduct that policy.

I can understand why there are trade offs there, but it doesn't automatically mean that everything about a large trade deficit is bad. Again, trade-offs, and it's important to understand them. It's not quite as black and white as I thought Stephen Moran did portray it in the piece.

Ben Miller: I guess I'm interjecting a little bit of opinion here, but if you wanted to pursue a policy to balance your trade deficits, I think it's would be very important to first balance your budget deficit. It's hard to control your. Trade deficit if you are a forced borrower at the federal level. 'cause you have a huge amount of federal debt and a huge amount of federal ongoing deficit.

One of the things that made their predictions incorrect was that the size of the deficit and the size of the federal debt made it more difficult for them to effectuate their tariff policy

Cardiff Garcia: So those are the premises.

Ben Miller: premises seem to be wrong or strangely reasoned. And then some of the predictions. Okay, here we go. Maybe you wanna go, 'cause we probably

have a bunch of the predictions that what they said they thought would happen with the policy and then what ended up happening.

Cardiff Garcia: The first is, I should note that Moran did call for only a gradual implementation of tariffs. He made the point, for example, that if you put in place a scheduled rise, gradual rise in tariffs on China, that that gives you sort of constant negotiating leverage against China and also it, it establishes a certain amount of predictability for investors and for companies, businesses all throughout the country.

We didn't do any of that. We just jacked up tariffs to extraordinarily high levels on China. I think the last I checked it was at a hundred and. 30 or 40 something percent, which is outrageously high if there ends up being no walk back. And it happened quite suddenly. Moran had this interesting Juujitsu move

where he said that first the dollar would be slightly overvalued or increase in value because of the tariffs, which is what you would normally expect.

And that over time, only over time would there be a gradual weakening in the dollar as things started to even out. In other words, as tariffs did their work and manufacturing came back and we stopped importing quite as much stuff from around the world. Then the dollar might gradually get to where it should be.

Well, none of that happened. Instead, what happened was that there was an extremely sudden aggressive spiky decline in the dollar against the rest of the world, and it happened at the same time. That yields on the long end. Were going up. This is sort of the worst of all worlds because the weaker dollar means you're gonna have inflationary pressures, and the higher rates means that there's gonna be a anti stimulating impulse on the US economy.

That was just one massive, massive failed prediction. What do you think?

Ben Miller: They based a lot of their thinking on what happened as a result of the 2019 tariffs. Trump negotiated a tariff on China called the phase one agreement, and the result of that was that the dollar appreciated and there was very little inflation impact on the US As a result of these tariffs on China, I think we're about 25%, and so their takeaway was.

Oh, you can put tariffs on China and between the Chinese companies absorbing some of the cost of it and the rising dollar, the impact on American consumers will be muted or limited. And so that's what they extrapolated forward. And what ended up happening so far is the opposite, the dollar depreciated, and there were tariffs, so you ended up with a double whammy on inflation.

Cardiff Garcia: That's exactly right. And part of this was also meant to be that because you'd have this gradual system in place, that other countries would then take the hint and stop undervaluing their currencies. And so you'd get the immediate rise in the dollar. But then over time, I. It would then weaken to where it should be, to what the sort of global marketplace dictates it should be.

That is just not happening. Instead, it got front run. The other thing is the entire aim of this policy is to rejuvenate US manufacturing well, what have we seen since the tariffs were announced? Absolute bloodletting in the American manufacturing sector, industrial production has taken a massive hit. And if you look at surveys of manufacturing companies, they are suffering mightily.

This is doing the exact opposite of what it was hoped for, and it's easy to see why this policy has been implemented, which is radical uncertainty. The tariffs implemented were super high, and the falling dollar on top of the tariffs now make it so that companies that need to import a lot of intermediate products are really struggling to do that.

It makes it so that their entire business becomes uneconomical. And a lot of companies, by the way, they use Chinese factories or factories overseas to make most of the products, which they then import to sell to American customers. Well, that's no longer economical. And so the people who were based here, employed here, they're gonna lose their jobs.

This has been so far a total catastrophe for American manufacturing. Not exactly what was supposed to happen.

Ben Miller: I've read that trucking and global freight has both fallen 50%. That's sort of a sign that there's a lot less manufacturing and trade. The other thing that's strange about the policy is that if you wanted to increase exports, you would necessarily want to exempt exports from import tax. About 25 to 30% of all of the inputs into manufacturing.

A US export is an import. So if you make a airplane, a lot of the components are imported, cabling or printer circuit boards, the PCBs. There's a lot of inputs in US manufacturing that are coming from supply chains around the world By not exempting exports from this tariff, you actually have made us exports much less competitive, and the concept was driven up the price of our exports.

So on average, I think our exports are now gonna be 11% more expensive because 30% of the inputs are being tariffed. So that's another sort of really strange part of the policy. I assume they're gonna fix that. It didn't make sense to me.

Cardiff Garcia: The other prediction, by the way, was that the potential for Chinese and other retaliation was. Less than what we've seen played out at least so far. This has been a really fascinating part of the discussion the last couple of weeks, which is the idea that because the US is running these huge trade deficits against these other countries, that they are the ones who are gonna have to submit because we're the buyers.

They're not gonna find ready substitutes to buy their products elsewhere in the world. The part that that omits though, is that there are a lot of things that we import that we really need that becomes a problem. If, for example, you look at China, which is now essentially suspended exports of rare earths, which American companies use to make all kinds of things.

That's a problem. Okay, we've got the money, but they've got the stuff. So it's not entirely the case that other places can't retaliate. In fact, we've seen them already start to retaliate starting with China, which is now not gonna buy as much American energy products. I think they put in place some kind of a ban on buying Boeing.

Ben Miller: Soybeans.

Cardiff Garcia: Soybeans oil, seeds and grains and things like that. This is not necessarily the case that other places can't retaliate just 'cause we have the money. Okay? But they've got the stuff and we're gonna have to get that somewhere. And it's gonna be a lot more expensive to get it, or we're gonna have to make do without, for at least a while, until we figure something else out.

The chance to hurt each other is very, very high going in both directions. I think it's important to point that out.

Ben Miller: Yeah. One more thing. That is both a premise and a prediction, and that is that foreigners had to hold US dollars, US assets, but what's happened is that foreigners have been selling the heck out of our US assets, and as a result of the stock market has been falling and interest rates have

been rising because foreign investors have been exiting the US market, in part because the dollar's been falling.

If you are a foreign investor and the dollar falls 10%, your assets worth 10% less, and so that has started a bit of a vicious cycle. 'cause the more the dollar falls, the more foreign investors sell, which then drives a dollar down more. The concept that the foreign investor had to hold us assets has so far turned out to be not correct.

Cardiff Garcia: I would stress just how unusual this is. If you look at previous episodes of US Stock Market freakouts, it's usually accompanied by people flocking to US treasuries as the global safe haven. In this case, what seems to have happened instead is that there's just been a generalized loss of confidence in US assets period, including the very safest one.

We've been discussing the problems with everything that's happened. I don't wanna be too alarmist too quickly either. It's not like the rise in yields or the sell off in the dollar has gotten to financial crisis levels or anything like that, but the trend has been so sharp. And so quick that it's worth looking at what on earth just happened and how strange this is for things to be going in this direction instead of the direction they historically go in when there's a freak out, a sort of risk off, freak out in US assets.

The one US asset that usually benefits is also suffering this time and that's treasuries.

Ben Miller: So. I don't want some of our listeners to think we're only negative here, and I feel like we've been flogging the Trump administration year. I wanna do some positive scenarios, but so far the policy has some poor implementation. And I just wanna mention two more things that were in the roadmap in Steve Moran's roadmap that have not yet happened, but in the roadmap they're saying they plan to do, and they seem to me to be bold and risky.

The first one that I think, I wonder if they're gonna, she is taxing foreign official holdings of US treasuries. So Steve Moran says that foreign governments have to hold US treasuries in order to keep their currencies low. They have to hold US dollars and they hold them in reserves. And so we should start to tax them.

Through a withholding, everybody who knows, if you get a dividend of 10%, you're gonna withhold some percentage of it to pay taxes. It's something that actually a lot of countries do where if you invest in Canada, for example, you're gonna have to withhold and pay to the Canadian government a tax on that dividend as a foreign investor.

And so that's a policy that Steve Moran is recommending that we do in order to discourage foreign holders of US reserve assets and then drive down the dollar.

Cardiff Garcia: I have a feeling that that's not just off the table. It's not in the room anymore. Given the specific response of the market to the initial round of tariffs, which by the way, that response is still ongoing. I think if you were to also then introduce an idea to start taxing foreign holdings of treasuries, the treasury freak out that's already taken place would just escalate to really troubling places.

I don't actually think that that's likely at this point. Fourth monitoring for sure. It was in the paper, but I don't think that's coming.

Ben Miller: My two comments on that are, one, you might be surprised, Cardiff Garcia: Yeah, I have been so far.

Ben Miller: and then two, it just shows you their thinking that they believed that the foreign investors had to hold treasuries and they'd even hold the treasuries if we tax them. By some amount. And so events have so far proven that to be incorrect, but it is illustrative of the logic underneath this plan. And the other thing I think actually will happen, and I think's gonna be very interesting to see what they do with it, is the Sovereign Wealth Fund.

I've heard this now a few times and it's in the paper and I'll give you what I think is the plan, but like all these things, you sort of hear echoes of it and then what happens? You look back and you're like, it was there in plain sight, but I didn't really appreciate it. I think it looks something like this in the paper.

There's a provision in the law that lets a treasury buy and sell currencies. Currently that fund holds about $40 billion in assets. I believe they're going to revalue gold, which would put a equivalent of $800 billion. Into that fund. The mechanism I've understood is that if you valued gold at fair Market today, that would revalue it from about tens of billions to almost a trillion if you put a trillion dollars into this emergency fund.

Scott Besson, who was famous for currency trading in the document, describes selling dollars and executing some sort of strategy to force other countries to appropriately value their currency.

Cardiff Garcia: It was essentially offered as a possible countervailing measure, a sort of counter manipulation of the currency and. Moran listed a whole bunch of different possible metrics or indicators to look at, to decide if a country was in fact manipulating its currency. This would be an idea for how to essentially buy foreign currencies and foreign assets to essentially offset it.

And then Moran, by the way, did go through like the risks of that, of what it would mean for the US to hold a large amount of reserves of other countries currencies and other countries assets. The risks are essentially what those countries are now running by holding so many dollars and so many dollar based assets just in reverse, but as an offsetting mechanism.

Ben Miller: He says they may do to us what we're planning to do to them, which is the tax, the holdings of those assets. I just want to point out that there are two big strategies that are in that document that have not been rolled out and may not get rolled out, but I. If they do, which would be a sovereign wealth fund, and then taxing foreign holdings of reserve assets, they would have huge consequences.

Cardiff Garcia: Totally agree with that. They would have huge consequences. And as you said, we might be surprised. I just sort of have a feeling that managing the fallout of what's happened in the last few weeks for at least a while is what's gonna keep everybody busy. The extent to which like some of the tariffs stay, how we use them as negotiating leverage on different countries, not just on China, whether or not there's any walk backs.

That is such a big endeavor itself to figure out for the administration that I have a feeling that these two options for now are off the table. But as you said, who knows? Maybe as part of a further negotiation, they'll come back to the table and say, we could do this. Stuff I just don't know. Worth following for sure.

Ben Miller: We'll follow it. I think that we'll see something to do with this investment Sovereign wealth fund and how it might trade in other currencies. I think that I. We'll actually end up in the news at some point and have interesting consequences, but okay to try to satisfy some of my listeners who feel like we're too critical of the one party versus another.

I wanna do a scenario where it works, the scenario where they pull it off, and I'm gonna try to make a scenario where I'm for it, where all of this, which seems up till now, messy, not looking so good, turns out to be genius, and it plays out. And I wanna walk through what that argument would look like. And I know a

lot of smart people who think this is true, think that this is actually gonna work out.

And I know a lot of smart people who think the opposite. I'm not trying to alienate either side. I think that there are some good arguments for why it could work out.

Cardiff Garcia: I'm quite happy to alienate myself from everybody in a case like this, but I love this idea of scenario planning. What does a best case scenario look like? What do a couple of intermediate scenarios look like? And then the worst case, I think that's always a useful exercise. And also because we get to experiment with the whole suite of outcomes, it means that we're not just gloom and doom the whole time.

We also get to live in a happy world for at least a few minutes. So you wanna start with the best case scenario? I love this idea, and I've got my best case scenario in mind too. But why don't you go first

Ben Miller: I feel like yours not gonna be as positive as mine Cardiff Garcia: possibly.

Ben Miller: because I know some people who worked with Scott Besson, treasury Secretary, and they really think he's a genius and they think that he has a plan. And so I'm gonna try to outline what they're telling me and make this argument that they're making, which is that this is a negotiation and what you're seeing is brinkmanship from Trump.

But there's actually, he's following a playbook or template, and I can give you two other times he's done this in the past. And how they played out. 'cause I think it's illustrative of their thinking in the, it all works out scenario.

Cardiff Garcia: I'm excited. Let's do this.

Ben Miller: So two other times where something very similar happened was, the first one is the US Mexico Canada agreement.

When Trump came into office, he used inflammatory language. I'll give you some quotes. He said NAFTA has been a disaster for the United States. So NAFTA was the North American Free Trade Agreement, I think signed into law under Clinton. A lot of people feel like that hurt US manufacturing, and a lot of people think it helped, but Trump said it was a disaster.

He said quote, Mexico is absolutely a threat to the United States of America. He also said, when Mexico send its people, they're not sending their best. They're bringing drugs, they're bringing crime, they're bringing rapists. So these are really inflammatory language. He put 25% tariffs on steel, 10% on aluminum, 25% tariffs on autos where he threatened.

He threatened a section 2 32 investigation. All of these things we're talking about now are exactly what he's doing right now to China, and he also talked about putting tariffs on dairy, extreme language, extreme behavior, aggressive tariffs. And then they ultimately did tear up NAFTA and renegotiated a whole new agreement called the US MCA, United States, Mexico Canada Agreement.

And what were the final results of that agreement? I'm gonna compare what NAFTA had versus what U-S-M-C-A ended up with. So under NAFTA for a good to be considered a North American good, it had to be 62.5% manufactured in the North America. The new agreement raised that to 75% of the vehicle had to be manufactured in America.

So from 62.5 to 75%, at least 40 to 45% of the vehicle had to be manufactured in a high wage area. Uh, in not Mexico. We, Canada or US, US, gained access to 3.6% of Canada's dairy market. Canada gave us access to 3.6% of their eggs

and milk market. And then a bunch of smaller things around strengthening environmental labor provisions, extending copyright from 50 years to 70 years, and some protections for the digital economy, and that was where they ended up.

So considering how extreme the language and behavior was from before to the actual agreement, in the end was very modest. Change to the status quo and the actual facts on the ground were slowly better for the United States, but certainly not dramatic.

Cardiff Garcia: U-S-M-C-A turned out to be a little bit of a nothing burger. It was NAFTA rewritten a few things to let the president essentially say, look, I just negotiated this incredible agreement. I should say that in, in this case, the one difference is just they've gone so much further and a lot of the things have in fact been implemented.

People sort of forget this. Those car tariffs have gone into effect. They're there now. It's enormous. Non U-S-M-C-A compliant goods have big tariffs on them as well, and obviously the rest of the world. But I think I know where you're going with this, which is a lot of the stuff we're doing now is leading to a much

milder place than where we currently are or where the President suggested we might go.

Ben Miller: That's the template from the past, and I'm gonna do the other one, which was the Trump China trade deal called the Phase one Trade Agreement. Again, very, very inflammatory language. China's ripping us off on trade. China has been cheating us for years. We're gonna make them pay. And

then the actual agreement, it's pretty modest.

They end up with some protections for ip, some patents. They agree to buy $200 billion of US exports. They agreed to not manipulate their currency. There's some reforms and there's some modest tariffs. So what was a high drama negotiation? Ended up with a pretty reasonable agreement between the two parties where a little bit of a win-win, certainly not a huge zero sum game win loss that we're currently imagining is going to happen in the world.

Cardiff Garcia: So, is that your best case scenario? Mine's way more positive than that, but go ahead.

Ben Miller: I'm saying that what ends up happening, they go around the world, they collect deals from countries. I have some examples of types of things. South Africa and Australia open up their markets to natural resources. Germany opens up their market to automakers. India opens up their markets to US Agriculture and US Tech, Japan and South Korea.

Here's an interesting stat. In Korea, US spends $13.5 billion a year maintaining our 28,500 active duty troops on the line between North Korea and South Korea. Currently, South Korea only pays 43% of that $5.8 billion a year. So you can imagine South Korea saying, we'll pay you more. We'll write a check to the treasury, help pay for defense.

Same thing in Japan. We have 53,000 active duty military in Japan costs us $21 billion a year. Japan pays for 60% of that. Maybe they pay for more. So you go down the list and say, okay, you could see bunch of countries actually lowering their barriers for US companies writing checks, and we end up in a more free

trade world with our allies.

And you see a really positive situation for all the big countries. I think that we end up leaving 10% tariffs on all the small countries. So that's where like a Vietnam or a Malaysia ends up having to pay tariffs to the US

because they just don't have enough to offer us. Small countries pay us tariffs, big countries give us more access.

And then I think China ends up making a deal where they agree to more fair treatment of US companies and maybe they agree to pay tariffs and open some US factories. So maybe that's not as positive. You're imagining at the end of this road, which is probably about three to six months from now. The world's trade is actually better.

US manufacturers are a little bit better off in terms of their access to other markets, and I've seen different forecasts of how much new manufacturing brings to the us. I've seen Goldman Sachs says a hundred thousand more US workers in the manufacturing industry and chat. CPT forecast up to 500,000.

So there's 12 million US factory workers. We may see an extra a hundred thousand to 500,000 additional US manufacturing workers and additional sort of export. So that's the kind of success I think that could happen. Maybe you're more optimistic.

Cardiff Garcia: Maybe just slightly more, but that's pretty close. I won't belabor the details, but the point about making a deal with essentially the rest of the world, non-China, is in my best case scenario, where effectively trade barriers maybe even end up going lower than they were before. We maybe even reestablish some kind of way to adjudicate trade disputes, but from a lower base of trade barriers than existed.

So tariff rates go effectively back down close to zero, and yes, that actually does in my best case scenario, include the smaller. Countries, they offer us something that's just nominal and they sort of acknowledge, yeah, sure, listen, we do export a lot of stuff to you guys. We appreciate it. And they throw in a sweetener.

I don't know what it would be, but they figure it out diplomatically. And then specifically to China, the dream scenario there is that on all non-national security related products, that trade barriers come down again, by national security related products. I think it's fair to leave your guard up a little bit in both directions.

So things that have to do with semiconductors. AI chips, those kinds of things. Probably there's no getting around that. The world from now on will simply have large trade barriers, exports and import controls on those kinds of goods. But then on everything else, the Trump administration essentially realizes that, for example, young families don't wanna have to pay so much more money for baby strollers and diapers and things like that, that we actually do import a lot

of low value, low tech goods, that we should have no interest in manufacturing here in this country because it would represent a huge climb down the value chain.

So we go back to importing that stuff and intermediate goods, no big deal. Tariffs fall as much as they possibly can again, and essentially we just leave a little bit there for the national security related items and maybe for some items that have to do with resiliency. So like making things in this country that we don't want to have to depend too much on or entirely on foreign countries in a crisis.

Okay. We kill back to like making that stuff again. We don't kill the Chips and Science Act as has been threatened because that actually seemed to have been working to construct new fabs, new factories in the country. We leave that there. That's part of trade policy too, but we go back to that and everything else falls as much as possible because of some extraordinary deals that the deal maker and chief makes.

And there you go. So that is in my head, the best case scenario. Likely no, but we're scenario planning here and I think that would be marvelous.

Ben Miller: Somehow the scenario in Trump's administration's view is that we leave tariffs high enough on China, that they pay US tariffs. And that marginal tariff brings back to the US the marginal manufacturing that we do want. And again, you said some of them, I'll just name a few. Machine tools, robotic parts, active pharmaceutical ingredients, different kinds of electronics, capacitors and resistors.

Those things are all manufactured in China. Maybe we wanna manufacture 'em here. Maybe I. And I think that there's some kind of best case scenario, which I'm having trouble figuring how to get from here to there where we do manufacture those things here. China helps us transition. It would probably take five years to get to a place where we're really able to manufacture them efficiently and somehow China agrees to help us with that transition and maybe pay us along the way in exchange for continued access for the rest of the US consumers.

Not exactly sure how you get there, but I feel like that would be the best case scenario.

Cardiff Garcia: An extraordinary feat of diplomacy.

Ben Miller: Yes.

Cardiff Garcia: China or any other country doesn't pay us tariffs. American importers always pay tariffs. It's a tax on them, but those other countries suffer from our tariffs because they end up not being able to sell as much to us. But all the revenue that's generated from it would come from American importers paying it.

It's just that we would be importing less stuff on the stuff that's tariffed by definition, in terms of China helping us to develop some of the high tech stuff that they've made. Oh man. Wouldn't that be like an extraordinary, I. Diplomatic outcome, that stuff tends to happen instead by threat. And what you're seeing most incredibly actually is that the Europeans are essentially saying, sure, we'll let you sell some of your BYD EVs here, but first you have to like agree to share some of the knowledge behind how to make it.

It's sort of the reversal of how things have worked for the last half century where it was China that was trying to acquire the knowledge behind how to make the high tech goods. Well, in this case, China has leapfrog the rest of the world when it comes to EV specifically. They're now making the very best EV and the cheapest EV that you can get.

And it's the Europeans demanding that the Chinese share the knowledge with them. So could something like that happen for some products in the us? Oh man. Given the geopolitics of this, the superpower rivalry, I really doubt it. But this is best case scenario. This is scenario planning, so I'm in. I'd love for that to happen.

I.

Ben Miller: Maybe I have a different best case scenario now that you've said it because lemme just finish yours and do a slight modification to the best case scenario. So, finishing yours is, that happened with the Plaza Accords with Japan, where Reagan dropped the hammer on Japan and they agreed to manufacture Japanese cars in America.

They opened up factories across the south. You could see, okay, maybe China does what Japan did, and they open up BYD and other types of manufacturing in America. That's one version. So I, I actually just realized the other best case scenario for the Trump administration is somehow the world agrees to ring fence China.

And the world essentially can do without China. The manufacturing that China is currently doing, it ends up getting done in the United States or in friendly countries, and we transition over the course of a few years, and that transition is not so painful in terms of inflation, in terms of not having certain types of goods that you'd normally get from China.

Somehow the world agrees to shift away from China and from a geopolitical point of view, China's now contained and the US is now ascendant.

Cardiff Garcia: That ring fencing part for me again. Applies specifically to national security related stuff, international IP, espionage, things like that, certain kinds of goods, semiconductors, things that can be used for surveillance, whatever, things like that. The reason I don't wanna ring fence China entirely to cut it off from the rest of the world, is that I actually think that leads to a more dangerous world rather than a less dangerous one.

I'm not saying that commerce with another country solves all the world's political problems. We've seen that it does not, but the truth is, I just don't see a world in which China's completely isolated from everybody else. That makes China a less dangerous adversary rather than a more dangerous adversary.

If there's absolutely no interdependence going in either direction, it then would have nothing to lose geopolitically from starting a war or whatever, pursuing some kind of territorial conquest, my best case scenario still includes a lot of trade with China, just not on those national security.

Ben Miller: I have a hard time imagining the world agreeing to Ringfence China, and I have a hard time imagining actually United States having no trade with China in practice. I think it's very difficult to pull off considering the costs, and I thought maybe in scenario two we could walk through why that is so difficult and maybe a less positive scenario or a bad one, but also helps you understand why a good scenario where somehow US is completely independent of China is not very realistic and maybe not even a good thing as you're saying.

Cardiff Garcia: In this case, what is scenario two? Exactly. This is the part where the Trumpian policies fail, and now we define what failure looks like. Is that right? I.

Ben Miller: Again, I think there's a few versions of this. Unfortunately. I think we have to start walking through some of the challenges and some of the ways it falls apart, and then maybe it shows why your scenario of actually trade with

China is good. It long as you have put up barriers around things that are critical national security, it's a more traditional point of view.

It's globalist, liberal, liberal in the sense of liberalism.

Cardiff Garcia: Classical liberal. Hey, listen, neoliberalism is back, baby. We are back. The one thing that the market freak out has accomplished, okay, is that it has once again brought the stigma to protectionism, which was the concept is jour for all this time, man.

Ben Miller: I don't know. You're celebrating too soon.

Cardiff Garcia: That's part of scenario one. That's best case scenario, intellectually scenario one for a generation or two. Protectionist, isolationist, nativist impulses are done. They're discredited. That's part of scenario one, but you're right, we're in scenario two, so let's go.

Ben Miller: I wanted to walk through some facts about why it would be difficult to do without China ahead of this podcast. I did some preparation. I was looking at China's manufacturing strength. I. And it's just staggering. So I just thought I'd give you a few stats. It makes you appreciate why it would be very difficult for the world to abandon China's manufacturing industrial base.

I mean, it's the world's manufacturer. There are 12 million workers in the United States in the manufacturing sector. There are a hundred million in China just in the manufacturing sector. China produces two times the electricity per person that the United States does, but we know they have a salary or wages that are five times less than the US so they produce so much more power and that goes to manufacturing.

So for the United States to try to do without Chinese manufacturing, you're missing 88 million workers and you'd have to produce a hell of a lot more electricity than the United States. You'd have to triple US electricity production, just if you're saying, if you're trying to do it all in the United States or somewhere else in the world.

That's a lot of infrastructure and a lot of workers who are highly skilled to replicate China's manufacturing industrial base. They think it would cost about 30 to $35 trillion to rebuild China's manufacturing and industrial base. That would mean the US would have to take 10% of their GDP for 10 years, or the world does.

Cardiff Garcia: Not to mention the logistical challenge of replicating the know-how, the process knowledge, which doesn't come easy. That's partly the result of the extraordinary experience and focus the Chinese economy's had over the last few decades. It wouldn't just be a matter of spending the money. It would be a matter of regaining, replicating the knowledge.

Those are incredible numbers and worth Keeping in mind, I should add that the despair over the US manufacturing sector is itself overdone. The US has about 16%. Of the world's manufacturing output by at least one metric and 4% of the

population. So we actually do punch way above our weight when it comes to manufacturing output.

We have fewer workers in the sector because the US economy is close to the production frontier. That means that it is just more technologically sophisticated than it used to be. Therefore, it's more efficient, more innovative, more productive. So the idea that we don't make anything or that nobody works in the sector just isn't quite true.

It's fewer people as a share of the total economy than in the past, but that is normal. It's normal for that sort of thing to happen, for it to decline by the way it's happening in other countries, including. China and Germany, which have run huge trade surpluses for the last few decades. A lot of this stuff is just way overdone, the despair.

I love that point about the Chinese manufacturing sector being so dominant that replicating it is a near impossibility. There would be an absolutely massive cost to the US and global economy of trying to just suddenly shut it out like that.

Ben Miller: You're right. I mean, the funny thing about US manufacturing is it's the second largest in the world. China's is the largest, but US is the second largest bio huge measure. Clearly, we could manufacture more here, and that's actually a policy that Biden also pursued with the Chips Act and the Green Infrastructure Act, the Inflation Production Act, which helped try to onshore a lot of green technologies.

There's a. Shared goal. In this scenario, the policy backfires. I called this the three underestimates. The Trump administration's underestimating how hard it is to execute this. The speed of execution of trying to negotiate all these deals around the world, that they underestimate the complexity of the global economy and the global market and the underestimate China, the underestimating, the actual ability to pull off what they're ostensibly trying to pull off.

As a consequence, it falls apart, and so we should walk through what that looks like. To some extent, the reality's actually much closer to it already falling apart so far than to it actually succeeding.

Cardiff Garcia: So scenario two, to be clear, is the worst case scenario outcome. Here. These policies fail and it has these cascading effects and things fall apart.

Ben Miller: Yeah. Some of those things, which I'm sure you have your list.

Cardiff Garcia: Oh, I'm ready.

Ben Miller: Wait.

Cardiff Garcia: ready. I think my worst case scenario is that the trade war continues in exactly the shape that it's in right now, which is to say that there is continued escalation with China driving trade between the US and China down close to zero. If you look at where tariffs are right now, that is a realistic possibility, or at least so low, that you're essentially round down.

To zero, that that would impose massive costs on American businesses and on American consumers, that that weakness, that resulting weakness, would continue the sell off of US assets. All US assets, including treasuries, which means higher interest rates, it means higher inflation, which makes it really hard for the Fed to respond because effectively we're then looking at a stagflationary scenario of lower growth, a fall into recession and higher inflation, and there's no avoiding it if it gets that bad.

So what ends up happening then is that political pressure builds on the Fed. You end up wiping out the central bank's independence and that threat has already started, as we've seen just this week, and you end up then with a really bad outcome, which is a politicized central bank, and that exacerbates the sell off of US assets.

And then on top of it, the approach that we're trying to take with geopolitical allies who we've just treated to 10% tariffs, does not lead to any kind of a diplomatic solution where we end up then effectively trying to use them to gang up on China. But instead, what those other countries do is they renew their own closeness with China, and then the US is effectively the country that becomes more and more isolated and ring-fenced.

Over time, we start falling even further into absolute widespread economic catastrophe, and that leads to all kinds of other cascading consequences like a financial crisis, a further sell off, and then more policies that isolate us, and the whole thing gets worse and worse and worse, so the dreaded vicious cycle begins.

So that is the worst case scenario. Again, as with scenario one, it's not what I consider to be the likely outcome, but it is the worst case scenario is that we end up in an absolute economic spiral. It's not likely, it's not my base case, but it has become just plausible enough that it makes me super uncomfortable.

Ben Miller: My worst case wasn't as bad as that is what I think is the likely worst case places where I agree with you. So I thought it was interesting when you look at what the inflationary impact would be. The different measures I've seen quoted talk about inflation as a national inflationary number, so maybe it rises another three to 4%, so it goes from about three to six or seven.

But for people who, that doesn't mean anything that's close to the inflation levels. When inflation was through the roof, it goes back to being as almost as bad or even worse than the worst period of 2022. That's the kind of inflation we're talking about, and it ends up being, in some ways, I think, more shocking to people 'cause it's not inflation of wages, which there was a lot of service sector inflation in that period.

This is really just inflation of goods. So you go to the store, you go to Walmart, and the thing you wanna buy has a 50% tariff premium, even at modest tariffs. So if the tariffs end up at 15 to 20%. The dollar falls 20%. You're talking about a 40% shock to import prices. And so that's a huge impact for people, especially in the more moderate income people who end up spending a lot of money at Walmart or Target, and they find that those goods are a lot more expensive.

So that ends up being a consumer tax and a consumer shock. The state of the economy going into this is so interesting. It was the opposite. We had a strong consumer who had saved a lot during the pandemic and was really powering the economy, so they end up getting shocked. And then the other part of it, I actually sat down with chat, GPT oh three last night, and oh three is the new open AI model.

Tyler Cowen, my favorite economist in the world, I think the smartest person in the world. He'd said last night, he thought it was a GI. Artificial general intelligence that we've hit a place where there's a machine as smart as a person.

In some ways it's smarter, and I asked it, okay, here's my scenario oh three model.

We have tariffs of 10% on all countries, and then 45 to 50% on China. The stock market then falls about 25% because this is a bad scenario where the stock market's been falling, and I think it would keep falling. So you have two negative shock, a negative wealth effect, shock, and also an inflation tax. It said it thought GDP would fall 2% and the Fed would have to drop rates by 225 basis points.

So the Fed would end up basically collapsing. Under that recessionary pressure, at least one to 2 million people are thrown outta work. So you push unemployment to five to 6%. That's not even the worst case scenario. That's closer to a more of the same, but without China tariffs at 150%, but at 50%, which I think is closer to actually Trump's aims.

Cardiff Garcia: That is a lot closer, for example. To, I guess my base case scenario, which we'll do next, that to me does not sound like the worst case scenario at all. If anything, I think that when you consider momentum effects, things can go a lot further uncertainty, especially if you combine it with the sell off and the dollar, things of that nature.

The sell off of US assets, generally, like I absolutely could see the stock market falling by a lot more than 20 or 25% in that kind of a scenario. That's not just a wealth shock. It also represents an incredibly brutal environment for

businesses to raise money just to keep themselves going, and that also would have a further effect on layoffs, bankruptcies, and so on.

Combined with the fact that interest rates are gonna be high deficit would have to explode as a result of it because revenues would be falling and there would be a lot of pressure to stimulate the economy in a scenario like that. But with not much firepower left, I just think that it would keep going and going and going in a situation like that.

Yeah, okay. If there's a walk back on the tariffs, then you might get that. Not bad. People see, okay, well it's uh, things are worse than they used to be. So we get a recession, it's an off the rack recession rather than an actual crisis proper, but it's not bad. But in a scenario where it's starts with a massive tariff induced shock and then just keeps on going, I don't know what would stop it other than a walk back from the Trump administration.

Ben Miller: But the challenge is that it takes time for Trump to be successful. You can't negotiate trade deals with a bunch of countries around the world very fast. I asked Chad GBT oh three again, like how long would it take

and when do you see like a deal with China and deal with Japan and uk, some of the more friendly players, and I basically thought it would take about three months.

We keep seeing templates of deals. I think we start seeing the outlines of what a successful deal looks like relatively soon, maybe 30 days, but it takes a while for the uncertainty to start to get baked out of it. It takes a lot longer to get to a deal with China, especially 'cause of the game theory dynamics where the two parties really are in a lose lose situation.

It's hard to come up with a win-win base case scenario of you have this shock, you have a lot of negative effects on the economy and on inflation stock market and on business investment. Without a deal with China, it's hard to really walk that back all that much.

Cardiff Garcia: That part I agree with. There's a dynamic here where the politics of both countries have become really tough. Neither side wants to be seen as the one that approaches the other. Neither side wants to be seen as the one that has offered concessions. It's tricky. I don't know how exactly you get around that.

Ben Miller: Why don't you tell me your base case scenario and then we can do a couple surprise scenarios.

Cardiff Garcia: That sounds good to me. My baseline prediction is that there is in fact a walk back from the Trump administration on a number of the tariffs that have been imposed, and also I. That enough damage has already been done, that it's still too hard to avoid a downturn, whether that's 0% growth or a recession, I'm not sure.

I think those two things are functionally quite similar anyways, whether we're technically in a recession or we, whether growth slows enormously. So my base case scenario is that especially with the rest of the world, non-China, there is in fact some kind of a negotiated thing. There is a walk back. We don't go all in on China at 140%, that at some point we do get to something a little bit more reasonable and that there's not further escalation from here, and we're somewhere close to the peak of the tensions between US and China.

But. Enough damage has been done. And the reason I'm worried is that even going into the tariff battles, even going into liberation day, I thought the US economy was already kind of in a precarious spot. Consumer spending growth had already started to slow down. We already knew that inflation adjusted income growth was also gonna be weaker this year than it was last year.

There was a lot of uncertainty beforehand about what tariffs might be enacted, and I think there's maybe a little bit of a respite because a lot of people went out and bought stuff, especially cars ahead of the tariffs coming in. And so it might take a minute for this to materialize, but if you think that growth was already pretty weak in the first quarter, and you look at the most recent estimates of what the tariffs might do, which is somewhere between like one to two percentage points of GDP growth this year, that to me signals enough damage to tip the US into either a downturn or into an outright recession within the next year or so.

I think that's coming. I believe that's where we're headed, and you can call that whatever you want, slow down, recession, downturn, whatever. But that's my base case scenario. And of course it's all contingent on the extent of the walk back. If there's a massive, essentially settlement slash capitulation. If your best case scenario component that was, Hey, we end up with something actually quite mild, I think you will see a big stock market rally.

I think you will see the dollar rally when everybody realizes, oh my God, the thing we thought was gonna happen, that we were in this totally new world, this totally new environment. We're not going down that path. We're just gonna do a little bit the way we saw in Trump won. If that happens, then it might be enough, and it might even be soon enough to avoid an outright recession, but my base case is at least one and likely or two quarters of negative GDP growth, so the unofficial version of a recession starts within the next year.

That's my base case scenario.

Ben Miller: I could see, again in my positive scenario, a lot of good deals getting negotiated with a lot of. Friendly countries and that ends up being probably comparable to your base case. 'cause I think that it's gonna take a little bit of time for that to play out and the shock has already happened. So there's a pullback in business investment and hiring and things like that.

And so I can see that coming together. I think that is likely to come together that I think Trump administration is not trying to punish allies if they can't get away

with it. If the country's willing to push back, I think they'll be more like a Trump one negotiation with a Canada or Mexico or India or Japan.

The part that I'm having trouble seeing in a base case scenario is how even if you bring tariffs with China, down to what Anna Wong said, which was 45%, 50%, she said that would cut trade with China down 60 to 70%. And that's also a price shock to American consumers. My question for you is, how do you see the inflationary pressures balancing out with the recessionary pressures?

'cause you have really two opposing forces playing out over the next six to 18 months. Can you walk me through how you see what's probably a mildly bad case where you have much higher tariffs on China, but otherwise a free market world?

Cardiff Garcia: Typically recessionary pressures would be disinflationary, or even in some cases if they're really bad deflationary. This is the problem with tariffs is that you get this one time massive price shock, which by the technical definition of inflation, you could say it's not an inflationary because it's not persistent.

It shows up in the inflation figures for this year because the prices go up, but over time, it doesn't raise persistently the inflation rate. That's the difference between a big increase in the price level versus something that is inflationary and continues to be inflationary over time. There's two problems.

One is that the inflation rate was already too high for the Fed's comfort going into all this, it was running at about two and a half percent a year, which is higher than the Fed's 2% target, and it had plateaued. In other words, it had stopped coming down the way it had been coming down last year, which means that there's not gonna be a whole lot of help coming from the Fed when it comes to stimulating the economy if the rate still looks like it's there.

The other problem is that Jerome Powell has said that he's a believer in the power of expectations. And if you get that one-time price shock and the inflation expectations that are higher set in, and we've seen inflation expectations already climb enormously, there is the risk that that becomes endogenous, that inflation expectations effectively lead to inflation itself being persistently higher.

And that is really dangerous for the Fed to allow. And so what ends up happening is that you simultaneously have. These recessionary pressures at the

same time that you have inflationary pressures. And the only way to manage that is for the Fed, essentially to say what Jerome Powell literally just said yesterday on April 16th, which is that he said, if we're missing on both of our targets of low inflation and high employment or low unemployment, that you have to put in place some idea of how far those two things are from the target, and then try to balance them out.

But it doesn't mean that you eradicate one at the expense of the other. It means that you in some sense, have to tolerate both things being off target for a while, inflation too high, and unemployment also being too high, and. That is a tough

place to be in, especially when the Fed is also facing all this political pressure from the White House.

So there's no easy way to like manage that. There's no easy way to balance it. You can have both things at the same time when you have what effectively amounts to a big supply shock, which is what terrorists represent, and in this case it happens to be a self-inflicted one instead of a massive external shock like we had in the 1970s.

But nonetheless, that is what it is,

Ben Miller: My expectation is I started calling it higher for shorter rather than higher for longer.

Cardiff Garcia: rather than lower for longer, higher for shorter.

Ben Miller: Yeah. We were in a market where interest rates were gonna stay higher for longer because inflation got stuck higher. And the way I think about what you just said is that the shock is, uh, short-term shock in terms of prices over time that starts to diminish and then the fed has to shift to start cutting and that starts happening.

Maybe serendipitously about the same time that Trump replaces Powell with a new fed share in May of 20, 26, 12 months from now. I think that the Fed does end up having to cut and they probably have to cut deeper when they finally cut. And so you end up going from a higher, for shorter period to lower for longer.

We almost go back to where we were in the early 2000 tens coming out of a bad recession. We don't have demographic growth like we did back then. We don't have maybe immigration, and so the only real way to grow out of it is

productivity growth. And that productivity growth, probably ai, but that productivity growth is deflationary.

And so we go to a period, there's a lot like the 2010s.

Cardiff Garcia: The other problem though is that the productivity growth takes a hit in the downturn. You have less investment, you have less adoption of new technologies. It's a problem. But I agree with you that if you have a deep enough recession and it lasts long enough, eventually that stamps out the inflation.

It's just that in a situation where you have both recessionary pressures and high inflation, that recession is gonna have to be prolonged to essentially wait for the inflation to clear out because demand is so subdued for so long. So eventually, yeah, sure that'll happen, but it means a lot of people suffer in the meantime before the Fed can effectively lower interest rates and stimulate the economy again, in an environment where it is not risking higher inflation and higher inflation expectations.

Setting in as for like ongoing economic growth, after that, it would help to have rising population growth via immigration. It looks like we're probably not gonna have that, or at least some pro-growth policies. But if we also happen to still have high tariffs on the rest of the world and whatnot, that may not be there either.

You almost need a recession to get so bad that you bottom out and then you can only go up from a lower base and after a whole lot of suffering, we're almost back in scenario two there. That's not my base case, but that's what would end up happening if there is no walk back.

Ben Miller: My challenge with you basically is that I don't understand what your walk back is on China and without a walk back on China, I don't see how you don't end up in the stagflationary downturn.

Cardiff Garcia: You might be right about that. My walk back on China, by the way, is that you get all the way back to the tariff rates that persisted before Liberation Day. In other words, they were a little bit higher from the start of the year when Trump raised tariffs on China. But that's basically it. You're not at 45 or 50%, which I think is what you said.

Anna Wong had it at, I think it was down closer to like 20, 25% or something like that. That is the walk back. So there's pain there, but it's a big walk back

and we basically go back to a world where, yeah, there's an impact on growth, there's an impact on inflation, but it's not what happens in a scenario where essentially we've made it completely uneconomical for anybody to have trade with China.

Ben Miller: So your base case is pretty much a full walk back across the world on everything after April 2nd.

Cardiff Garcia: No, it's quite a large walk back. So on most of the world, we don't keep 10% tariffs. We end up lowering that through a series of negotiations. It takes some time again, but we lower them from where they are. That especially applies to Mexico and Canada and with China. We do end up at some kind of a walk back, maybe not on everything, and maybe we keep export controls on Nvidia chips and things like that, and they stop buying Boeing airplanes.

But on the smaller items, the stuff that makes up the majority of the 400 and something billion dollars worth of stuff that we import from them, most of that stuff tariffs go back down to where they were at the start of the year,

Ben Miller: And without that walk back, it's much more of a serious downturn. Cardiff Garcia: correct?

Ben Miller: Alright. Do you want to do the surprises? Scenario three? Cardiff Garcia: No, you didn't tell me your base case. We talked about mine. Ben Miller: I feel like I did. I sort of walked through.

Cardiff Garcia: Yours is the somewhat more pessimistic version of my base case. There's not enough of a walk back. We end up in a deeper recession than I'm anticipating. Is that right?

Ben Miller: Just to put it on the table. The few other possible worst case scenarios are that China has been preparing for this for eight years and they are clever about how they negotiate. So they prevent the world from aligning with the US 'cause they keep making Trump look bad. And a lot of the world, like Europe isn't feeling very friendly to Trump after the Ukraine policy.

And so it's sort of an everyone loses scenario where Trump can't really make a deal with China or really any material deal with the whole world. I mean, there's

some negotiations with Japan and India, but more or less can't even get there with Europe. Then you can get worse from there. It seems like some chance of China doing so in provocative around Taiwan, locating Taiwan.

I also think Ukraine could become a proxy war between China and the United States, where you see China wanting to put pressure on Europe by supporting Russia more. If you align against us, we're gonna help Russia more or help Russia less.

Cardiff Garcia: I left myself my little crawl out space if the walk back is not as big as I'd thought. But everything you said is true. What I will say is that my base case is effectively what I think the market is currently pricing in. There's been a sell off in US stocks. It's been significant, and I'm not expecting it to get way, way worse.

Basically, the dollar is where it is reflecting the state of the world, but not expecting the capital flight to continue indefinitely, or it would've been worse to this point. We've done ourselves a huge disservice. We've punched ourselves in the face, we get a recession, it's bad, but it's not the kind of trenchant, awful years long slog that you just described.

It's a little bit less pronounced, so there you go. But yeah, let's do surprises. Ben Miller: Okay.

Cardiff Garcia: So the surprise is that effectively the astonishing advances in artificial intelligence. Biotech, other extraordinary new technologies. Reverse the capital flight and leads to a totally unexpected investment boom

in the country, precisely because the productivity growth and the gains are so astonishing that it offsets all of the stupidity of the last few weeks.

The idea for this surprise scenario came from Uriel Rubini, who's Dr. Doom, and yet posted an interesting long tweet the other day where he said, look, the reason that the dollar's not gonna lose its status, the reason that the capital flight won't last is that all of the industries of the future are effectively sourced or originated, or at least have a big presence in the US and everybody's gonna want in on that.

So all the stuff that you think is gonna happen based on the recent trade war is gonna be washed off the map by. The sudden unexpectedly fast emergence and implementation of these amazing technologies. So don't worry about it. I

say surprising source because Rubini is known for being the most pessimistic person on the planet.

He is written books about his pessimism. He was labeled Dr. Doom before the crisis. I saw this and I was like, what is going on here? That's a great surprise scenario.

Ben Miller: I saw that too. I think he's right. I think he's not right for a year. I think it's gonna take a little longer. So it's probably, again, 18 to 24 months from now, and the next 18 months, or at least the next six to 12 months are mostly dictated by government policy. So my surprise was that somehow there's deton between China and the United States.

Trump negotiates a deal on Taiwan with Xi Jinping and they agree to a 50 to a hundred year ground lease on Taiwan. So there's sort of a Hong Kong Macau deal where we'll give you Taiwan a hundred years from now, 50 years from now, taking this concern off the table for the world. Xi Jinping looks like a victor.

'cause for China, a hundred years is tomorrow. For America. It's forever. That would be my surprise.

Cardiff Garcia: Wow. Trespassing all over the realm of diplomacy, international relations, geopolitics, and a little bit of economics in there. I love it. There's flames shooting outta my ears right now. The hot takes are coming fast and furious now from Noel, now a 50 year solution to this. I'd love that. I mean, send that up the chain and see if it happens.

A total peaceful solution to this that also involves the reestablishment of global commerce, I think would be amazing for the US economy and for American businesses and workers. So I'm all in on that.

Ben Miller: A couple of more things. Under the Biden administration, we had a higher, for longer interest rate policy. Inflation ended up being higher. I think it ended up being largely higher because of excess government spending, government stimulus. What is another driver for why inflation stayed higher? That's my primary explanation is just sort of Jason Ferman's, is that there was just too much government stimulus to really bring inflation down.

Is there another explanation you would have?

Cardiff Garcia: It's a really tough question. I think in addition to the sort of fiscal policy explanation to it. It's hard to bring inflation down when the labor market is still quite strong. Unemployment remained really low. Personal balance sheets, household balance sheets were so much better than they were, let's say, in the mid two thousands at the top of that cycle, so long as you have the stock market doing well.

So people feel good about that. They feel good about their retirement savings. The labor market was doing well. We had finally, by the way, in the last couple of years of the Biden administration, or at least the last year, we'd seen wage growth for low income folks, outpacing wage growth for everybody else, and they have a higher propensity to spend.

Personal consumption remained healthy. When you have all of those things going, I think it's quite hard to get inflation down by too much, and it wasn't like it was so much higher by the end. It was concerning. 2.5% inflation versus 2% inflation. Would you like it to be a little bit lower than that so that the Fed can say, we've hit our target?

Sure. But at that point, the Fed may have calculated that it wasn't so much higher than Target, that it had to like aggressively keep raising rates or declining stimulus to the economy in order to keep bringing it down. Or at least it got the reaction function a little bit off, which makes sense. That happens.

It was feeling good, it was trying to stick that soft landing and it came really close. Inflation falling from 9% to 2.5%. That's impressive. That's close.

Ben Miller: Without a recession.

Cardiff Garcia: That's really impressive. It may have just concluded like, Hey, we don't wanna risk a recession. Things are good right now. It just didn't go quite far enough in offsetting the fiscal impulse and the fact that things were fine.

Nobody was really complaining too much about inflation. Being where it was at the end of last year was just slightly higher than where the Fed would like it to be.

Ben Miller: We didn't talk about this. I'm not gonna be surprised that the Trump federal budget really cuts government spending and again, cuts taxes. So we still have a large deficit, but that cut the government spending probably

would've been the last thing. You need to bring inflation down from two point a half to 2%.

But for real estate, the silver lining is that I believe we are going to end up in a long term, a lower inflation environment because. This recession that Trump administrations chose to bring on, it's gonna ring out the last bit of that wage spiral. The wage spiral is obviously good for workers, but it kept interest rates higher, which is bad for real estate and mortgage prices, right?

Mortgages is really expensive because there's so much wage growth. One might think wage growth positive, but it made mortgages higher and that was hurting real estate prices. So I think that's certainly gone and I can see a lot of scenarios where we end up with much lower interest rates eventually, even in your base case scenario within six to 12 months.

And that's gonna be very positive for real estate, especially our real estate because it's a combination of headed towards lower rates, although higher for shorter. And then also no new construction. There'll be no new apartment construction, so it'll be much less competition. And the interesting thing about tariffs is that they hurt flow, but help stock.

My analogy is if you were a car dealership and you were bringing in cars, maybe you had an extra thousand cars that you'd imported last year and they were sitting in your lots and all of a sudden it's 50% tariff on them. Any new car imported, it's gonna be 50% more expensive. So your inventory is now arguably worth 50% more.

Cardiff Garcia: Whatever already exists is worth more effectively because there's no more competition for it.

Ben Miller: And so the inventory of apartment units are now worth a lot more because the cost of bringing in new apartment units can be much higher. This is, I think, gonna be saluatory for parts of the real estate sector, even though I think it's gonna be hard on some of these operating businesses that manufacture the things or require ongoing flow of inputs.

Cardiff Garcia: I would imagine that in particular, if you're looking to build something new within the next few years, lumber, steel, aluminum, all of those costs have gone up because of the tariffs. In the case of lumber, I think they're set to go up higher, but steel and aluminum already more expensive. That's gotta have an effect.

Ben Miller: Higher interest rates in the short term. So high rates and high cost will, I think, squeeze out the supply of new construcion for existing owners. That's good. Obviously, it may not be good for other reasons, but at least narrowly speaking, narrowly real estate that we own is set to outperform the things that we're benefiting from the previous regime of higher wage growth, higher consumer spending, and higher interest rates.

Cardiff Garcia: It's been an extraordinary few weeks, so I'm really glad we had this chat. Ben, any final thoughts for listeners? Anything you wanna leave them with?

Ben Miller: I think AI is gonna be so revolutionary. As tough as the next six months probably gonna be. I'm optimistic that we'll end the plane. It'll work out. US technology will drive the next bull run

Cardiff Garcia: I hope so. That surprise scenario is sort of half of what would satisfy my deepest wishes, which is just an incredible productivity spurt combined with some wise macroeconomic policy when it comes to trade, immigration, globalization generally, et cetera. I think that would be amazing. So we'll end on that, perhaps unjustifiably hopeful note.

How about that?

Ben Miller: onward.

Cardiff Garcia: Onward indeed. And you've been listening to Onward, the Fundrise podcast featuring Ben Miller, CEO of Fundrise. I'm Cardiff Garcia of the Economic Innovation Group and host of the New Bazaar. We invite you again to please send your comments and questions to onward@fundrise.com, and if you like what you heard, rate and review us on Apple Podcasts and be sure to follow us wherever you listen to podcasts.

Finally, for more information on Fundrise sponsored investment products, including relevant legal disclaimers, check out our show notes. Thanks so much for listening, and we'll see you next episode.