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The End of Magical Thinking? Maybe the Penny has Finally Dropped, Along with the Market. [1]
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Date: 2025-04-06
I’ve been thinking about rational thinking versus magical thinking. We suffer greatly from magical thinking, when it proves wrong.
A Quick History of Market Crashes
As an old person and ex-stockbroker, I remember the various market crashes over the past couple decades.
Black Monday ‘87: Dow dropped over 22% in a day’s panic, accelerated by new computerized trading. Daily limits were imposed, and the markets recovered fairly quickly.
Tech Bubble ‘01: NASDAQ dropped 78% when folks realized that many new dot com firms were no more than dreams. Money started looking for “safer” harbors.
Mortgage Crisis ‘08: Dow dropped 50%. Who knew that real estate could be risky too? Well, at least Wall St got bailed out.
Covid ‘20: S&P dropped 34%, briefly. Some guy named Joe got us back on track the next year.
So, where are we now?
S&P (broad market) is down 17%, a deep correction.
Dow Jones (big & famous) is down 14%, a correction.
NASDAQ (tech) is down over 20%, a ‘bear’ market.
Russell (small) is also down over 22%, a bear.
Folks are wondering whether markets will bounce on Monday or continue declining longer term. Temporary problems resolve quickly, but bigger problems can take many years to resolve.
Яepublican Magical Thinking About Trade Deficits
The cause of the correction/bear market is clear, and his first name is Donald. Whether he’s feeble-minded, helping Putin, drunk with power, deluded, or some combination thereof, doesn’t matter. His tariff policies have initiated a partial withdrawal of the US from the global economy.
His professed thinking is clearly magical. He thinks what’s wrong with our economy is that foreigners are getting rich off of us, so he thinks that tariffs will solve our economic problems. Worse, he believe that the markets will quickly agree, adjust and grow, so he gives no indication that he will change course.
Due to years of Яepublican dishonest rhetoric about trade deficits and the national debt, many Americans have confused the two. Xenophobes may lie all day about the ‘evils of foreign trade’, but trade deficits are merely descriptive of who is buying and selling more. Since trade is voluntary, participants benefit economically, more than they would without trade.
49 states have a massive trade deficit with Vermont in maple syrup, but it only makes pancakes taste better. There’s no reason to balance this trade deficit by trying to grow maple trees in all other states.
The budget deficit created when our government fails to tax the rich sufficiently to pay for its programs grows into our national debt over time. Trade deficits do not add to our national debt. Balancing trade doesn’t solve anything economically, since free markets work better on their own.
That makes the current crash different from those above. It’s not a temporary freak out, bubble, or lockdown. Dictating trade balances through tariffs and trying to dictate economic growth—coal mining, drilling, ship building—is both destructive and won’t work. Fascism may have made some trains run on time, but overall it was an economic disaster.
And the tariffs are ours, on each of our bilateral trade relations, not global. Since trading with us is now more expensive for virtually every other country, the rest of the world will trade more with each other, excluding us. The maladministration effectively made Russia our most favored nation in trade, at the expense of all the other tariffed countries. The rest of the world has no reason to follow Donald’s madness, and they will outperform us as a result. We will quickly become less than ¼ of the global economy and will continue shrinking relatively as long as this continues.
You may rightly distrust global capitalism—since the rich have co-opted most of it—, but the free market system has created a remarkable amount of prosperity, by producing what folks want where others want to make it at low prices. The stock markets rationally expected that system to continue indefinitely, and they were genuinely shocked when Trump actually shot our economy, despite promising to do so. Any deviation from the free market path will cause some economic pain. Actively and persistently attacking and dismantling our whole free trade system will cause long term economic destruction.
100 Years Ago, Tariffs and the Great Depression
The last time the US imposed tariffs on this scale was in 1922, when the US was building railroads, began mass production of cars, and Edison’s and other inventions were bringing lights, vacuum cleaners, phonographs, washing machines and refrigerators into people’s homes for the first time. Our economy was growing over 4% per year. Exports were only 5% of the US economy, and the rest of the world was very different. But still, eventually, increasing tariffs helped cause the global Great Depression. The stock market dropped ~30% in a few days in 1929, and in a spiral of bad news, eventually bottomed out 3 years later after losing 89% altogether.
Now What?
Today, US exports equal 11% of our economy, and our economy had been growing at ~2.5% per year. Global finance operates much faster now, with many huge multinational companies capable of realigning global trade to exclude us. China, already larger than us by PPP GDP, has been working diligently to grow its trade globally. India is growing at 3 times our rate. The EU and Commonwealth countries have long had deep global trade relationships. Instead of trying to compete fairly, the maladministration has chosen to shoot us in the foot at a critical point in the race.
The quick losses of US investors will spread rapidly through the economy. Some business owners are already deciding which jobs to cut. The US government cannot bail out all our exporters. Sure, some businesses will eventually grow domestically, and some coal mining jobs will be saved. But the disruption of trade will cascade through the economy first, long before significant steel production returns to the US. And those jobs are not high paying anymore. In China a steel worker makes less than $15,000 per year. Tariffs are not going to make that a high paying job here. If Americans wanted to do that work at those rates, then we would still be producing lots of steel. But, we chose to do other work. Forcing people to do jobs they don’t want to do, without paying them what they want, is how the Fascist economy works: 20% of Nazi Germany’s labor were slaves.
The market, while shocked, is now, finally, clearly indicating that we’re headed in the wrong direction. Investors can do math, and they’re now betting on imminent economic danger. I remember walking unsteadily outside my office in 2000 after some brutal market days. Most folks outside were still happily going about their business—many at tech firms in that city at that time—seemingly unaware of how many of their jobs would disappear and that their lives would soon change. Same thing happened when the housing bubble burst. One of the few people to understand well what was going on at the time was Bonddad on this site. Others figured it out later. The stock market is predictive. The recent crash indicates that the economy will get worse quickly, even though it may take time before it works its way to you.
Normally, a rational President would be trying to stave off this dark future by all means. So, typically, stock market panics are brief. Unfortunately, the maladministration is saying that the decline is both needed and positive, indicating neither understanding of the problem nor desire to fix it. To me, this signals that we’re entering a long-term problem, rather than a short-term blip. I hope I’m wrong.
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