The Truth about Tariffs: The Ultimate Guide to Busting Inflation Myths

[00:00:00] A lot of people are saying tariffs cause inflation. People bring up how during the Great Depression there was this Smoot-Hawley tariff, which maybe really hurt the economy and the depression got bigger. So I just want to quickly describe why tariffs actually have nothing to do with inflation and chances are they are not a bad thing. And it remains to be seen whether they're going to be a good or great thing. Let's just go over the basics a little bit.

[00:00:33] This isn't your average business podcast and he's not your average host. This is the James Altucher Show. Something interesting happened yesterday, which is that my wife, she was grocery shopping and she left her car in the parking lot and her car was keyed by somebody while she was in the grocery store, meaning someone scraped their key across the door and created a mark.

[00:01:03] And my wife, Robin, she has a Cybertruck. And so I guess this person, whoever keyed her car either really hates Cybertrucks or as I suspect is more likely the case, hates Elon Musk. So decided that all Cybertrucks or Tesla's, they were just going to key randomly like that would maybe send a message.

[00:01:30] Like anybody who has a Tesla represents Elon Musk's political beliefs. So there's obviously this is a crazy thing. I don't think this is the average person, but I am noticing this kind of behavior more and more. Like one time my wife was telling me just a week ago that she was parking right next to somebody else. And that person, when they saw it was a Cybertruck, pulled out of the spot that she was already parking in and parked across the lot and glared at my wife when they're walking in the store at the same time.

[00:01:59] So people hate Elon Musk so much they're willing to vandalize or not be physically near other Teslas. And why this is interesting is, so my wife signed up for the waiting list for Cybertrucks in 2021. As far as we all know, Elon Musk was a liberal Democrat then. Like we had no idea where he stood on anything. And my wife didn't care about any of that stuff. She just wanted a Cybertruck.

[00:02:26] I mean, they were supposedly environmentally friendly, runs on electricity. And I know a lot of people do not like the Cybertruck design. If you think about it, all the cars on the road look the same. Every SUV looks the same. Every small car looks the same. Every midsize car looks the same. The Cybertruck really stands out. It looks different. It reminds me of like when the Chrysler PT Cruiser came out and it looked different. I don't even drive, but I appreciate cars that have an interesting design.

[00:02:54] Cybertruck certainly has an interesting design. And obviously it's disturbing that A, someone was willing to vandalize because of their political beliefs. And look, obviously this person was liberal. And in general, I've been liberal most of my life. I would say it's the classic thing. I'm economically conservative, probably more conservative as I get older and liberal on most social issues. On the one hand, I miss the days of 2012.

[00:03:24] I was vaguely aware there was even an election going on. Do you even remember who Obama was running against in 2012? He was running against Mitt Romney. And there was nothing memorable about that. In fact, they probably stood for the same things. There's just nothing memorable about that election. Anyway, people stand for many different things now, whether it's on the topics of war or taxes or I suppose there's a lot of differences. But one issue has stood out recently and it's tariffs.

[00:03:53] Now, our tariffs, a lot of people are saying tariffs cause inflation. People bring up how during the Great Depression, there was the Smoot-Hawley tariff, which maybe really hurt the economy and the depression got bigger. So I just want to quickly describe why tariffs actually have nothing to do with inflation. And chances are they are not a bad thing. And it remains to be seen whether they're going to be a good or great thing.

[00:04:21] But let's just go over the basics a little bit. First off, tariffs, as you know, are basically a tax on goods that are imported into the country. So let's say a chip costs $2,000 and it's coming from China and we have a 20% tariff on it. That means when it arrives at customs in the U.S., they've got to pay a $400 tariff, 20% of $2,000.

[00:04:48] And so as far as the manufacturer is concerned, they can't just charge $2,000 plus profit. They have to charge $2,400 plus profit. So that's why people think when there's lots of tariffs, there's inflation. This is not true. Inflation has nothing to do with tariffs. So let me just mention in the 1800s, so for basically 100 years, 97% of all U.S. revenue came from tariffs.

[00:05:18] There were no income taxes. So 97% of all U.S. revenue came from tariffs. And during that time, if you look at a chart of inflation during the 1800s, inflation was basically 0%. I mean, maybe it was like 1% per year, not more than that. The economy was booming. The U.S. government obviously had enough money to keep going. And again, 97% of all U.S. revenue came from tariffs. So the stock market had its ups and downs like it always does, like it did in the 1900s also.

[00:05:48] But there was no increase in inflation. So why would tariffs now cause inflation? Now, let's just ask the question first. What is inflation? Well, I'll tell you what inflation isn't. If a few items have their prices go up, that is not inflation. There's a lot of definitions out there. I posted something on Twitter and all these professors were disagreeing with each other, not just me, but with each other about what inflation is. It was all BS.

[00:06:17] I don't care if you're from like a professor of economics at Harvard. There was a professor of economics at Harvard arguing with a professor of economics at Stanford. There were other people literally calling me a retard. Like, and then I would look at their background. There are professors at Harvard or Princeton. Like people get so upset. But I will tell you what inflation is. And it's just common sense. Because inflation occurs when basically everything goes up. The value of the dollar is weaker.

[00:06:44] So it takes more dollars to buy anything. It takes more dollars to buy a hamburger. It takes more dollars to buy a shirt. It takes more dollars to buy a newspaper. Inflation is when the average price of a basket of goods, meaning like a whole random sampling from the economy of products, like shirts, newspapers, coffee, eggs, flowers, whatever, cars. So when the average price of a basket of a wide variety of items goes up,

[00:07:13] that means inflation is occurring. Now, what inflation people have to understand is different from price. So a lot of people think if something costs $100, then the price has to be at least $100. That's not really true. Price is a function of supply and demand.

[00:07:40] If there is a lot of supply of something and no demand, then the price is going to go down until there's a demand for it. So for instance, during COVID, there was the lockdowns. And everybody thought, oh, no one's going to be driving. So nobody needs oil for gasoline. So the price of oil is going to go way down. Well, guess what happened? Prices of oil went to literally zero. In fact, there was a brief period when the price of oil was negative.

[00:08:09] You had to pay people to take your oil if you were an oil company. Now, what happens when the price goes below the cost is they stop making it. Oil companies stopped drilling for oil in March of 2020 because the price went to zero. And all of the products we see in the world are just the products where demand is enough that the price could be higher than the cost. Again, the price is determined by supply and demand.

[00:08:40] And if the price goes below the cost, then companies will just stop making that item because it's not profitable. Now, another example in COVID, everybody was worried the supply of toilet paper was going to go down because all supply chains were breaking down. So there was not going to be nobody delivering toilet paper to the grocery stores. So everybody was worried supply was going to go to zero. And demand for toilet paper is, of course, always pretty steady throughout history.

[00:09:08] So the price of toilet paper not only skyrocketed, but there were actual physical fights to get toilet paper. So again, supply was going down. Demand was going up. So the price of toilet paper was so high, it was worth it to people to have a physical fight to get their toilet paper. So again, it had nothing to do with the cost to make toilet paper. It has everything to do with supply and demand.

[00:09:35] Now, why do people think tariffs cause inflation? Well, it makes common sense, but it's not common sense. And I'll explain in a second. It seems like everything you would put a tariff on, the price would go up and then there would be inflation. So like, for instance, in the chip example, the chip was $2,000 and there's a 20% tariff. Now the price is going to be $2,400 at least because manufacturers pass on the price to the consumers. Here's the issue with this. Let's say I make a fixed amount of money.

[00:10:05] I make $100. And now let's say I buy five items every month. I buy gas, a shirt, a newspaper, coffee, and a banana. And I spend $20 on each. It adds it to my $100. If gas goes up to $25 instead of $20 because of tariffs, then I'm going to have to think to myself, hmm, I can't afford the other four items. So maybe I stopped buying newspapers so I could buy gas to go to work.

[00:10:32] Now, if everybody is like me and we all stopped buying newspapers, guess what? The price of newspapers will go down until they find their customers. The newspaper companies will go out of business because they're not selling any more newspapers because everyone's using their extra money to buy gas. So newspapers would have to keep lowering their price until people finally say, oh, okay, I still have $15 left after spending $5 more on gas. So now I can spend $5 less on newspapers.

[00:11:01] And it just so happens the price of newspapers has gone down by $5. Or newspaper companies will just go out of business. Let's look actually at a specific example. If there are tariffs on chips from China, then three things could happen. A, we spend more on chips. But that means like in the example I had above about gas, we spend less on other items. So demand goes down for other items and price goes down for other items. In which case, inflation has not changed at all because I'm spending more on some items,

[00:11:31] but I'm spending less on other items. B, China starts making chips in the US so they don't have to raise their prices. So this is the case Taiwan Semiconductor has announced they're going to spend $100 billion building plants in the US. So they're going to move all their manufacturing here so prices will stay the same. And again, inflation is zero in that scenario.

[00:11:56] C, the third scenario is we simply stop buying chips for whatever reason. We said, you know what? We have enough computers. We're going to stop buying chips. So now because there's no demand, all the chipmakers will say, listen, can we lower the price to $2,000 so that you can start buying them? So that when demand goes down, price has to go down or businesses go out of business. So profit margins get a little bit lower. Maybe even some companies lose money for a while and all the smaller companies go out

[00:12:23] of business while the bigger companies can afford to lose a little bit of money while prices are still higher. But in all of these cases, inflation stays the same. We can also look for alternatives instead of buying chips from China. Maybe we'll buy chips from a US manufacturer. Now it just so happens Taiwan Semiconductor basically manufactures all the chips. So what happened is that in order to avoid the price increase and maybe risk competition

[00:12:50] developing, Taiwan Semiconductor is moving their operations to their manufacturing operations to the US. So in all of these cases, inflation stays the same. If we have a fixed amount of money, now note, my salary is not going up. So I have a fixed amount of money and prices are going up for some items, but that means demand has to go lower for other items. So if the price of eggs are going up and I eat a lot of eggs per month, I might say, you know what?

[00:13:18] I can't really afford to do these Netflix subscriptions anymore. And so what will happen is Netflix will say, hmm, we seem to be having less demand for Netflix. We're going to have to lower prices to increase demand again. If you ever self-publish the book on Amazon, you can change the price whenever you want. And you'll always notice as the lower the price, and this is sort of common sense, the more people buy it. So price is not a function of the cost of the item.

[00:13:44] And this is where some professor from Stanford is like, oh, this guy is a moron. Well, show me a case in history where price was determined not by supply and demand. I mean, look, the cost is a factor because you won't even make the product if the price goes below the cost. But the main factor, again, is supply and demand. And in every scenario that I just described, there's no inflation. So when does inflation occur?

[00:14:11] Well, when money is printed by the U.S. government, here's exactly how they print money. The Federal Reserve will lend money to the U.S. So how do they do that? Every bank has treasury bills, which are like mini loans to the U.S. Every bank sells treasury bills. And the Federal Reserve will say to like Chase, hey, we're going to buy $100 billion worth of treasury bills. And Chase is like, sure, this is the price.

[00:14:40] Give us $100 billion. And the Federal Reserve says, guess what? You already have the $100 billion. We just put it in your bank. How'd the Federal Reserve do that? They have the power to take a bank and put $100 billion in it without that $100 billion ever existing before. So now the U.S. is in more debt. They're in debt to the Federal Reserve. The bank has $100 billion that never existed before. The Federal Reserve waved a magic wand and the $100 billion appeared in the bank.

[00:15:07] That's how the money supply increases. When the money supply increases, then here's what banks do. They lend out more money. People are very happy. Companies that borrowed a lot of money might raise salaries. So in general, it's considered economic stimulus when the Federal Reserve creates money like this. But if they put too much money into the system, then there's inflation.

[00:15:33] Because if everybody had $100 before and now suddenly everybody has $200, then whenever there's demand for something, people will say, well, I used to pay a dollar for a newspaper. But I'm now willing to pay $2 for a newspaper. And so suppliers and manufacturers quickly realize that everyone is willing to spend more money for their products. So all prices raise. In the extreme example I give, oh, everybody has $100 and suddenly they have $200, inflation would literally be 100%.

[00:16:03] Now, it's interesting to note that during COVID, so from the years 2000 to 2022, 40% of all the money that has existed in the history of the planet was created. So let me repeat that again. 40% of all the money that has ever existed was printed just in the years 2000 to 2022. So guess what?

[00:16:27] If you look at a chart of the money supply, it goes straight up from 2000 to 2022, particularly in 2021 when most of the bailouts were happening. And then if you look at inflation, a year later, inflation spikes at the fastest rate in history. We didn't have the highest inflation in history, but it moves up at the fastest rate in history. So inflation goes up only when there is more money in the system. If there's not more money in the system, we have the same situation before.

[00:16:56] If you have to spend more money on one thing, you have to spend less on something else. So demand and supply changes and there's no inflation. So that's the summary. Inflation goes up only when the money supply goes up. Tariffs will change behavior. So, for example, we'll buy less chips from China or China will build their chips or Taiwan will build their chips in the United States. So tariffs change behavior, but it does not change the inflation rate.

[00:17:26] And by the way, this is on a defense of tariffs. This is more like an economics kind of podcast in this episode. But inflation during Trump was about 1.7%. Inflation only went up to like 9% or close to 10% when in 2022, 2023, when the money supply went up so much. Now, what is the problem with tariffs? Well, let's look at the Great Depression. So the Great Depression kind of started with the stock market crash in 1929.

[00:17:55] But a few months later, these tariffs went into effect called the Smoot-Hawley Tariff Act, which passed around this time. And the Smoot-Hawley Tariff Act was what's called a blanket tariff. It just put a tariff on everything. The Smoot-Hawley was an act passed in Congress and it put tariffs on 20,000 goods that were being imported into the U.S.

[00:18:19] And when you put a blanket tariff on everything, the price of everything goes up and people can't find alternatives really. And also it was the Depression was starting. So it was just a bad move. Like blanket tariffs try to force inflation, but it doesn't work because you end up getting this weird stagflation because prices are up, but nobody could afford anything. So you get either a recession or a depression. That's not what's happening here.

[00:18:46] You know, on March 4th, he imposed tariffs on Mexico, Canada, and strategically chips in China. A few other things, but this was the main thing. So he didn't put tariffs on everything and it was just select goods. Now, what was the result? And we see this. Now, Trump in the first term, I think, used tariffs for the United States to make money.

[00:19:12] And the U.S. generated something like 30 or 40 billion dollars in revenues from the tariffs that Trump imposed. You could say it all adds up, every big counts, but that's not a big number. I mean, the U.S. spends six and a half trillion, almost seven trillion a year. So an extra 30 or 40 billion doesn't solve the real issues. So I think during this term, he's using tariffs much more strategically. So one strategic issue is national security.

[00:19:39] Taiwan semiconductor based in Taiwan makes all of the chips in the U.S. for computers. China, as we all know, might someday invade Taiwan. We don't know, but it's in the air. We've had generals on this podcast say that it's going to happen. So what if China invades Taiwan? We're in big trouble because we won't be able to get any computers. So strategically, Trump or the U.S., let's say, put a tariff on chips coming out of Taiwan.

[00:20:09] And now, guess what? Taiwan's going to move their manufacturing here and spend 100 billion dollars in the U.S. to do it. So strategic goal accomplished. And then there won't be any tariffs on chips. Now, Canada and Mexico is another story. So unlike his first term, which is mostly focused on China, Canada and Mexico are our friends. They're like our best friends. You know, you don't want to have a trade war with your best friends, but maybe you do.

[00:20:34] So first off, as we all know, the administration has a problem with people having an open border, not policing their border. So this administration wants Mexico to police their border and they want Canada to police their border. They don't want drug traffickers, sex traffickers, all that kind of stuff coming across the border. Trump has even specifically said, unless you fix your problems at the border, we're going to put tariffs on. And that's exactly what he did. He put a 25 percent tariff on a bunch of goods coming out of Canada and Mexico.

[00:21:04] Before that, there was almost zero percent tariffs. But let's just put this in perspective. Canada, even though we're like the best friend of Canada, Canada has huge tariffs on our goods going into Canada. For instance, if some company makes milk and sends it over to Canada, southern Canada, Canada says, well, we got to put a tariff on it. It's a 241 percent tariff.

[00:21:30] So if you've said over a bottle of milk and it costs $2.50, now it costs $6 to sell milk in Canada. And we don't have any tariff on milk coming from Canada here. Cheese, Canada's tariff on us, 245 percent. Butter, 299 percent. Chicken, 238 percent. Cotton shirts, 17 percent. Cars. Cars, actually cars, 0 percent. So in some cases, they have no tariff.

[00:21:59] In some cases, they have these huge tariffs on us. And Trump has long said, he said this in his first administration, it's not fair when a country puts a high tariff on us and the United States, which is the customer of the rest of the world. I mean, Canada exports 75 percent of the goods that they make to the U.S. We are the entire customer of all of Canada's manufacturers.

[00:22:23] So Trump's point is it's not fair that with this tariff, they are keeping all of our goods out and we're supporting the entire industry of their economy. Like who's going to buy milk made in the U.S. if it costs six dollars when you could buy milk made in Canada for two dollars. So no one's going to do it. So partly Trump is saying, let's make it fair. He hasn't even raised it to the level they have it.

[00:22:49] But it does look like strategically, both Mexico and Canada are going to agree to what we want and those tariffs are going to start to go away. Or Trump might do reciprocal tariffs, in which case that's called a trade war. But there's no winner to a trade war. So ultimately, both sides reduce their tariffs. Look, that's probably going to be the outcome. But it's interesting to note that Trump is being much more strategic this term about his tariff.

[00:23:17] Again, to summarize, he's not putting a blanket tariff on, meaning tariffs on everything. That would be like the Swoon-Hawley tariff. It's very different from that. He's putting it on things of national strategic interest like, hey, we don't want all our chips coming from Taiwan. If China is going to invade Taiwan, let's make them here. Also, the tariffs now are more strategic in the sense that it's not just about making revenue. It's about making things equal. So perhaps other countries will lower their tariffs on us.

[00:23:45] I do not expect tariffs to be a huge source of revenue for the U.S. I think more interesting is this kind of enhanced green card he just announced called a golden card, which he's selling for $5 million. People want to start businesses here and create jobs and so on. They can get there for $5 million. They can get this golden card. That might be an interesting revenue maker for the U.S. But I don't think tariffs by themselves. I think he's going to use it much more strategically.

[00:24:12] Again, to summarize, tariffs do not cause inflation. Only money printing causes inflation. If there's a fixed supply of money, then when some goods go up in price, other goods go down and inflation remains the same. Second thing is today's tariffs are much more strategic than a blanket tariff like the Smoot-Hawley tariff in 1930.

[00:24:35] Today's tariffs are either about national strategic interests or making trade fair, which will bring down hopefully all tariffs. And finally, I'm really upset people have such a problem about Teslas and Elon Musk. They just blanket vandalize anybody who's got a Tesla or a Cybertruck. I will note Volkswagen was essentially created by Hitler during World War II. Nobody seems to be keying Volkswagens, but that's neither here nor there.

[00:25:04] You can't expect people to know all the history of every car. But please, if you're listening to this and you feel inclined to kee someone's car or do some other damage, just don't do it. Get off Twitter. Get off social media. Read a good book. Listen to some of my podcasts. Have a good day.