Bill Strong and Stephen Rahl on comparative advantage, trade deficits and reserve currency status

“The reality... is that the international trade system is designed to cheat us... every country around the world cheats us.” 

~ Peter Navarro, Counselor to the President of the United States 

“Navarro is dumber than a sack of bricks... Navarro is truly a moron.  What he says is demonstrably false.”

~ Elon Musk, Senior Advisor to the President of the United States

David Ricardo was not “dumber than a sack of bricks.”  Rather, the brilliant, early 19th-century British economist developed the theory of comparative advantage, in opposition to the then, widely accepted, mercantilism.  In his “Principles of Political Economy and Taxation” (1817) he proves that countries running trade surpluses are not “cheating” their trade partners and that free trade benefits both parties, regardless of which runs a surplus/deficit. 

Since Ricardo’s era, in the modern globalized trading world the country that has the world reserve currency must, by necessity, sustain a current account deficit.  This is because the extra demand for its “international” money must overvalue its currency.  This ensures that said country sustains more imports than exports, penalizing its net trade balance into long-term deficit.

Hence, the American dollar’s global trade dominance status provides the US with an “exorbitant privilege”—permitting only Americans to enjoy a permanent trade deficit and allowing us to live better than we otherwise would.  The idea that eliminating our current account deficit would “make America wealthy again” is exactly backwards. 

Rhetoric surrounding the radical “Liberation Day” tariff regime ignores Ricardo and harkens back to the good-old-days of tail fins and American manufacturing dominance.  We remember Dad’s made-in-Detroit 1957 Chrysler Windsor, and “good” as those days seemed at the time (real GDP per capita was about one quarter of today’s), they pale in comparison to the 21st century—partly because consumer goods were inferior and much more expensive then.  The idea that Trump’s (now paused) drastic tariff regime would improve Americans’ standard of living is a complete fantasy.

~ Bill Strong and Stephen Rahl, Eschaton Opportunities Fund Quarterly Letter Q1 2025

1957 Chrysler Windsor

Bill Strong on the rise of Donald Trump

The ascension of a Donald Trump administration seems to represent a genuine and meaningful disruptive force in American government—and indeed maybe in society at large (given the growing severity and duration of America’s problems, it is not surprising that such a political reaction has finally occurred).  Obviously, we cannot predict how much of the agenda for change will be implemented--but history suggests much of it will be difficult.  Nor can we say for sure what its net outcome will be. 

However, we would note that Trump’s optimistic populist prescription for addressing America’s decline does NOT include a call for popular sacrifice.  There is no acknowledgement that total debt (and the burdens of servicing it) in our country, and the world, is unsustainable.  In other words, there is no call for Americans to reverse our decades-long habit of living way beyond our means, as huge imbalances in borrowing and the current account show.  Rather, suggestions of further gains are legion. 

In addition, I doubt if Republicans’ call for a return to “common sense,” is referring to stock market valuations.  As chronicled below, stock valuations in the US are beyond “manic”.  In other words, we see no evidence that new leadership acknowledges the massive valuation anomalies in markets.  A renaissance of faith in “American Exceptionalism” seems to justify the severe over and under-pricing of assets and currencies in the global marketplace. 

~ Bill Strong, co-portfolio manager, Eschaton Opportunities Fund, Quarterly Letter Q4 2024, January 27, 2025