After the Tariff Earthquake

The fires that have been ignited are not yet visible.

There's a eerie calm after an earthquake. Those trapped in collapsed buildings are aware of the consequences, but the majority experience a silence, as if the world stopped and has yet to restart. The full consequences are as yet unknown, and so we breathe a sigh of relief. Whew. Everything looks OK.

But this initial assessment is off the mark, as much of the damage is not immediately visible. As reports start coming in of broken infrastructure and fires break out, we start realizing the immensity of the damage and the rising risks of conflagration. Uncertainty and rapidly accelerating chaos reign.

President Trump used a medical analogy for what I'm calling The Tariff Earthquake: the patient underwent a procedure and has had a shock, but it's all for the good as the healing is already underway.

We often use medical or therapeutic analogies, but in this case the earthquake analogy is more insightful in making sense of what happens to economic structures that have been systemically disrupted.

The key parallel is the damage is often hidden, and only manifests later. The scene after the initial shock looks normal, but water mains have been broken beneath the surface, foundations have cracked, and though structures look undamaged and safe, they're closer to collapse than we imagine, as the structural damage is hidden.

Another parallel is the potential for damage arising from forces other than the direct destruction from the temblor. The earthquake that destroyed much of San Francisco in 1906 damaged many structures, but the real devastation was the result of fires that started in the aftermath that could not be controlled due to the water mains being broken and streets clogged with debris, inhibiting the movement of the fire brigades, which were inadequate to the task even if movement had been unobstructed.

The earthquake damaged the city, but the fire is what destroyed it.

What was considered rock-solid and safe is revealed as vulnerable in ways that are poorly understood. Structures that met with official approval collapse despite the official declarations. What was deemed sound and safe cracked when the stresses exceeded the average range.

The Tariff Earthquake exhibits many of these same features. Much of the damage has yet to reveal itself; much remains uncertain as the chaos spreads. Like an earthquake, the damage is systemic: both infrastructure and households are disrupted. The potential for second-order effects (fires in the earthquake analogy) to prove more devastating than expected is high.

(First order effects: actions have consequences. Second order effects: consequences have consequences.)

The uncertainty is itself a destructive force. Enterprises must allocate capital and labor based on forecasts of future supply and demand. If the future is inherently unpredictable, forecasting becomes impossible and so conducting business becomes impossible.

Just as the 1906 fires sweeping through San Francisco were only contained by the US Army blowing up entire streets of houses to create a fire break, the containment efforts themselves may well be destructive. We had to destroy the village in order to save it is a tragic possibility.

Here is a building damaged in the 1989 Loma Prieta earthquake that struck the San Francisco Bay region. The residents may have initially reckoned their home had survived intact, but the foundation and first floor were so severely damaged that the entire structure was at risk of collapse.



On this USGS map of recent earthquakes around the world, note the clustering of quakes on the "Ring of Fire" that traces out the dynamic zones where the planet's tectonic plates meet. Earthquakes can trigger other events along these dynamic intersections of tectonic forces.



In a similar fashion, The Tariff Earthquake is unleashing economic reactions across the globe, each of which influences all the other dynamic intersections, both directly and via second-order effects generated by the initial movement.

Anyone claiming to have a forecast of all the first-order and second-order effects of the The Tariff Earthquake will be wrong, as it's impossible to foresee the consequences of so many forces interacting or make an informed assessment of all the damage that's been wrought that's not yet visible.

The fires that have been ignited are not yet visible. They're smoldering but not yet alarming, and so the observers who are confident that everything's under control have yet to awaken to the potential for events to spiral out of control.

New podcast: The Coming Global Recession will be Longer and Deeper than Most Analysts Anticipate (42 min)

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