Of Tulip Bulbs and Tin Cans


Of Tulip Bulbs and Tin Cans

Profits based on speculation but not backed by intrinsic value will generally come to a halt.  As Herb Stein said, if a thing can’t go on forever, it will eventually stop. In the early 17th century, the Netherlands became the world’s most active trading nation.  Futures contracts for tulip bulbs became so popular that at one point they were changing hands several times a day and fetching as much as (in today's dollars) $1 million.  However, in 1637, the bottom fell out of the market when the bubonic plague broke out and nobody showed up at auction to buy them.

Today, economists use the term “animal spirits” for profits based on speculation that are not backed by intrinsic value.  President Donald Trump has used his considerable sales ability to stoke the American business community – and introduced (rashly in my opinion) deregulation – with the result that the U.S. economy is booming.

The question is: is this a true recovery based on solid fundamentals or another bubble?  Either way, Trump has now begun shooing America's best customers out of the market for its goods and services.  In a clumsy attempt to bully America’s closest allies and strongest trading partners into renegotiating the trade agreements (NAFTA and the WTO), the Trump administration recklessly imposed 25% duties on steel and 10% on aluminum imports from both Canada and the European Union this week. 


In an immediate reaction to this news, (think animal spirits), the Dow dropped 300 points then rebounded 50 points for a net loss of 250 points, or 1%.  If my calculation is correct, this translates to a loss of approximately $68 billion.

This does not take into account the further hit the American economy is about to get from retaliatory tariffs on American goods.  As the premier of Ontario said today: “Mr. Trump is a bully, and we’ve had just about enough of him up here.” 

What Americans have to ask themselves is: how much business will America have to lose before buyers stop showing up at the auction altogether?  That’s what happened in 1930, the last time the American government imposed protectionist tariffs.

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