That would explain a lot. He\u2019s not very effective at much, but he is effective at setting the preconditions for a recession<\/a>. From Yahoo!Finance<\/a> quoting the Kobeissi Letter:<\/p>\n \u201cIn a way, President Trump may actually want a recession,\u201d the post says. \u201cA recession achieves most of Trump\u2019s economic goals at once,\u201d referring to his campaign promises of low inflation, treasury yields, a reduction in trade deficits, a rate cut by the Federal Reserve, and lower oil prices.<\/p>\n<\/blockquote>\n As I\u2019ve discussed before<\/a>, it\u2019s hard for tariffs (a microeconomic tool, with sometimes macro consequences) to substantially reduce the trade deficit especially when foreign countries can retaliate.<\/p>\n I wondered, then, what it would take to get the trade deficit to zero, by way of exchange rate depreciation or recession (or, expenditure switching vs. expenditure reduction). Consider the following graph.<\/p>\n Figure 1:<\/strong> Net exports to GDP (blue, left scale), and real value of US dollar, 2006M01=1 (tan, right log scale). NBER defined peak-to-trough recession dates shaded gray. Source: BEA 2025Q1 second release, Federal Reserve, and NBER.<\/em><\/p>\n Note that some observers have indicated 20-30% as a reasonable number<\/a>. One of those is Peter Hooper who at the Fed coauthored a well known paper on trade elasticities<\/a>; however, I think the 20-30% figure is a number which incorporates other effects besides just the relative price effects).<\/p>\n In order to answer the question of required depreciation, we need elasticity estimates. Without going into extensive calculations, I obtained some back of the envelope estimates (for more detailed analyses, but on older data, see here<\/a>).<\/p>\n These are regressions of y\/y growth rates, non-overlapping (sampled at Q4) for goods exports on rest-of-world US export weighted GDP and real value of dollar, and for non-oil goods imports on US GDP and real value of the dollar, along with a Covid dummy (imports, exports, GDP in real terms).<\/p>\n Confirming my earlier estimates, export price elasticities are higher than non-oil import price elasticities, and import income elasticity is very high.<\/p>\n Using these estimates, I conduct back of the envelope calculations to see what changes are needed for an elimination of the 1053 bn Ch.2017$ reduction the net export deficit (2024Q4 numbers).<\/p>\n By my calculations, a 20% real depreciation of the dollar only gets one about a third of the way (326 bn), while a 1.4% reduction in GDP relative to trend will zero out the trade deficit, assuming the rest-of-the-world does not experience any decline (so that US exports are stable). While 1.4% doesn\u2019t sound like a large number, given a baseline growth rate of 1.8%, this implies about a 3.2% decline relative to baseline.<\/p>\n Using the SPF forecast, this implies GDP would have to be 23197 vs 23952 in 2026Q2.<\/p>\n\n
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