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Trudeau to Trump: Drop Dead! (Implications for Gold) - Peter Diekmeyer (3/4/2017)

Trudeau to Trump: Drop Dead! (Implications for Gold) - Peter Diekmeyer

April 3, 2017

Forty years ago, the Daily News published its famous Ford to City: Drop Dead headline, which dealt with President Gerald Ford’s response to a New York City handout request.

The article recalls Canadian Prime Minister Justin Trudeau’s message to US President Donald Trump, who has been seeking help to relieve America’s defence forces.

Trudeau’s blunt reply, delivered in last week’s Liberal budget, came in the form of vast cuts to Canada’s military spending. Just as important as the scale of the cuts was the timing, which came shortly after the US President had demanded an increase.

This sharp rebuttal has important implications for how a Trump Administration’s policies could play out on the world stage, the US economy, and yes, for gold.

First, a little background.

Donald Trump's threats

America is widely criticized for its wars, occupations, and bombings. However, the country also plays a crucial role as a global cop, which on balance, does a lot more good than bad, particularly for rich Western economies.

American soldiers guard the world's sea lanes, keeping commerce safe. Its bases in more than 100 countries help keep a range of governments in power, which are favorable to US (and Canadian) interests.

But that costs a lot of money, and American taxpayers have been footing much of the bill. American military spending, as a percentage of GDP, is roughly triple that of what other NATO counties pay, possibly more.

(The precise total is hard to determine, because reported US defence outlays exclude items such as nuclear weapons, military pensions, supplemental allocations, and the like).

Trump has demanded that NATO allies, which have been freeloading on the back of US protection, ante up. His key demand is that they abide by a target set more than a decade ago: to spend 2% of their GDPs on defence.

More important, Trump threatened to withdraw protection for laggards by hinting that the United States might not feel bound to defend countries that didn't meet their 2% commitments.

There's method to Trump's madness. Lost in his bellicose rhetoric is the fact that if NATO members adhere to his demands, it would generate huge business for American defence contractors, who produce much of the world's best equipment.

Trump's request, in short, is for foreign help to bail out America's military industrial complex.

Trudeau's response: smile, shake hands and cut defence spending

Like Gerald Ford before him, Justin Trudeau never actually voiced the words "Drop Dead." In fact Trudeau's recent meeting with the US president was characterized by smiles, much-publicized handshakes, and a co-announcement with a swooning Ivanka Trump of a new initiative to advance women's rights.

Then Trudeau got on a plane, went home, and did exactly the opposite of what Trump demanded. Worse, the $8.4 billion in "re-profilings" that Trudeau's government announced amount to the largest defence cuts in recent history.

Canada has no enemies to defend against, Trudeau is betting. Even if it did, with time and winter as our allies, Canada could defeat any invading force, the thinking goes.

Implications for gold and the economy

Trudeau's slap in the face of a nascent Trump Administration has huge implications for its agenda going forward. The most obvious of these relates to Trump's "America First," trade policies.

As previously highlighted (see Smoot-Hawley, Donald Trump's economic mentors), the idea that the United States can set up trade barriers without encountering serious retaliation is a pipe dream.

Unless Trump changes his bullying tactics, he is similarly unlikely to get his way with Congress. Like Trudeau, US Senators (both Republicans and Democrats) will simply smile at his tax cut, health care, and deregulation proposals, play along, and then filibuster to ensure they never make it to the floor.

There's even a takeaway for investors worried that Trump, who is facing the same liquidity trap that Franklin Delano Roosevelt faced during the 1930s, might similarly respond by seizing Americans' gold.

Because a Trudeau government that ignores Trump's threats on defence provides a strong signal that it would also be unlikely to comply with US expropriation requests related to American gold stored in Canada.

Trump is a quick learner. But whether he can adjust his tactics fast enough to force a shift in Canadian policy remains an open question.

Don’t miss a golden opportunity.

Now that you’ve gained a deeper understanding about gold, it’s time to browse our selection of gold bars, coins, or exclusive Sprott Gold wafers.

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About the Author

Peter Diekmeyer has been a business writer/editor with publications such as Sprott Money News, the National Post and Canadian Defence Review and Jane's Defence for nearly three decades. He has studied in MBA, CA and Law programs but dropped out of all three after failing to convince the academics that they were wrong about everything.  Diekmeyer has interviewed more than 200 CEOs and filed reports from dozens of countries. 

His most terrifying moment came when he spoke to central bank economists for the first time and realized that (unlike politicians) they actually believed their own analysis and forecasts. 
He has been a regular contributor to the Sprott Money blog since 2015.

*The author is not affiliated with, endorsed or sponsored by Sprott Money Ltd. The views and opinions expressed in this material are those of the author or guest speaker, are subject to change and may not necessarily reflect the opinions of Sprott Money Ltd. Sprott Money does not guarantee the accuracy, completeness, timeliness and reliability of the information or any results from its use.