Dear Money & Crisis Reader,
Your trusty old editor is on annual leave this week.
As you read this, I’m probably somewhere on the eastern shore, drinking cocktails in a CAT 4 hurricane.
But that doesn’t mean the Money & Crisis headquarters is closed for business.
I’ve asked some of my colleagues — as well industry experts on crisis, money and personal liberty — to fill in for me while I’m gone.
Today’s issue comes to you courtesy of Jim Rickards, economist and author of New York Times bestseller Currency Wars.
All the best,
Editor, Money & Crisis
P.S. Jim Rickards was one of the few big name economists who actually predicted the 2008 financial crisis. For a limited time, you can grab a free copy of his new book The Road to Ruin: The Global Elites’ Secret Plan for the Next Financial Crisis as a reader of Money & Crisis. In it, Jim reveals the powerful strategies you can take to protect your money and your family from the next crisis. Claim your FREE copy now.
The Trade War Will Get Worse
Several years ago, I began warning my readers that a global trade war was likely in the wake of the currency wars.
This forecast did not seem like a stretch.
It would simply be a carbon copy of the sequence of events kicked off by Weimar Germany when they started the original currency war in 1921.
In a matter of years, the currency war morphed into the global trade wars and eventually transformed into a full-scale shooting war started by Japan in Asia and Germany in Europe.
The existing currency war started in 2010 with Obama’s National Export Initiative, which led directly to the cheapest dollar in history by August 2011.
The currency war evolved into a trade war by January 2018. And unfortunately, a shooting war cannot be ruled out given current developments in North Korea and the South China Sea.
The reasons the currency war and trade war today are repeating the 1921–39 sequence are not hard to discern.
The Repeating Pattern of War
Currency wars are a way to steal growth from trading partners by reducing the cost of exports. So, countries resort to currency wars when they face a global situation of too much debt and not enough growth.
The problem is that this tactic doesn’t work because trade partners retaliate by reducing the value of their own currencies. This competitive devaluation goes back and forth for years.
Everyone is worse off and no one wins.
Once leaders realize the currency wars are not working, they pivot to trade wars.
The dynamic is the same.
One country imposes tariffs on imports from another country. The idea is to reduce imports and the trade deficit, which improves growth. But the end result is the same as a currency war.
Trade partners retaliate and everyone is worse off as global trade shrinks.
Currency wars and trade wars can exist side by side as they do today. But eventually, both financial tactics fail and the original problem of debt and growth persists.
At that point, shooting wars start to emerge. Shooting actually solves everyone’s problems to a certain extent because the winning side increases production and the losing side has infrastructure destroyed that needs to be rebuilt after the war.
Yet the human cost is high.
The potential for shooting wars exists in North Korea, the South China Sea, Taiwan, Israel, Venezuela and elsewhere.
Let’s hope things don’t get that far this time.
The Mainstream Media Does Not Understand the Trade War
What surprised me the most about the new trade war was not that it started, but that the mainstream financial media denied it was happening.
It’s possible to date the trade war back to January 2018 when Trump announced tariffs on solar panels and appliances mostly from China.
A deeper analysis would look all the way back to 2001 when China joined the World Trade Organization (WTO) and immediately began to break the rules. Or 2008 when China cheapened its currency to prop up exports during the global financial crisis.
But January 2018 is a more formal date because the Trump tariffs were explicit and not indirect as China’s tactics had been.
The media have consistently denied the impact of this trade war.
Early headlines said that Trump was bluffing and would not follow through on the tariffs.
Later headlines said that China was just trying to save face and would not retaliate.
Today the story line is that the trade war will not have a large impact on macroeconomic growth.
The mainstream media have been wrong in their analysis at every stage of this trade war. The trade war is here, it’s highly impactful and it will get worse. The sooner investors and policymakers internalize that reality, the better off they’ll be.
The easiest way to understand the trade war dynamics is to take Trump at his word.
Trump is not posturing or bluffing. He will agree to trade deals, but only on terms that improve the outlook for jobs and growth in the U.S.
Trump is not a globalist; he’s a nationalist. That may not be popular among the elites, but that’s how he sets policy. Trump is entirely focused on the U.S. trade deficit. He does not care about global supply chains or least-cost production. He cares about U.S. growth, and one way to increase growth is to reduce the trade deficit.
That makes Trump’s trade policy a simple numbers game.
If the U.S. can gain jobs at the expense of Korea or Vietnam, then Trump will do it; too bad for Korea and Vietnam.
From there, the next step is to consider what’s causing the U.S. trade deficit. This chart tells the story. It shows the composite U.S. trade deficit broken down by specific trading partners:
The problem quickly becomes obvious. The U.S. trade deficit is due almost entirely to four trading partners: China, Mexico, Japan and Germany.
Of those, China is 64% of the total.
President Trump just concluded a new trade deal with Mexico that benefits both countries and will lead to a reduced trade deficit as Mexico buys more U.S. soybeans.
The U.S. has good relations with Japan and much U.S.-Japanese trade is already governed by agreements acceptable to both sides.
This means the U.S. trade deficit problem is confined to China and Germany.
The atmosphere between the U.S. and the EU has been improving lately and Germany knows it needs to make concessions in order to avoid punitive tariffs on EU exports to the U.S.
Therefore, the global trade war is not global at all but really a slugfest between the U.S. and China, the world’s two largest economies.
The Fight of the Century
This reality and the gravity of the situation are beginning to sink in even to the most optimistic rookie journalists. Seasoned market-maker and stock specialist Stephen “Sarge” Guilfoyle offered this insightful analysis in his blog for Aug. 31, 2018:
Part of the problem with market reaction to trade news is that keyword-reading algorithms react ahead of human response to any news item. Every time. Price discovery has become perverse. This is now part of the complex, changing environment. Just this week, we have already seen a tremendous effort to renegotiate a NAFTA deal that has the backing of both the United States and Mexico. A deadline for bringing Canada on board looms today…
Less than two weeks ago, the president threatened to pull the United States out of the WTO (World Trade Organization). The president has complained in the past that the WTO does not always side with the U.S. and sometimes infringes on rights of self-determination.
The president also rejected a European Union offer to scrap automobile tariffs, citing European consumer habits that lead to a greater appetite across that continent for vehicles manufactured on the continent.
Guess what? In the realm of global trade, the United States is an extremely desirable customer. In fact, for most, we are their best customer.
Think the export-based Chinese economy can afford to sell significantly less manufactured goods across borders?
Think that same Chinese economy can allow for a significant devaluation of U.S. sovereign debt?
Think EU manufacturers can afford to sell substantially fewer vehicles inside U.S. borders?
Of course not.
Even China is slowly coming to the realization that the trade war is real and here to stay. Senior Chinese policymakers are beginning to refer to the trade war as part of a larger strategy of containment of Chinese ambitions that may lead to a new Cold War.
Unlike in other policy arenas, Trump enjoys bipartisan support in Congress.
The Republicans are backing Trump from a national security perspective and the Democrats are backing him from a pro-labor perspective. China sees the writing on the wall.
This trade war will not end soon, because it’s part of something bigger and much more difficult to resolve. This is a struggle for hegemony in the 21st century.
The trade war will be good for U.S. jobs but bad for global output. The stock market is just waking up to this reality. The currency wars and trade wars are set to get worse.
Investors should prepare now.
Editor’s note: For more of Jim’s insights on the developing global financial crisis, check out his new book, The Road to Ruin: The Global Elites’ Secret Plan for the Next Financial Crisis. Right now, it’s free to readers of Money & Crisis. Click here to get a hardback copy delivered straight to your home.