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Trump's Trade Catastrophe?

Jan 6, 2017

27

It is worse than 'voodoo economics', says former Treasury Secretary Larry Summers. It is the 'economic equivalent of creationism'.

Wait a minute...

Larry Summers is wrong about almost everything. Could he be right about this?

'Trade Cheaters'

Summers is referring to the paper written by two members of Trump's trade team: his pick for secretary of commerce, billionaire investor Wilbur Ross, and the director of Trump's new National Trade Council, PhD economist Peter Navarro.

It calls for a turn away from free trade and toward managed trade - or what is vaguely described as 'fair' trade.

Colleague Karim Rahemtulla, on an investment scouting trip in India and China, sends this note:

  • I met with a factory owner in China. He pays his workers 2,000 renminbi a month, about US$300. He thinks it's too expensive and is now opening factories in Vietnam and Cambodia, where he can pay half of what he's paying just outside Shanghai.

    In India, I saw two ads in the newspaper. One was for call center workers with a college degree as a requirement. The pay range was between 9,000 rupees (US$132) and 15,000 rupees (US$220) a month. The other ad was for a chartered accountant with three years' experience for the Nehru Foundation - a big Indian NGO. The pay for that was 29,000 rupees per month, about US$426.

What kind of 'fairness' is it that denies a job to a man in Calcutta to pay a man in San Jose 10 times as much for the same work?


Ross and Navarro call China a 'trade cheater'.

Imagine a town with a bar on every corner. One of these gin joints gets an idea of how to increase his customer base: Offer free drinks!

There's a 'cheater' for sure...and a moral conundrum for a nitwit.

What should a serious drinker do?

Turn up his nose...turn away his face...and take his business to another place in the name of fairness?

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Laughing, Crying, Learning

But it is not fairness that interests us today; it is a worldwide depression, to which we will return in a minute.

First, we would like to thank our dear readers.

There is no obvious benefit to reading our Diary. We give no stock tips. Our market-timing advice is, let us say, imperfect.

As for our insights on the rest of life...well, we only hope they are worth what you pay for them.

Thanks also to the many readers who write in to the Diary mailbag with their comments.

We read every one of them. Often surprised...often touched...sometimes alarmed - we laugh, we cry, we learn...and consider retirement.

Now, back to our story...

Bad Engineers

If the new Trump administration follows the advice laid out in the Ross-Navarro plan, it will almost certainly lead to disaster.

Of course, there will probably be a disaster anyway. But as it is, you can't fault the hotel mogul, reality TV star, and president-elect. He didn't build this railroad; it won't be his doing when it goes off the rails.

But Ross and Navarro are bad engineers... They're twisting the tracks!

Specifically, they're advising the new administration to abandon free trade in favour of crony trade - deals designed to reward or punish certain industries or countries depending on which direction the political winds and lobbyists' money are blowing.

As far as we know, all human economic progress has been made by a combination of technological advances, specialisation, and an elaboration of the division of labour made possible by property rights, honest money, and free-market capitalism.

Anything that stands in the way of these things - for instance, crony trade deals - reduces output, wealth, and choice.

But alert readers are right: Just as free immigration can be incompatible with a zombie welfare system (it attracts immigrants who become parasites)...free trade can cause problems in a fake financial system (it causes imbalances that threaten the world economy).

Out of Hand

An honest money system has feedback loops that keep things from getting out of hand.

Under the Bretton Woods system, for instance, a nation that imported more than it exported soon found its gold reserves - and therefore its money supply - shrinking. A recession was sure to follow.

But the post-1971 fake money system has no such natural limits.

Americans bought products from overseas with the feds' fake dollars. Foreigners - particularly the Chinese - took these dollars and used them to build out their economies...and compete with US manufacturers to provide cheap products for credit-fueled US consumers.

As we reported yesterday, America's trade deficit with China (the dollar value of imports we buy from China unmatched by exports to China) now runs at $1 billion a day.

And since 1980, when trade with the Middle Kingdom really got going, we have accumulated a trade deficit of about $10 trillion with China.

That is the money that built the factories that now undercut American manufacturers...that created a $225 trillion pile of global dry debt...and that corrupted and corroded the whole world's financial system.

Still, we wonder if Ross and Navarro really know what they are doing.

They say they aim to reduce America's trade deficit. That is to say they want the US to export more and import less...thus keeping more dollars at home.

Do they realise that our whole world economy is built on fake money, giant US trade imbalances, and a mountain of debt?

Take away the trade imbalances and the whole system collapses.

The fake dollars go overseas...then come back home and buy US Treasurys, lowering yields. (In the bond market, yields move 'inversely' to prices.)

If the fake money stays home, Treasury yields - and the government's borrowing costs - go up...and the whole shebang comes down. Interest rates rise. Stocks fall. The economy goes into recession...and probably depression. China is devastated. And jobs disappear everywhere...in Mexico, China...and the US. Is that what they really want?

Regards,
BILL BONNER Founder, Agora Inc
Bill


Bill Bonner is the President & Founder of Agora Inc, an international publisher of financial and special interest books and newsletters.

Disclaimer: The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

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1 Responses to "Trump's Trade Catastrophe?"

sanjay

Jan 9, 2017

Borrowing has become a way of life for individuals, is the most worrisome sign. Is Indian economy relatively insulated from US fake money? FII funds not withstanding. Max it may deflate the stock market, or can it do more damage?

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