Free Reports

Why Trump Won't Start a Real Trade War

Aug 3, 2018

27

NORMANDY, FRANCE - Oh boy... the plot thickens.

The New York Times reports:

  • President Trump escalated his trade war with China on Wednesday, ordering his administration to consider more than doubling proposed tariffs on $200 billion worth of Chinese goods to 25 percent from 10 percent, as talks between Washington and Beijing remain at a standstill.

    Mr. Trump instructed the United States trade representative to look into increasing tariffs on Chinese imports like fish, petroleum, chemicals, handbags, and other goods to 25 percent, a significant escalation in a dispute that is beginning to take a toll on industries and consumers in both countries. A final decision on the size and scope of the tariffs is not expected before September.

Fake Wars

The Deep State welcomes war. But, especially in the case of a trade war with China, it must be a phony war.

And here is a good test. We'll see how well, or badly, we have connected the dots.

According to the picture we see, the Deep State - the more or less permanent, but fluid and schismatic, group of insiders that controls U.S. public policies - uses war to gain public support for policies that actually serve only one purpose... to shift power, wealth, and status from the public to itself.

That's why the trade war has to be fake.

Real wars threaten the Deep State's survival. The wars in the Middle East (now also in Africa), for example, help justify trillions of dollars of wealth transfers to the military/industrial/surveillance complex.

--- Advertisement ---
Want big returns from small caps? Your strategy is what matters most...

A lot of people dream of making big returns from small caps.

But most of them don't have any strategy in place for achieving that, and just go by a friend's suggestion or their gut feeling while investing in small caps.

Wrong method!

After 10-plus years' experience of picking out high-potential small companies, Equitymaster has uncovered and finetuned a strategy to make big returns from small caps.

To know what that strategy is, just click here...
------------------------------

But the U.S. has nothing really at stake in these fights; no matter what happens, it will not be invaded, bombed, or humiliated.

Likewise, the wars at home - against poor people and drug users - go on for decades. And no one is better off - except the Deep State industries engaged in the wars themselves (welfare agencies, prisons, police, drug pushers, etc.).

The Donald's new trade war is a delight, too; already, the sidewalks are slick with greasy swamp water; lobbyists line up around the block to ask for special favors and dispensations. The insiders gain power and money by controlling crony trade deals.

But neither the president nor his crackpot advisors may realize the danger. And here is where it gets interesting: They mustn't allow this war to get out of hand.

Where the Elite Get Money

A real trade war with China would be disastrous - for the Deep State itself. That's why we predict it won't happen. The 25% tariffs will more than likely never be fully implemented.

Mr. Trump will follow a pattern that is already familiar. He will talk tough. He will stir things up. He will announce victory. And he will quietly back down.

Or else he will not survive as president to the end of his term.

The world now has nearly $250 trillion of debt. Typically, an economy can comfortably carry about 1.5 times as much debt as it has output (GDP).

Global GDP is estimated to be about $90 trillion. That means anything above $135 trillion of world debt is excess, made possible only by the manipulation of the credit system by central banks that have added some $18 trillion to the world's monetary foundation since 1997.

Total world debt was about $40 trillion back in the late 1990s. Now, it is more than six times as much. World output was only about $27 trillion two decades ago. It has grown, too, but at $90 trillion today, only half as fast.

Main Street is where ordinary people work. They get their incomes and living standards from GDP. As it grows, they grow.

But Wall Street is where the credit flows... and where the elite get their money - from rising asset prices.

Super investor Warren Buffett famously gauges the stock market by comparing Wall Street to Main Street - stock market capitalization to GDP. The stock market value should be about even with annual GDP, he says.

An increase in credit heats up stock prices but leaves Main Street GDP cold. During the dot-com bubble, for example, stocks rose to 145% of GDP - indicating an oversold market ready for a correction.

And now, according to some calculation, the ratio is even more out of whack, with stocks at 149% of GDP.

Out of Balance

Bonds and real estate are similarly overpriced. Wall Street and Main Street have never before been so out of balance. The rich have never been richer, compared to the average guy.

According to classic theory, increasing the supply of money faster than the supply of goods (GDP) causes prices to go up.

Consumer prices did rise in recent years... but not nearly as much as the explosion of the base money supply would imply. Why not?

The answer is in China... where dirt-cheap labor and an export-led economy met America's fake-money regime.

In effect, the U.S. exported its inflation... It exchanged its major export item - dollars - for cheap Chinese-made goods.

This kept U.S. consumer prices from rising and prevented the working stiffs from noticing that they were getting ripped off.

By contrast, prices rose sharply for things the Chinese couldn't export - medical care and college educations, for example.

But that's not the last dot. We need to look at what happened to the dollars sent to China.

They left the country as consumer spending. But they didn't stay abroad for long. Chinese merchants deposited them at the Bank of China, which used them to buy U.S. bonds.

They went out from the pockets of Main Street households, in other words, and came back into the pockets of Wall Street investors in the form of higher asset prices.

Fake-Money System

And there you have the gist of the whole world economic boom of the last 30 years: Big increases in the money supply, with low consumer prices and low interest rates. The China trade was an essential part of the whole fake-money flimflam.

Fake money was created by central banks... and flowed into the pockets of the elite, where it could be converted to real wealth. (Some reports show the top 10% of families making 100% of the wealth gains in the entire 21st century.)

Meanwhile, the masses were kept quiet with cheap consumer items from China (available from Walmart or Amazon), along with mindless distractions like YouTube and Facebook.

But imagine a real trade war... No more "everyday low prices" at Walmart. Inflation would spike up. And no more low interest rates, either.

China - either by necessity or revenge - would dump its $1.2 trillion worth of U.S. bonds. Bond prices would crash as a massive supply came to the market. Bond yields would soar, forcing stocks down, too.

Commodity prices would collapse. And most of the world would enter a depression - including the U.S.

And which group would lose most? Those with the most to lose, of course - the rich... the well-connected... and the Deep State insiders.

Earlier this week, we passed on economist Martin Feldstein's estimate that $9 trillion will be lost in the U.S. stock market when prices revert to the mean. But that is just the beginning.

At least that much... and more... would be lost in bonds and real estate, too, in the U.S. alone.

When this picture becomes clear to Mr. Donald J. Trump... our prediction is that he will turn his attention elsewhere.

Regards,

BILL BONNER Founder, Agora Inc
Bill Bonner, Bonner & Partners
Vivek Kaul's Diary

PS: When the markets nosedive, that's the best time to put wealth building in motion. Small caps are crashing - that only means there is more opportunity than ever to buy them up - get our market-beating small caps recommendations here.

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.

Recent Articles

A New Infrastructure Boom March 26, 2019
Selva Freigedo talks about the potential in 5G network and how it could transform the way we communicate.
A 40 Somethings Guide to YouTube Hits March 20, 2019
Vivek dwells into a new YouTube phenomenon.
As the Economy Slows Down, Maruti and Two-Wheeler Companies Cut Production March 19, 2019
The country's largest car maker has cut production by more than a fourth.
In Supporting Demonetisation, RBI Behaved Like an Old Uncle Not Willing to Take a Stand March 13, 2019
The minutes of the meeting of the RBI Board which happened before demonetisation have been released.

Equitymaster requests your view! Post a comment on "Why Trump Won't Start a Real Trade War". Click here!