Interesting Times Arrive

“Things sure are getting exciting again, ain’t they?”  The remark was made by a colleague on Tuesday morning, as we stepped off the elevator to grab a cup of coffee.


Ancient Chinese curse alert… [PT]


“One moment markets are gorging on financial slop like fat pigs in mud.  The next they’re collectively vomiting on themselves. I’ll tell you one thing.  President Trump’s trade war with China won’t end well.  I mean, come on.  China’s outplayed the U.S. at this game for over a quarter century.  They have the upper hand.

“Besides, what’s the point?  If we no longer buy stuff from China, then how will China buy Uncle Sam’s debt?  And the timing for all this couldn’t be worse.  Deficits are spiraling out of control.  We’re talking $1 trillion or more a year for the next decade.  I don’t see any way out of this quagmire, do you?

“Printing money to buy government debt is no solution at all.  And a trade war will just hasten America’s insolvency.  What is it that Trump thinks he’ll accomplish, anyway?

“I’ve also heard that China’s tickled the debt poodle way more than we have.  So they may be worse off at absorbing an economic shock than us.  But I wouldn’t bet my life on it.

“Obviously, like I said, this won’t end well.  Yet there’s no turning back now. The trade war genie’s already out of the bottle.  That’s easy enough to see.  And maybe President Trump is right, and a trade war with China is warranted.


A joint hanging venture… [PT]


“But in the end, something big – like a massive fighting war or worldwide depression – will need to happen before this genie can be put safely back inside the bottle.  How do I know this?

“I know this because this is how these peacocks on the walk contests always play out.  The invisible line has been crossed.  Trump and Xi Jinping have both gone all in. There’s no backing up.  There’s no walking away.  They’ll keep chest bumping each other until something serious happens.  Then it will really be game on.”


It cries out for funding… the federal debtberg in all its glory. [PT]


Integration and Disintegration

Certainly, our colleague brings up some good points.  Is a trade war upon us?  If so, where will it lead?  Here we take a deep breath, and a sip of coffee, and endeavor to offer some perspective.

Expansions and contractions in global trade have rotated back and forth over long secular trends for thousands of years. The Silk Road, for example, was established by the Han Dynasty of China in 130 BC.  This trade route provided continuous conduit for the exchange of goods, culture, and knowledge, between east and west for nearly 1,600 years.

Trade along the Silk Road came to an abrupt end when the Byzantine Empire fell to the Turks in 1453 AD.  For whatever reason, maybe a madman was President, geopolitical trends turned inward towards isolation. The Ottoman Empire closed the Silk Road and cut all ties with the west.


Sultan Mehmet II, the conqueror: not a friend of free trade [PT]


Global trade these days is conducted by shipping cargo across the international waters of the high seas.  Trade cycles over the last 200 years have often expanded for such a lengthy duration that several generations will come and go while only knowing the expansionary half of the trend. These extended expansionary episodes compel people to believe that increased global trade is a linear phenomenon.


A little row-boat with trinkets from China. [PT]


You have to go back to pre-1960 in the United States, Japan, and Western Europe to find someone with living memory of a global trade contraction.  China’s latest trade expansion began in the 1970s.  Eastern Europe’s began in the early 1990s.

Just because global trade has expanded for the last 50 years doesn’t mean it will continue to expand without interruption.  In fact, geopolitical shocks have periodically disrupted or reversed overall long-term trends in expanding global trade.  According to the World Trade Report 2013:


“Politics [at times] has intervened – sometimes consciously, sometimes accidentally – to slow down or even roll back the integrationist pressures of technology and markets.  It is this complex interplay of structural and political forces that explains the successive waves of economic integration and disintegration over the past 200 years; and in particular how the seemingly inexorable rise of the ‘first age of globalization’ in the 19th century was abruptly cut short between 1914 and 1945 – by the related catastrophes of the First World War, the Great Depression and the Second World War – only to be followed by the rise of a ‘second age of globalization’ during the latter half of the 20th century.”


Trade War Game On!

Presently, it’s unclear if we’re in the early stages of a global trade contraction. The trend in expanding global trade appears to have slowed over the last decade, following the 2008 financial crisis.  The budding trade war between the United States and China just might be the geopolitical shock that closes out the ‘second age of globalization.’


It wasn’t all that long ago, when they were still the best of friends… [PT]


This week Trump and Xi likely pushed the trade war past the point of no return. They called each other’s bluffs and raised the stakes as the week progressed.  By Thursday things had hit a fever pitch.

Our friends at Zero Hedge have been closely monitoring the situation.  Here are several choice quotes they alerted us to from an editorial published in the Global Times, China’s state-owned party mouthpiece:


“Many believe that the Trump administration’s $50 billion tariff on Chinese products is meant to pressure China to submit to the U.S. demands.  If that is the case, the U.S. will undoubtedly lose.  This is because the Chinese government has rallied its citizens and is prepared to go toe-to-toe in its fight with Washington.  In fact, more and more Chinese citizens think that an ‘epic trade war’ is inevitable, and could knock some common sense into the U.S. government, so that it will change its way of dealing with China.

“If the trade war happens, China will show that it has just as many reserve plans as the U.S., if not more.  Chinese experts suggest that China could even take actions to weaken the strength of its currency.  Since China is the world’s largest trading economy and the largest buyer of commodities like oil products, China could use its influence to push its own currency, RMB, in global markets to reduce the dominance of the U.S. dollar.  That would be a heavy blow to Washington.

“If this trade war comes to pass, it will be an evenly matched total war between China and the U.S. economies, and not some small scuffle.  It would be delusional for the U.S. to think it will be victorious at the end of this trade war.  China comes up with the conclusion in confidence, and will not shy away from letting Washington know in this situation.”


Alas, not good friends anymore. [PT]


By Thursday evening Trump had ordered US Trade Representatives to consider raising Chinese import tariffs an additional $100 billion, from $50 billion to $150 billion.  Several hours later, “Beijing vowed to defend China’s national interest against U.S. trade actions and protectionism.”

Now we’re talking.  Trade war game on!

Definitely not friends anymore!


In closing, lettuce spare a thought for the victims…  [PT


Chart by: St. Louis Fed


Chart and image captions by PT


MN Gordon is President and Founder of Direct Expressions LLC, an independent publishing company. He is the Editorial Director and Publisher of the Economic Prism – an E-Newsletter that tries to bring clarity to the muddy waters of economic policy and discusses interesting investment opportunities.




Emigrate While You Can... Learn More




Dear Readers!

You may have noticed that our so-called “semiannual” funding drive, which started sometime in the summer if memory serves, has seamlessly segued into the winter. In fact, the year is almost over! We assure you this is not merely evidence of our chutzpa; rather, it is indicative of the fact that ad income still needs to be supplemented in order to support upkeep of the site. Naturally, the traditional benefits that can be spontaneously triggered by donations to this site remain operative regardless of the season - ranging from a boost to general well-being/happiness (inter alia featuring improved sleep & appetite), children including you in their songs, up to the likely allotment of privileges in the afterlife, etc., etc., but the Christmas season is probably an especially propitious time to cross our palms with silver. A special thank you to all readers who have already chipped in, your generosity is greatly appreciated. Regardless of that, we are honored by everybody's readership and hope we have managed to add a little value to your life.


Bitcoin address: 12vB2LeWQNjWh59tyfWw23ySqJ9kTfJifA


6 Responses to “Trade War Game On!”

  • Hans:

    Would it be fair to say, that those whom argue that
    trade imbalance do not matter are the same folks
    whom believe that Federale debt does not matter either?

  • Hans:

    Now, this is a very interesting hypothesis, as to why America has suffered
    a long and lengthy red balance of trade.

    “Some economists attribute the enduring U.S. trade deficit to a new form of mercantilism by America’s trading partners, dubbed “monetary mercantilism” by Joshua Aizenman & Jaewoo Lee (2005), who defined it as “hoarding international reserves in order to improve competitiveness.” Under the classical form of mercantilism, countries encouraged their exports and discouraged their imports in order to build up their gold hoards. Under the new form, countries build up their foreign currency reserves as part of currency manipulations designed to encourage their exports and discourage their imports.

    Japan had gradually invented monetary mercantilism in the years following World War II. Then Taiwan, the Asian Tigers and China copied the policy that had converted Japan from a weak and backward economy to a world powerhouse. In recent years, more and more countries have been joining the bandwagon, with the United States as their primary target. They have accumulated dollar assets in order to manipulate currency values and preserve the conditions that produce trade surpluses for them and trade deficits for the United States. China’s foreign exchange reserve buildups outstripped all of the others put together. Navarro and Autry (2011) summarized the disastrous effect of Chinese mercantilism upon the U.S. economy:”

    The nations whom have enacted this action, have all reached economic prominence – with
    of course their primary mechanism being trade surpluses. Does this suggest, that currency
    manipulate is more important than investments?

  • Hans:

    JKS, thank you for your reply.

    “if a foreign trader chooses to save and invest in US govt. debt, US business debt, or equity; its still trade even though it shows up in that much maligned “trade deficit” stat.”

    Again, investments appear in current accounts. Foreign investments in the USA, are still debt or asset sales, which can not continue indefinitely.

    I will ask this question until I receive an adequate answer: Present a nation which has had a trade deficits over an extended period (30 years with 2/3 deficit) that has risen to economic prominence, America notwithstanding.

    Here is a more extensive article from Mr Griswold.

    “There is no connection between trade deficits and industrial decline. From 1992 and 1997, the U.S. trade deficit almost tripled, while at the same time U.S. industrial production increased by 24 percent and manufacturing output by 27 percent. Trade deficits do not cost jobs.”

    Not true, if one examines the FRED chart. In fact, since 2000 industrial growth has stalled. Moreover, as of 1970
    industrial percent growth has been on a steep decline, based on the 1950 to 1970 period. Moreover, net
    manufacturing investment in the United States all but collapsed after 1980. The result is reflected in the
    second link below.

    “Americans have run an annual trade deficit in goods and services with the rest of world in every year since 1976. That unbroken string of deficits has colored much of the trade debate in the United States in the last two decades.”

    Has not Mr Griswold seen these effects upon the ever shrinking middle class! But he like the Fed said, trade deficit do not matter, because of foreign investments.

    “A nation’s trade deficit is determined by the flow of investment funds into or out of the country.”

    What becomes of nations which do not have the economic appeal for investments?

    “An understanding of the trade deficit begins with the balance of payments, the broadest accounting of a nation’s international transactions. By definition, the balance of payments always equals zero—that is, what a country buys or gives away in the global market must equal what it sells or receives—because of the exchange nature of trade.”

    So what, does this accounting method mean that the nation is healthy? A business balance statement always zeros out, does this mean the firm has a net worth?

    The thrust of the Mr Griswold prose is this – “Exports Are Good, Imports Are Better” rather than the effects on wealth.

    If what he says is correct, then we should have numerous examples of countries which imported
    themselves to economic prominence. Who are they and how many or should I say few are there?

    Here is chart comparing economies over a five year period: those with a surplus and
    those with a deficit and their annual growth rate.

    Most if not all nations that prospered, did so because they had trade surpluses, which
    created wealth and a higher standard of living. Red China is the latest example and
    India and others will surely follow.

    Exports Are Good, Imports Are Better

  • Thank you very much for these analyses !

  • Hans:

    For every Red China import of $5.05, America exports $1.30. They say the balance
    of trade does not matter – if so, then why even bother to keep the stats?

    Granted, it is not a game of winners or losers, however, clearly in the long run, one
    of two becomes more wealthier. One becomes a debtor, another a creditor.

    No nation has risen to economic prominence by running a continuous trade deficient.

    • jks:

      Hans, when you get paid do you spend the entire amount? If you save and invest a portion of your pay, that’s a trade deficit. Is that a bad thing? No. It’s a good thing. Capitalist economies need capital to start and/or expand business.

      Why even bother to keep the stats? Why indeed. Because if a foreign trader chooses to save and invest in US govt. debt, US business debt, or equity; its still trade even though it shows up in that much maligned “trade deficit” stat.

      This short article explains the benefits of a trade deficit well:

      Any trade intervention that discourages foreigners from trading with the US cuts them off from earning the dollars they need to buy American. Trade makes everyone wealthier. That’s why a trade war can’t be won–only lost.

Your comment:

You must be logged in to post a comment.

Most read in the last 20 days:

  • Trade War Game On!
      Interesting Times Arrive “Things sure are getting exciting again, ain’t they?”  The remark was made by a colleague on Tuesday morning, as we stepped off the elevator to grab a cup of coffee.   Ancient Chinese curse alert... [PT]   “One moment markets are gorging on financial slop like fat pigs in mud.  The next they’re collectively vomiting on themselves. I’ll tell you one thing.  President Trump’s trade war with China won’t end well.  I mean, come...
  • The Dollar Cancer and the Gold Cure
      The Long Run is Here The dollar is failing. Millions of people can see at least some of the major signs, such as the collapse of interest rates, record high number of people not counted in the workforce, and debt rising from already-unpayable levels at an accelerating rate.   Total US credit market debt has hit a new high of $68.6 trillion at the end of 2017. That's up from $22.3 trillion a mere 20 years ago. It's a fairly good bet this isn't sustainable....
  • Rise of the Japanese Androids
      Good Intentions One of the unspoken delights in life is the rich satisfaction that comes with bearing witness to the spectacular failure of an offensive and unjust system. This week served up a lavish plate of delicious appetizers with both a style and refinement that’s ordinarily reserved for a competitive speed eating contest. What a remarkable time to be alive.   It seemed a good idea at first... [PT]   Many thrilling stories of doom and gloom were published...
  • US Stock Market: Happy Days Are Here Again? Not so Fast...
      A “Typical” Correction? A Narrative Fail May Be in Store Obviously, assorted crash analogs have by now gone out of the window – we already noted that the market was late if it was to continue to mimic them, as the decline would have had to accelerate in the last week of March to remain in compliance with the “official time table”. Of course crashes are always very low probability events – but there are occasions when they have a higher probability than otherwise, and we will...
  • Getting High on Bubbles
      Turn on, Tune in, Drop out Back in the drug-soaked, if not halcyon, days known at the sexual and drug revolution—the 1960’s—many people were on a quest for the “perfect trip”, and the “perfect hit of acid” (the drug lysergic acid diethylamide, LSD).   Dr. Albert Hoffman and his famous bicycle ride through Basel after he ingested a few drops of LSD-25 by mistake. The photograph in the middle was taken at the Woodstock festival and inter alia serves as a...
  • Claudio Grass on Cryptocurrencies and Gold – An X22 Report Interview
       The Global Community is Unhappy With the Monetary System, Change is Coming Our friend Claudio Grass of Precious Metal Advisory Switzerland was recently interviewed by the X22 Report on cryptocurrencies and gold. He offers interesting perspectives on cryptocurrencies, bringing them into context with Hayek's idea of the denationalization of money. The connection is that they have originated in the market and exist in a framework of free competition, with users determining which of them...
  • From Fake Boom to Real Bust
      Paradise in LA LA Land More is revealed with each passing day.  You can count on it.  But what exactly the ‘more is of’ requires careful discrimination.  Is the ‘more’ merely more noise?  Or is it something of actual substance?  Today we endeavor to pass judgment, on your behalf.   Normally, judgment would be passed on a Thursday, but we are making an exception. [PT]   For example, here in the land of fruits and nuts, things are whacky, things are...
  • No Revolution Just Yet - Precious Metals Supply and Demand Report
      Irredeemably Yours... Yuan Stops Rallying at the Wrong Moment The so-called petro-yuan was to revolutionize the world of irredeemable fiat paper currencies. Well, since its launch on March 26 — it has gone down. It was to be an enabler for oil companies who were desperate to sell oil for gold, but could not do so until the yuan oil contract.   After becoming progressively stronger over the past year, it looks as thought the 6.25 level in USDCNY is providing support for the...
  • The “Turn of the Month Effect” Exists in 11 of 11 Countries
      A Well Known Seasonal Phenomenon in the US Market – Is There More to It? I already discussed the “turn-of-the-month effect” in a previous issues of Seasonal Insights, see e.g. this report from earlier this year. The term describes the fact that price gains in the stock market tend to cluster around the turn of the month. By contrast, the rest of the time around the middle of the month is typically less profitable for investors.   Due to continual monetary inflation in the...
  • Flight of the Bricks - Precious Metals Supply and Demand
      The Lighthouse Moves Picture, if you will, a brick slowly falling off a cliff. The brick is printed with green ink, and engraved on it are the words “Federal Reserve Note” (FRN). A camera is mounted to the brick. The camera shows lots of things moving up. The cliff face is whizzing upwards at a blur. A black painted brick labeled “oil” is going up pretty fast, but not so fast as the cliff face. It is up 26% in a year. A special brick, a government data brick of sorts, labeled...

Support Acting Man

Item Guides


The Review Insider

Austrian Theory and Investment



THE GOLD CARTEL: Government Intervention on Gold, the Mega Bubble in Paper and What This Means for Your Future

Realtime Charts


Gold in USD:

[Most Recent Quotes from]



Gold in EUR:

[Most Recent Quotes from]



Silver in USD:

[Most Recent Quotes from]



Platinum in USD:

[Most Recent Quotes from]



USD - Index:

[Most Recent USD from]


Mish Talk

Buy Silver Now!
Buy Gold Now!

Diary of a Rogue Economist