Justin’s note: The trade war is spiraling out of control.
If you’ve been reading the Dispatch, you already know what I mean. In short, Trump’s taken his tough stance on trade to new heights.
He hit China with more tariffs last month. He also threatened to impose tariffs on Mexico. This is a huge deal. After all, we’re talking about two of America’s biggest trading partners.
Unfortunately, this is likely just a taste of what’s to come.
Doug Casey explains why in today’s brand-new Conversations With Casey. Doug also tells me why Trump absolutely cannot win the trade war…
Justin: Doug, Trump’s really been living up to the “Tariff Man” nickname lately. Why can’t he stop it with the tariffs?
Doug: This really brings us to a discussion of Trump himself. I admit to kind of liking Trump when he was running in 2016, despite the numerous philosophical and psychological problems that I pointed out – accurately – in 2011 when he was toying with a run. And I did make a gentleman’s bet for 100 ounces of silver with Marin Katusa that Trump would win – but that’s a different matter. The main reason I hoped Trump would win was because he wasn’t Hillary, who would have been a total and complete disaster.
Although it was clear Trump didn’t know anything about economics, he at least had a business background, unlike Hillary or most politicians. He also said he was going to end all the pointless wars the U.S. either started or aggravated.
Unfortunately, what little mettle Trump had has apparently been corrupted by living in Mordor for the past two years. The Deep State is a very real thing.
He hasn’t pulled troops out of Afghanistan, Syria, or a dozen other countries where the U.S. has varying levels of actual combat troops. Instead, he’s made the already bloated military bigger. He’s letting his warmongering advisors play chicken with China, Russia, and Iran. So, he’s failed from that point of view.
Justin: And what about trade?
Doug: He’s taken a mercantilist, nationalist, aggressive, even warlike approach to trade. He’s basically telling countries to do what the U.S. government wants, or they’ll be cut off from using dollars, or embargoed. In the case of China and Mexico – the biggest U.S. trading partners – their exports will be subject to massive duties.
It’s correctly pointed out that when you put a duty on goods imported to the U.S. it just makes them that much more expensive for the Americans buying them.
It’s actually rather funny. The major export of the U.S. is paper dollars. In effect, the U.S. can print an essentially unlimited amount of fiat money, and get those nice foreigners to accept them for real goods. The Chinese send all kinds of electronics and miscellaneous junk to fill people’s garages and storage containers. Mexicans send fruit, vegetables, and goods manufactured in the Maquiladora zones just across the border. Which are largely owned by American companies.
This is slated to end very badly. Mexican workers will lose their jobs, and many will try to migrate to the U.S. American consumers will pay more. American business will suffer from having less to import and sell. A business slowdown in China – which is as debt-burdened as the U.S. – could result in widespread bankruptcies, bank failures, and unemployment. The effects could ripple throughout a very unstable world, with unforeseen blowback. Don’t forget that what really set off the last depression, in 1929, was the failure of a relatively minor Austrian bank. And the Smoot-Hawley tariffs. The stock market crash was an effect, not a cause.
At some point, foreigners may – actually I’ll go so far as to say will – stop accepting dollars, which are I.O.U. nothings on the part of a bankrupt government.
When that happens, we’ll have a truly massive currency crisis. Foreigners won’t want to own dollars. They’ll be viewed as an undesirable store of value, and a questionable medium of exchange. Old maid cards, hot potatoes. There are perhaps 20 trillion of them outside the U.S. – although I don’t think anyone has the real number. Only Americans are obligated to accept them as legal tender – they’re just convenient trading sardines in foreign countries. They’ll be shipped back to the U.S. in exchange for American shares, American land, and American businesses. Americans will be transformed into indentured servants in their own country. But perhaps that’s just recompense for living above their means for decades…
Trump is just asking for trouble by upsetting a world already overbalanced on an economic tightrope.
Justin: I agree that the current trade war will hurt demand for U.S. dollars going forward.
But could Trump win in the short term? In other words, will he get China to play by our rules?
Doug: The Chinese are very shrewd, highly intelligent, and an ancient trading culture. They recognize how much progress China has made over the last 40 years. It’s almost unique in world history when you consider how much and how fast they’ve grown.
They don’t want to jeopardize their banking system, which is bankrupt. Like most countries, China’s banking system is floating on a sea of debt. It can’t be repaid. They don’t want hundreds of millions of angry Mrs. Wongs who can’t access the yuan they’ve saved for decades. They understand the damage a trade war can do in today’s highly interconnected world. They want to avoid that. I don’t believe Trump understands how damaging a trade war would be.
So, there’s a chance that the Chinese will give Trump what he wants, if only to stop him from doing something really foolish.
On the other hand, it’s very, very important with Oriental cultures not to lose face. They absolutely don’t want to be seen as if they’re being told what to do, or be bossed around. Especially by a power in decline. They have long memories, and recall being humiliated by foreigners in the 19th and early 20th centuries. They may feel forced to do something they know is foolish.
Justin: And what about Mexico?
Doug: Well, Andrés Manuel López Obrador is now running the country. He’s an economically ignorant socialist, but he doesn’t want to create problems for Mexican producers exporting to the U.S.
So, it’s possible that he’ll send the Federales to round up Salvadorians, Guatemalans, and Hondurans who are crossing Mexico, and the main source of migrants coming across the border. And the main thing that’s ignited Trump’s temper tantrum.
I understand the problem of having literally millions of poor, ignorant peasants from a different race, a different culture, and speaking a different language flood the country. It’s extremely destabilizing. And quite different from the waves of European immigrants of a hundred years ago – which is another discussion. In fact, I don’t doubt the current problem is going to worsen considerably. For instance, hundreds of Africans from the Congo, Equatorial Guinea, Senegal, and a dozen other benighted places on the continent are apparently using Mexico as a way to migrate to the U.S. every week.
It would be nice if Obrador tightens Mexico’s borders. But the next decade is going to see unparalleled migration from poor countries to rich ones. It’s the biggest thing – bigger, actually – than the barbarian invasions that overwhelmed Rome in the 5th century.
This is a situation where nobody wants to look like the weak sister, being told what to do. Anything can, and probably will happen. But you shouldn’t play with fire when the world is sitting on a keg of financial and economic gunpowder.
Justin: Doug, the market recently sold off hard on trade war news. Could this be the pin that finally pops the bubble in U.S. stocks?
Doug: As we approach the trailing edge of this giant financial hurricane that we’ve been in since 2007, the world is more awash in debt than ever before.
If you destroy trade with Mexico and China, you upset the current financial order. All the companies that are engaging in trade are going to suffer a serious bang on earnings. Some will be bankrupted, defaulting on their debt, and bringing down others.
It’s not only American consumers that will get hurt. The companies that are catering to them will suffer a loss of revenue. It will make it harder for them to pay their debts. It might collapse the stock and bond markets, which means pension funds will collapse.
Trump is running the risk of collapsing the financial markets and the economy. It’s very foolish what he’s doing. Who knows how this will end? Probably with a far-left Democrat being elected in two years – among many other nasty things.
He’s certainly not making the U.S. government smaller and less important in people’s lives. He’s making it even bigger and more dangerous. I’m increasingly unhappy with Trump.
Trump absolutely, positively, cannot “win” a trade war by doing the kind of things he’s doing. Trying to “win” by putting on duties is just shooting yourself in the foot.
You win trade wars by producing better goods at lower prices so foreigners want to buy them.
And the U.S. won’t be able to do that until it radically deregulates, cuts taxes, and stabilizes the U.S. dollar. If the U.S. did that, it would become a great exporting nation again. And truly prosperous.
Unfortunately, the U.S. is not cutting regulations or taxes. It’s not stabilizing the dollar, either. It’s increasing taxes and regulations. It’s destabilizing the dollar by running trillion-dollar-plus deficits, and they’ll all have to be monetized at this point because foreigners don’t want to buy the paper anymore. This is bound to end badly, and Trump is just making it worse.
I’m not looking forward to the next stage of the Greater Depression.
Justin’s note: You’ll have the chance to talk to Doug about this topic (and more) at the second annual Legacy Investment Summit in September. Doug and his colleagues from Casey Research will be gathering in Southern California to talk about what big ideas and trends they’re most excited about. Go here to reserve your tickets.