Full-blown trade war could bring about a global depression or hot war:
“President Trump appears to be sincere and determined in his intention to bring down the U.S.-China trade deficit, and he’s probably willing to hold China’s feet to the fire to accomplish his goal.
“China, however, really can’t afford to meet Trump’s demands, Duncan noted, and has to fight back, driving the likelihood that the trade war’s seriousness escalates further.
“For one, China’s economy is already in a crisis to begin with, he said, and it is probably in the greatest economic bubble in history. This happened because China has an export-led strategy since the 1980s, that saw total investment skyrocket, leading to tremendous excess capacity across every industry in China…
“”One world is just not big enough to absorb [or sufficiently energy-rich to afford] everything that China can produce,” Duncan said. “It’s very difficult to see how China is going to grow as matters are now, even without a trade war with the U.S. If we bring in a trade war … (where) President Trump has demanded that China reduce its trade surplus with the U.S. by $200 billion a year. … This would be enough to tip China’s already fragile economy into a very severe economic downturn. There’s no possibility that China is going to agree. That’s what makes this crisis so serious.”
“A protracted trade war between the United States and China would likely represent a major turning point in history, Duncan warned.
“It could kill China’s economic rise and even trigger an economic crisis, similar to what we saw in Japan after 1998.
“A serious, prolonged trade war would also do a great deal of damage to the United States economy, Duncan noted. Once the U.S. started running large trade deficits with other countries in the early 1980s, inflationary pressures were dramatically reduced due to two primary factors: cheaper goods and cheaper workers, particularly from China, Taiwan, and other emerging markets.
“As the inflation rate came down, interest rates fell from double-digit levels, making credit and borrowing more affordable. Consequently, this led to a multi-decade, credit-led economic boom in the U.S. and other nations as well.
“Duncan warns that a full-blown, all-out trade war between China and the U.S. would change this dramatically… and that investors don’t quite understand the risks that are at stake.
“If we see President Trump put 25 percent tariffs on everything imported from China, the inflation rate is likely to spike to 8 or 10 percent, and interest rates will likely shoot higher to around 13 percent, Duncan warned.
“Such a scenario could potentially throw the world into a new Great Depression and even into outright war, said Duncan.
“”If interest rates spike higher, that would, of course, make credit much less affordable,” Duncan said. “Rather than driving economic growth through credit expansion, we would see extreme credit contraction. The credit contraction alone would be enough to throw the U.S. into severe recession.”
“In addition, higher interest rates would cause the stock market and property market to crash, Duncan added, and we would experience an extreme negative wealth effect that would also by itself throw the U.S. into a severe recession.
“”Combined, the crashing asset prices and the contract of credit would be enough to throw the U.S. into a depression, most probably,” Duncan said.”
“A number of U.S companies have said increased tariffs hurt their businesses and increase prices for consumers. “At the end of the day you become less efficient economically and therefore everybody will somehow suffer from it,” Pesaran said.”
“Australia risks getting caught in the crossfire as the world’s two biggest economies move ahead with tariffs on large swathes of each other’s exports in a dispute that shows little sign of ending anytime soon… Australia thrives on selling goods to countries around the world — particularly to China, which sucks up about a third of Australian exports every year.”
““[China’s] Local government officials never worry about repaying debts, they only worry that no one is lending them money,” Yin said at last year’s NPC gathering. “Part of the reason was that all local governments are part of a centralized authority that will eventually be bailed out.””
“When Federal Reserve chair Jay Powell meets colleagues and counterparts at Jackson Hole this week, investors’ attention will focus on how aggressively he plans to pursue his dual tightening policy. Fed officials are signalling at least five interest rate rises in the next 15 months…
“Since the financial markets of emerging Asia were the biggest beneficiaries of quantitative easing, why wouldn’t they be the victims of the reversal of that policy? The fact that both the US and China are committed to deleveraging is not a good thing for global liquidity.
“Each time the central banks tried to unwind their QE programmes over the past nine years, there have been significant dislocations.”
“The US Treasury has imposed fresh sanctions against Russian actors in connection with the Kremlin’s aggressive cyber attacks. The additional sanctions have been made to “disrupt Russian efforts to circumvent our sanctions”, said US Treasury Secretary Steven Mnuchin.”
“Iran’s unemployment rate is about 12 percent, with over three million people unable to find jobs. There is also growing numbers of the so-called “working poor”, who are struggling to survive rising living costs as US sanctions worsen economic crisis.”
“At major produce market Quinta Crespo, some stands were closed. Some employees were unable to get to work because they could not find public transportation, which has been in steady decline for months due to lack of auto parts… Businesses were largely closed in the second-largest city, Maracaibo, which has suffered months of prolonged power outages, as well as in the smaller cities of Punto Fijo and Valencia. Banks had long lines outside as people sought to withdraw the newly released bills. The collapse of [Venezuela’s] once-booming economy has fueled hunger and disease, spurring an exodus of migrants to nearby countries.”
“The US stock market climbed to its highest ever level in afternoon trading in New York as it closed in on the longest bull run ever. The benchmark US index the S&P 500 has surged 320% since its crisis lows in March 2009. The nine-year rally has been underpinned by ultra low interest rates and central banks’ quantitative easing programmes, earning it the nickname of the most hated bull market on Wall Street.”
“…nobody expects economic models to predict crises, future prices and recessions with total accuracy. But at least they should be able to explain the basic functioning of the economy… most tenured economics professors keep teaching the same simplistic, faith-based, empirically challenged models, combined with the belief that almost anything can be explained with a linear regression. So 10 years after Lehman, much remains to be explained and understood.”
“As we learned in the GFC, poor vetting of borrowers can lead to repayment problems. And in a world where loans again are increasingly repackaged into structured securities and sold to other investors, the dominoes again are lining up for a potential fall.”
“…[US] consumer credit outstanding is now 45% higher than its 2008 peak.”
“A decade ago, the imploding housing market wreaked havoc on the U.S. economy, driven by a distinct set of market conditions that have been widely studied and discussed by policymakers and pundits alike. In 2018, similar conditions are surfacing in the auto lending market. Together, these disturbing trends raise questions about the auto finance industry’s future and should prompt discussion about how to prepare for a potential crisis.”