Global Trade War: US Wins, Everyone Else Loses
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2018-07-25 06:55 by Karl Denninger
in Editorial , 977 references Ignore this thread
Global Trade War: US Wins, Everyone Else Loses
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It's a shibboleth that when you engage in a trade war nobody wins.  You get killed and so does your opponent.  In the process of poisoning him, you wind up poisoning yourself by accident or avarice, and die as well.

The problem is that it's not working that way.

The S&P 500 is rising, not falling.  US GDP estimates are not going down, they're stable.  The US Dollar is not diving, it's rising-to-stable.  And while the yield curve is flat, it was flat before and it appears the brief spike in the 10 year yield was actually a result of Russia dumping Treasuries -- not global dismay or a consequence of trade actions.  In other words all those who "diagnosed" the 10 year were either wrong or lying too.

Incidentally that "dumping" was absorbed pretty-easily and now we're back where we were.  This speaks very loudly toward China and any threat to do so, thinly-veiled or otherwise, on a wider scale.  It certainly appears that they couldn't do jack and jackola if they wanted to with that tactic, which has been the cause celebre' of the fearmongering of those who said we can't stop Chinese IP theft and trade abuse.  Well, how's that looking now, given that Russia has basically unloaded their entire Treasury position and didn't crash anything!

Oops.

So let's first talk about why this is the case.

The first is the obvious: We are the ones who were getting the sausage up the chute all these years.  Correcting that will always benefit whoever was formerly getting screwed, net-net.

Then consider this -- China has a huge property and malinvestment bubble.  They imported it with our federal deficit spending -- a direct consequence of the trade imbalance and abuse they caused and stoked.  The PLA and Xi thought they could get away with this forever, just as we thought we could in 1929.  We were wrong and so were they; their arrogance has now backed them into a corner from which they cannot escape with more monetary and fiscal game-playing.  It's not our fault that they believed that they could cheat math, or worse, collapse our economy and then walk all over us.  Had Hillary won they might have gotten away with it, but she didn't.  Oops.

Then there's a third part of the problem which is that big business and big government in the US have both colluded with the media to sell the spin that any correction of this problem over the last 30 years would lead to instant catastrophe for US economy.  By doing this they have greatly deepened the chasm into which China has climbed, gleefully believing they have us over a barrel.  They aren't as smart as they think they are but their actions have been no accident -- the Neocons and Democrats both have had increasing their power, along with those of their friends in the industrial, medical, educational, banking and defense industries as the only real goal -- and however they could pull that off and whoever they screwed in the process didn't matter one bit to them.

I frankly do not care if China's economy and ultimately their banking system detonates.  They deserve it, and they're going to get it too.  The only way out for them that doesn't involve the bankruptcy of huge numbers of enterprises, many of which are state-sponsored or owned (meaning the government gets ****ed) is to ridiculously devalue their currency (to put a scale on this, we're talking devaluing by more than 50%!) and screw a couple hundred million Chinese who are on the left side of the curve to the literal point of starvation.  That has a very real risk of provoking internal unrest on a scale not seen in a very long time -- but hardly unprecedented in China's history.  1911 anyone?  Or what followed.... like in 1927... and which didn't really coalesce until the nation was forced to confront an invading Japan!

But then there's the second-order problem and it lies in the US.  We cannot run trillion dollar deficits into the indefinite future, multiplying each year, without that trade deficit to absorb them.  We can try but we can't do it, and if we don't cut the crap on that we're going to get at least a Vietnam War type replay of the monetary consequences -- leading to a need to pull another Volcker.  We are not far away from the triggering that right here, right now, given Trump's tax cuts and fiscal plans which, I remind you, Congress is ultimately responsible for -- not Trump.

If we do trigger that sort of crisis unlike the last time due to the much worse income inequality and debt load among those with little income it won't be anywhere near as mundane here as it was the last time around.  Then you saw high inflation and higher interest rates until the spiral was finally brought under control.  But what you didn't see was much in the way of forced liquidations because there were too many protected classes that all argued in chorus that the economy would literally die if they were not protected, and the high rates engendered by Volcker were directly responsible for the 40 years of malinvestment and belief in the ability to sustain permanent deficit spending by both state and federal governments since, never mind the corporate debt-binge orgy that has taken place over the last couple of decades that followed!

Now corporate debt levels are high enough that any such event will instantly destroy anyone with debt coverage over 1:1.  Firms like Tesla will be a smoking crater immediately under such a scenario, and they won't be alone -- materially more than half of the S&P 500 will not survive, never mind the Russell 2000.

This we must correct and we must stop it now.  The only way to do it, simply on the math, is to break all the medical monopolies.  There is nowhere else the Federal Government can get enough of a reduction in spending to make the books balance; this is not about desire, it is about necessity.  Further it's the right place to let those chips fall, since they've screwed the people out of trillions.  I'd rather see them burn than see the cities burn, which is where we're headed if we don't take corrective action in this regard.

It's simple: Either we do that, and do it now, or we're ****ed.

But at the same time do not believe for a second that trade wars cannot be "won."  They can be and they are being, right now.  The EU is screaming because they know good and damn well that the claims of "everyone loses" was and is a lie, and they're scared ****less by the fact that we haven't seen the market go to hell as everyone predicted would happen.

Instead the EU auto manufacturers know that they either have to drop their tariffs and restrictions on American cars or lose a good part of their export market here in the US.  They want both the advantage here and there..... just like the Chinese want to steal all our intellectual property and sell our corporations slave labor, and call this 'free trade'.

It's not -- its theft and fraud, and anything that threatens their gravy train is thus "bad" from their point of view.

Cry me a river Xi -- and while you're at it suck some rotten eggs.

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Whitehat
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thanks for bringing up the Volcker rule. most do not realize how he was forced to do what he did and how it set the stage for the laddering of debt in the later four decades. some progressive economists call him Paul Adolf Volcker for what he did not admitting that their policy preferences are unicorn farts.

on a high note when China hits the skids, there is a lot of American big city real estate, New York, cough, cough, that is going to take a ****. the smart Chinese have been bringing the money over in suitcases for a decade like they know that things will change.

if we ever break this free trade monster, perhaps there will also be a justification to let our native companies fail in the proper legal manner when they must. funny how one bending of the rules leads to others. this is how power is accumulated since success relies upon govt. largess.

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There are two ways to be rich: One is by acquiring much, and the other is by desiring little.
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"Be not deceived; God is not mocked; for whatsoever a man soweth, that shall he also reap" (Gal. 6:7)
Ktrosper
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Thank you.

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The unexamined life is not worth living.-Socrates
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Tickerguy
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Yep -- Volcker's actions were made necessary by his predecessor and the Vietnam war, which was almost-entirely deficit financed with a backdrop of a Fed that was bullied (and, while outwardly it appeared to be "independent" it in fact subsidized that spending with intentionally below-market rates.)

The problem with monetary games like this is that they always appear to work at the time, but never in fact do -- and the compounding makes the damage MUCH worse than it first appears to be. Then the response necessary to prevent it from COMPLETELY blowing up in your face is much worse.

It's one thing to engage in such games during a time when your nation is being physically invaded and the consequence for not doing so is that you literally cease to exist! It's quite another to do the same thing for the explicit purpose of engaging in some foreign ****hole's "fight for democracy" (as they always tell us) because you can't get the people to agree to tighten up their belts and suck up the cost for what amounts to a voluntary military excursion.

If you attempt to prevent the damage from going where it SHOULD, however, you REALLY **** yourself because people get drummed into their head that there's no death penalty consequence for being ridiculously stupid. They thus respond exactly as you'd EXPECT them to respond -- they anticipate it the next time around and try to profit from it, up and down the line.

The ENTIRETY of the so-called "wild expansion" from Reagan forward was a direct consequence of this horse****; it has ALL been debt leverage.

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Winding it down.

Aquapura
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So by pull a Volcker assume you mean a return to double digit rates? That would provide a nice buying opportunity for anyone with cash. I highly doubt anyone is going to do a damn thing about the medical monopolies so maybe real-estate isn't a good place since my money is on the cities burning.
Tsherry
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It feels like a lot of people/companies are trading airspeed for altitude.

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Cobra2411
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Philly P.a.
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I think the hesitation with cratering the medical industry is the 5-8% drop directly in employment and the loss of collateral jobs.

What they don't get is the alternative is worse. Loose a leg or die... But... It's never come to that. There's always been a lever to goose. I predict they'll keep goosing up till they trigger the thermonuclear explosion...

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Click
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There's this little economic thing that grows into a monster; it's called "contagion". You can think of it as something like Ebola or a highly contagious strain of bird/swine flu that mutates and spreads to humans. And, as we all know, airborn strains are the worst kind for self-evident reasons.

Every once in a while (sometimes it takes a generation or two or three) the entire world suffers a nasty economic Ebola pandemic. Economic Ebola starts out with a small outbreak (e.g., a seemingly small bankruptcy) and within months the contagion really gets rolling......

The truth is nobody knows for an absolute certainty when and where Economic Ebola strikes next, but at present many countries across the entire globe would be an excellent host. Economic Ebola could incubate in Turkey and the vector might find its way across the globe in less than a year. Italy is another strong possibility. And if Trump plays his trade cards correctly, China could turn out to be the mother of all outbreaks.

Could a "trade war" with China cause an economic collapse? It all depends on what you mean by "trade war". I submit that America has been in a trade war with China ever since China joined the WTO. America has been at war with the EU ever since it was formed. America has no friends only competitors.

"No nation has friends only interests". ~ Charles de Gaulle

I would say countries are basically economic combatants. Sometimes countries side with each other in the same manner as one cartel forms an alliance with another, but in the end every country is for itself. Anybody who says differently is just spreading perfumed bull****....

America is currently the core economy of the world; therefore, there is no other place I'd rather be if and when the trade nukes come out. And it doesn't really matter in my situation if a trade war causes a global economic depression or a global economic depression causes a trade war. What matters is "nobody is coming to rescue you or [me]".








Mannfm11
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This might be your best Karl. I have felt like writing much the same. I have heard more bull**** about this. Some of these people peeing in their pants.

The trade deficit has been $500 billion or so since the early part of the century. People that can't figure something is wrong with this and that it is connected to the raging split in incomes that have occurred in the US, are flat economic, financial and accounting stupid. Next to and maybe more than other government enabled theft, massive trade deficits have destroyed the bottom half of the population, done little for the next 45% and massively enriched the top 1/2 of 1%. It has endangered the security of the United States more than 1 million Russian hacks of political crook servers. In fact, if the hacks happened, they probably saved the US.

$800 billion is money leaving. It has to be balanced by liquidating assets or borrowing money. There is no other means to make that system balance. If there is, they have modified accounting since I received almost a full education in the matter in the late 1970's. What is walking out? Cash, credit card debt and home equity, along with capital that could be put into America, but for the fact the politicians spent the last 70 years destroying basic investment in the country How is it coming back? Well, I suspect a large section of imports are bought by the same .5% that benefit from it. Thus, they sell their inflated stock. The rest is US treasury bonds. The talking heads want to call that foreign investment. No, it is domestic liquidation. Then, after awhile, we have China and others buying our strategic businesses and taking them out of the country. The balance against American mortgages continue to go up and few ever get a free and clear house, as they did 50 years ago. This flows more money to the top .01%

If Americans made $600 billion more goods for domestic consumption and lost $300 billion in exports, we would be trillions ahead. How? To start, we would have $300 billion in balance. Next, the first place that $300 billion would be spent is here, not there. Empty, formerly middle sized industrial cities don't sell as many hamburgers as ones with healthy industries. They don't buy as many houses, furniture, etc. They might buy more heroin, pot and booze, beans and other cheap food, all added to the debts of local, state and federal ledgers. Those jobs provide more jobs and so on. If it goes to China, we have to sell something to balance the books, not to spend more money, but to get the balance sheet back to even.

One only has to look at the housing market to realize they don't build starter homes much now. In fact, we have a pretty solid boom going on and yet single family home construction levels suck. This is because half the population is debt broke.

Where did a lot of things go? There are no pensions. The corporate elite took them, because they couldn't afford to pay them to Americans, but instead hired foreigners.

Regardless of whether you like Trump or not, the louder the bull**** artist scream, the more he is likely doing right. I don't believe he has a personal reason to be there other than to do what he can to straighten the nonsense that has taken middle America down.

Remember, someone like Obama, even if he wanted to, is too young to even remember what America was like in the 1950-1970 period. It was about 1970's when the Federal government got into the medical business, thus destroying the cost structure. I had 3 grandparents die in the 1970's, all in their 80's. They got there without much in the way of government medicine. Almost all their children didn't fare so well. Then we had food stamps, and other great society stuff and with it when the living standard of the working men and women of the country.

All this bull**** is based on the idea it is free. The rich are never taxed, as their taxes are paid by the consumer of their goods. Sure, they can have their capital watered down. All the free **** is paid for by people who put their pants on and go to work, which means the pay one needs to go to work has to increase.

It is a crying shame you have to be around 60 years old to have a clue what we are being told is a lie. Really 70 or older, when you get right down to it. The snowflakes are clueless. They want more of the dog that bit them, rather than the cure for the illness. Remember, they are smarter than we are, because they went to school, despite the fact that most of them have skill levels that qualify them to pour coffee at Starbucks. If they have a marketable skill, corporate America brings people from India to work for half what would get them off their asses to work and pay their student debts incurred when they were becoming political Einstein's. They wouldn't dream of closing the door on the Indians, that might be racist or something.

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The only function of economic forecasting is to make astrology look respectable.---John Kenneth Galbraith
Tat668
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China's real estate debt bubble is at extreme stress point causing some real concern for those who don't want to see any default in this area. Selling price in some of the most expensive real estates areas have drop it price by 25%. Their shadow banking in the construction sector will be demanding repayments and developers executives may be disappearing in large numbers.

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"This marks the beginning of the end."- Barack Obama 2-26-09
Whitehat
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it is kind of fitting that Volcker as a following the rules of sound monetary policy kind of guy would be known for the Volcker Rule of decades later. these are the kind of people who should run things.

the way that we should fund our military excursions and the follow-on expenses when necessary is through liens on all assets. when the country is facing a real threat to itself, these assets like our houses, businesses, equities and even cash are seriously in danger of becoming worthless. this is one major thing that the military protects. perhaps those without assets might face a war tax to make up for the protection of that other important thing that is protected for them, their lives and the way that they lead them here. this rules out a lot of other wars where we do not have a direct threat to our contiguous lands and resident peoples. this prevents a lot of those who stayed at home being pantyhose patriots from basking in the prosperity during and after the war and the opportunities transferred from those who did not come home in whole or in part.

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There are two ways to be rich: One is by acquiring much, and the other is by desiring little.
snow, seasons, distance and dirt roads: SSDD
"Be not deceived; God is not mocked; for whatsoever a man soweth, that shall he also reap" (Gal. 6:7)
Tickerguy
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I argued at the time of the FIRST Iraq war -- which was fully justified as the nation INVADED Kuwait -- that we should have been fully willing to engage BUT that we would do so and take the ENTIRE cost of same, plus 10%, out of Iraq's ass in the form of oil.

Of course the idiots didn't do that.

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Winding it down.
Whitehat
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yes, i agree that if we do for someone else in this regard, we should be compensated. question is why should we care about Kuwait or any other country not us. are we mercenaries for hire. even if we do not have plenty of oil at a particular time and at a price acceptable to us, that is our problem to solve here not there.

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There are two ways to be rich: One is by acquiring much, and the other is by desiring little.
snow, seasons, distance and dirt roads: SSDD
"Be not deceived; God is not mocked; for whatsoever a man soweth, that shall he also reap" (Gal. 6:7)
Tickerguy
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Well, in Kuwait's case we did have a formal relationship with them and they DID ask for our assistance.

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Winding it down.
Whitehat
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ok, i agree with a commitment that we made and your logical way of us being compensated. never again, simply because one has done something does not mean one has to continue doing it.

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There are two ways to be rich: One is by acquiring much, and the other is by desiring little.
snow, seasons, distance and dirt roads: SSDD
"Be not deceived; God is not mocked; for whatsoever a man soweth, that shall he also reap" (Gal. 6:7)
Jduwaldt
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I recall the economist Lester C Thurow argued that we made a small amount of money off Desert Storm I, supposedly from contributions by Germany and Japan. (He did not mention Kuwait.) I wish I could remember which book... The Future of Capitalism?

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It's not an issue of "cooperation" vs "go it alone": it's a question of involuntary vs voluntary relationships.
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