TRADE WAR WITH LITTLE EFFECT
CURRENCY MANIPULATORS EVERYWHERE
Over the first half of the year, China’s exports to the US fell by 8 per cent, while imports dropped by 30 per cent. This is what The Donald calls “winning” the trade war.
But over the last 5 years, since 2014, China’s total imports from all nations have stayed relatively stable overall, around US$ 2 Trillion average per year. Its total exports have also been relatively stable, around US$ 2.4 Trillion per year. This stability reflects the fact that China’s external trade is becoming steadily less important to the total size of its economy.
During this period, despite this lack of increased trade with the rest of the world, China’s total Nominal GDP has grown by more than 30%. Conclusion? That growth has been all due to internal, domestic growth as China’s consumption of internally produced goods and services grows.
The official statistics show that Chinese wages growth has been strong in the period, around 33% in total. So Chinese workers are earning more and spending more while their reliance on exports and imports has been falling. This is strong evidence that the Chinese economy is making a very successful transition from being an exporting nation to being one of internal consumption.
The rise and rise of the local consumer is the key driving force in delivering annualized GDP growth around 6 – 7%. At that annual growth rate, the Chinese economy will double in size by 2030, just 10 short years away. If that all continues to happen, the Chinese economy will then be bigger than the European Union economy and also bigger than the US economy.
So is China worried about the “Trump Trade War”? In BOOM’s opinion, the answer is No. China can tolerate a drop of 10% of exports to the USA with ease. That would wipe out about 2% of its total exports which amounts to approximately US $ 48 Billion. That is only 0.35% of its total GDP. And those exports can be switched to other markets.
What about imports from the US? It is instructive to note that China imports more individually from both Japan and South Korea than it does from the USA. A 30 % drop in imports from the USA, would be equivalent to approximately US $ 60 Billion. That is only 0.45% of its total GDP. And those imports can be sourced from other nations.
So, if China maintains its current trade position with the US, it will have a negative 0.8 % impact on its total GDP, presuming it finds no other markets for its exports and presuming that it finds no other suppliers for its imports. Highly unlikely. BOOM can assume that it will find other nations willing to be clients and suppliers equivalent to at least 50% of the total effect. In that case, China’s GDP will fall by only 0.4 %.
Donald will have to do a lot more to worry China, expecially as China can also devalue its currency and stop exports of rare earth minerals that are essential for so many functions in the US economy.
So BOOM concludes that “Trump’s Trade War” is not going to hurt China much in the short term and very little in the long term. But even Donald knows that. The Trade War is really designed for political impact inside the US borders, to give the impression, that Trump is “Making America Great Again” as a manufacturing and trading nation and as the dominant world power.
Sadly for The Don, it doesn’t appear to be working. Trump’s Job Approval Poll ratings look awful and are not showing any signs of improvement. Currently, according to the Real Clear Politics amalgam of all the Polls conducted in America, 53.2% of Americans Disapprove of his job performance and only 43.3% Approve.
Reference Link: https://www.realclearpolitics.com/epolls/other/president_trump_job_approval-6179.html
The US branded China a “currency manipulator” last week. So what else is new? All nations that are in control of their currency manipulate their currency. All central bankers in that position regard this power as perhaps their greatest weapon, even more so than their role in setting domestic interest rates.
Their ability to manipulate the currency in relation to other currencies gives them perhaps their greatest power to fight dis-inflation (and deflation). Why? Because as their currency falls, CPI inflation generally grows and so does the profits of their exporters. These two consequences “stimulate” their nation’s economic resilience, according to conventional economic thought. BOOM is not so convinced but that is not the topic of discussion today.
Which nations cannot do this? The answer is any nation that is not in control of its currency. That includes all the nations of the European Union and the United States (except in exceptional circumstances).
If the US wanted to lower its currency relative to other currencies in any significant way long term, it would have to become truly “exceptional” and embark upon a massive purchase of external assets, boosting the prices of stocks and real estate worldwide. Or it would have to get many other nations (including China) to engage in another Plaza Accord.
Buying massive amounts of external bonds is no longer an option as over $ 14 Trillion of government bonds globally are already priced at negative yields.
If, for the moment, we exclude the prospect of the US buying huge amounts of foreign real estate and stock assets, that leaves only one option — another Plaza Accord. What does that mean?
The Plaza Accord was a 1985 agreement among the G-5 nations—France, Germany, the United States, the United Kingdom, and Japan—to manipulate exchange rates to depreciate the U.S. dollar relative to the Japanese Yen and the German Deutschemark. It succeeded then because Germany had its own currency (the Euro began in 1999) plus Japan’s economy was ascendant and because China had no role in such coordinated global “manipulations” at the time.
A Plaza Accord Two, done these days would have to include China and China would be very unwilling to participate, especially now that the White House has officially labelled it as a “currency manipulator”. The gloves are off. China will not “cooperate” with the hegemonic US power as did Germany, the UK, Japan and France way back in 1985. It will drop its currency whenever it likes and it will reduce imports from the US. That is what it can do — and that is exactly what it did do last week.
So, this game is far from over. Washington is trapped. It cannot lower its Dollar significantly relative to other currencies without a concerted, long term, massive action by its central bank to buy external assets (similar to what the Swiss National Bank has been doing for some years). And it cannot arrange a “Plaza Accord”.
So, what will it do? BOOM thinks that the US central bank will eventually work out what to do. They will eventually embark on such a policy — a massive QE program for the world, a Marshall Plan Two. It will have the effect of boosting asset prices world wide to very high levels and it will result in the US Dollar falling in relation to all other major currencies. All of that will work until it stops working.
The only question is this — how long will it take for them to reach the conclusion that this is their only option? They could flood the world with Trillions more US Dollars, boosting the huge Eurodollar volume that is already in existence. And it would boost CPI inflation inside the US, rescuing its financial sector from its current moribund state and rescuing its manufacturing sector. Plus, it would ensure the continued existence of TINA. TINA stands for There Is No Alternative to trade settlement being dominated by US Dollars.
This massive global effort to “rescue” the planet from the scourge of Dis-inflation and Deflation (which BOOM explained in last week’s editorial) can only come from one nation. Failure is possible at any step along the way but if they don’t do this then the US Dollar strength will continue and eventually become a major impediment to US economic health.
As Winston Churchill is reported to have said, “You can always count on the Americans to do the right thing after they have tried everything else.”
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HOW MOST MONEY IS CREATED
BANKS CREATE FRESH NEW MONEY OUT OF THIN AIR
(but they always need a Borrower to do so)
THERE IS NO SUCH THING AS A DEPOSIT
BANKS PURCHASE SECURITIES, THEY DON’T MAKE LOANS
BANKS DON’T TAKE DEPOSITS, THEY BORROW YOUR MONEY
How is Most New Money Created ?
LOANS CREATE DEPOSITS — that is how almost all new money is created in the economy (by commercial banks making loans).
From the Bank of England Quarterly Bulletin Q1 2014 —
“Whenever a bank makes a loan, it simultaneously creates a matching deposit in the borrower’s bank account, thereby creating new money.“
“Most money in the modern economy is in the form of bank deposits, which are created by commercial banks themselves”.
Quarterly Bulletins Index
Most economists are unaware of this and even ignore the banking & finance sectors in their econometric models.
On 25th April 2017, the central bank of Germany, the Bundesbank, released a statement on this matter —
“In terms of volume, the majority of the money supply is made up of book money, which is created through transactions between banks and domestic customers. Sight deposits are an example of book money: sight deposits are created when a bank settles transactions with a customer, ie it grants a credit, say, or purchases an asset and credits the corresponding amount to the customer’s bank account in return. This means that banks can create book money just by making an accounting entry: according to the Bundesbank’s economists, “this refutes a popular misconception that banks act simply as intermediaries at the time of lending – i.e. that banks can only grant credit using funds placed with them previously as deposits by other customers”. By the same token, excess central bank reserves are not a necessary precondition for a bank to grant credit (and thus create money).”
The Reserve Bank of Australia (Australia’s central bank) has also contributed to the issue in a speech by Christopher Kent, the Assistant Governor on September 19th 2018.
“…… the vast bulk of broad money consists of bank deposits”
“Money can be created …….. when financial intermediaries make loans”
“In the first instance, the process of money creation requires a willing borrower.”
“It’s also worth emphasizing that the process of money creation is not the result of the actions of any single bank – rather, the banking system as a whole acts to create money.”
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