The news is being dominated by breathless headlines about the new trade war between the U.S. and China. But this trade war has been brewing for years and came as no surprise to readers of my newsletter, Project Prophesy. In fact, the new trade war is simply a continuation of the currency wars that began in 2010.
I’ve warned for over a year that President Trump’s threats of tariffs should be taken seriously, while most of Wall Street discounted Trump’s talk as mere bluster. Now the trade wars are here as we expected, and they will get much worse before they are resolved.
Currency wars arise in a condition of too much debt and too little growth. Economic powers try to steal growth from their trading partners by devaluing their currencies to promote exports and import inflation.
But China can’t keep going with tariffs.
They only import about $150 billion of U.S. exports. At the rate they’re going, they’ll run out of goods to impose tariffs on. Trump can keep going because the U.S. imports so much more from China than they buy from us.
But the Chinese are obsessed with not losing face. Chinese President Xi has just been named in effect dictator for life. He doesn’t want to start out his new dictatorial regime by backing down from a stare-fest with Donald Trump. So he needs another option.
For China to keep fighting, they need an asymmetric response; they need to fight the trade war with something other than tariffs.
China holds over $1.2 trillion of U.S. Treasury securities. Some analysts say China can dump those Treasuries on world markets and drive up U.S. interest rates. This will also drive up mortgage rates, damage the U.S. housing market, and possibly drive the U.S. economy into a recession. Analysts call this China’s “nuclear option” when it comes to fighting a financial war with Trump.
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