Now, A Trade War; Next A Shooting War?

Authored by James Rickards via The Daily Reckoning,

A popular thesis since the 1930s is that a natural progression exists from currency wars to trade wars to shooting wars. Both history and analysis support this thesis.

Currency wars do not exist all the time; they arise under certain conditions and persist until there is either systemic reform or systemic collapse. The conditions that give rise to currency wars are too much debt and too little growth.

In those circumstances, countries try to steal growth from trading partners by cheapening their currencies to promote exports and create export-related jobs.

The problem with currency wars is that they are zero-sum or negative-sum games. It is true that countries can obtain short-term relief by cheapening their currencies, but sooner than later, their trading partners also cheapen their currencies to regain the export advantage.

This process of tit-for-tat devaluations feeds on itself with the pendulum of short-term trade advantage swinging back and forth and no one getting any further ahead.

After a few years, the futility of currency wars becomes apparent, and countries resort to trade wars. This consists of punitive tariffs, export subsidies and nontariff barriers to trade.

The dynamic is the same as in a currency war. The first country to impose tariffs gets a short-term advantage, but retaliation is not long in coming and the initial advantage is eliminated as trading partners impose tariffs in response.

Trade wars produce the same result as currency wars. Despite the illusion of short-term advantage, in the long-run everyone is worse off. The original condition of too much debt and too little growth never goes away.

Finally, tensions rise, rival blocs are formed and a shooting war begins. The shooting wars often have a not-so-hidden economic grievance or rationale behind them.

The sequence in the early 20th century began with a currency war that started in Weimar Germany with a hyperinflation (1921–23) and then extended through a French devaluation (1925), a U.K. devaluation (1931), a U.S. devaluation (1933) and another French/U.K. devaluation (1936).

Meanwhile, a global trade war emerged after the Smoot-Hawley tariffs (1930) and comparable tariffs of trading partners of the U.S.

Finally, a shooting war progressed with the Japanese invasion of Manchuria (1931), the Japanese invasion of Beijing and China (1937), the German invasion of Poland (1939) and the Japanese attack on Pearl Harbor (1941).

Eventually, the world was engulfed in the flames of World War II, and the international monetary system came to a complete collapse until the Bretton Woods Conference in 1944.

Is this pattern repeating itself today?

Sadly, the answer appears to be yes.

The new currency war began in January 2010 with efforts of the Obama administration to promote U.S. growth with a weak dollar. By August 2011, the U.S. dollar reached an all-time low on the Fed’s broad real index.

Other nations retaliated, and the period of the “cheap dollar” was followed by the “cheap euro” and “cheap yuan” after 2012.

Once again, currency wars proved to be a dead end.

Now the trade wars have begun. On Thursday, July 27, the U.S. Congress passed one of the toughest economic sanctions bills ever and sent it to President Trump for signature. Trump signed it, although not enthusiastically.

But Trump’s views don’t really matter. The bill was passed by veto-proof majorities in the House and Senate, so even if Trump vetoed the bill, Congress would have overrode him and the sanctions would become the law of the land.

This new law provides that U.S. companies may not participate in Russian efforts to explore for oil and gas in the Arctic. But it goes further and says that even foreign companies that do business with Russia in Arctic exploration will be banned from U.S. markets and U.S. contracts.

These new sanctions pose an existential threat to Russia because depends heavily on oil and gas revenue to propel its economy. Russia tries to control new discoveries in order to maintain its quasi-monopoly position as the premier energy provider to Europe. Russia needs Western technology to meet the challenges of Arctic exploration.

In effect, this law handicaps Russia’s efforts financially and technologically and weakens its grip on global energy markets.

Russia has already vowed to retaliate.

Yet Russian retaliation will not consist of reciprocal sanctions on the U.S. Russia has said it will strike “asymmetrically.” This means Russia will use the means it is best at, including cyberattacks.

If you wake up one day soon and the power grid is down and banks and stock exchanges are closed, you can thank President Putin and the U.S. Congress for starting a financial and cyberwar that neither side could control.

Meanwhile, the long-expected trade war with China has begun at last. This is a trade war that President Trump threatened the entire time while he was on the campaign trail. Yet after Trump was sworn in as president he did nothing about Chinese trade and currency practices. Trump did not declare China a “currency manipulator” and did not impose tariffs on Chinese steel and aluminum being dumped on U.S. and world markets.

The reason Trump did not act swiftly was because he wanted China’s help facing North Korea’s nuclear weapons and missile programs. If China would put pressure on North Korea, Trump would go easy on China.

But China did not hold up their end. China has done nothing to change North Korea’s behavior and will not do so in the future. Now Trump has no reason to hold back. The White House has already begun to unleash its formidable arsenal of trade weapons against China.

The Trump administration has made clear its intentions to impose tariffs on cheap Chinese steel and aluminum and to punish China for theft of U.S. intellectual property. After that, more action will be taken to punish Chinese banks that help North Korea finance its weapons programs.

The U.S. can block acquisitions of U.S. firms by Chinese companies through review by a group called the Committee on Foreign Investment in the United States, or CFIUS. That committee has already blocked several Chinese deals and has many more stuck in the review pipeline.

By November, the U.S. will label China a currency manipulator, which will start another review process, leading to still further sanctions. Like Russia, China will not take any of this lying down but will retaliate with its own sanctions, tariffs and bans on U.S. investment in China. Get ready for an all-out financial war between the U.S. and China.

This trade and currency war will shake markets and be a major headwind for world growth.

Germany is also in the crosshairs because of its huge trade surplus. Trump has already torn up the TPP trade agreement and has put Canada, Mexico and South Korea on notice that their trade deals need to be renegotiated.

None of these trading partners will stand still for this U.S. assault on bilateral trading relations. Retaliation can be expected. A full-scale trade war is now upon us.

Next comes the shooting war with North Korea, which will inevitably draw in Russia, China, South Korea and Japan. This will be tantamount to World War III.

As Mark Twain reputedly remarked, “History does not repeat, but it does rhyme.”

Today looks like a replay of the 1930s. Let’s hope things do not go as far as they did then. Markets are not priced for the worst outcomes based on the lessons of history.

As the progression of currency wars, trade wars and shooting wars plays out, get ready for some major market moves to the downside as the reality of this sequence begins to sink in.


hedgeless_horseman NoDebt Tue, 08/08/2017 - 11:23 Permalink

 Everyone has a plan...until the paratroopers start dropping on the lawn.Look at how many top 20 oil producers already have shit hitting the fan...Iraq, Venezuela, Saudi Arabia, Nigeria, Brazil, Mexico, Angola, Qatar...1 Russia 10,551,4972 Saudi Arabia (OPEC) 10,460,7103 United States 8,875,8174 Iraq (OPEC) 4,451,5165 Iran (OPEC) 3,990,9566 China 3,980,6507 Canada 3,662,6948 United Arab Emirates (OPEC) 3,106,0779 Kuwait (OPEC) 2,923,82510 Brazil 2,515,45911 Venezuela (OPEC) 2,276,96712 Mexico 2,186,87713 Nigeria (OPEC) 1,999,88514 Angola (OPEC) 1,769,61515 Norway 1,647,97516 Kazakhstan 1,595,19917 Qatar (OPEC) 1,522,90218 Algeria (OPEC) 1,348,36119 Oman 1,006,84120 United Kingdom 939,760 Impossible, you say, that we wake up tomorrow morning with millions of Chinese, Russian, North Korean, Iranian, and Venezuelan paratroopers (and missiles) falling from the sky?

...if nine intelligence analysts came to the same conclusion, it was the duty of the tenth to disagree. No matter how unlikely or far-fetched a possibility might be, one must always dig deeper.  World War Z, by Max Brooks


In reply to by NoDebt

Stuck on Zero sleigher Tue, 08/08/2017 - 11:52 Permalink

All these trade wars could be avoided if there were two sets of currency: internal and external. We would purchase Chinese goods with external dollars and they would buy our goods with external dollars. Trade would, by necessity, have to be equal in external dollar volume. External dollars could not buy anything within either country.

In reply to by sleigher

autofixer Tue, 08/08/2017 - 10:42 Permalink

Inflation has been exported to these " 3rd World" countries by Globalist agreements.  Trump will bring that inflation home.  Hedge accordingly amigos.  

aliens is here Tue, 08/08/2017 - 10:48 Permalink

What is wrong with a trade war? Trading with commies in China is a lose lose deal. We can avoid a trade war now or be taken over by foreigners 10 years from now. We might suffer in a trade war but they can't live without us buying their shit.

keep the basta… aliens is here Tue, 08/08/2017 - 11:06 Permalink

China is fine without the US, the US as an importer country gets GDP boost by buying very very cheap from China then sells at multiples in the US. The uS economy would fall a lot without chinese imports. China might as well increase  its export prices to the US as Trump complains  its products are unfairly cheap.  easily fixed. but its a hard position for the US as China  does not need the US for  trade.

In reply to by aliens is here

Kobe Beef besnook Thu, 08/10/2017 - 06:33 Permalink

Nuke the Sauds.Take the oil.QED.#DeathToIslamps: Saudi Arabia only exists because Britain needed their manpower to stave off an Axis takeover of former Ottoman lands. Nowadays, one Trident sub packs more punch than a million ululating camel jockeys. Times have changed, and there's no reason to tolerate them, or their Bronze Age death cult. Exterminate the brutes.

In reply to by besnook

Ghost of PartysOver keep the basta… Tue, 08/08/2017 - 11:26 Permalink

China is fine without the US   Not so fast there. The last numbers I have seen (unfortunately I don't recall the date) are: The top export destinations of China are the United States ($457B), Hong Kong ($273B), Japan ($152B), Germany ($97.4B) and South Korea ($90.1B).  If US closes the market then China's banking system might implode.  Yes, Trump has leverage if he wants to use it.

In reply to by keep the basta…

Winston Churchill Ghost of PartysOver Tue, 08/08/2017 - 14:35 Permalink

Without a VAT system in place in the US, its hard to know what % of imports from China are reexported in value addedproduct.From my personal experience I'd hazard a guess of between 33% to 50%.Even the weapons we drop on unlucky foreigners probably have a high component of re export.Be very carefull with raw data like that.It has to be obvious to the Chinese that their US markets are dying,itsone of the primary reasons for OBOR.

In reply to by Ghost of PartysOver

Gravatomic Tue, 08/08/2017 - 10:49 Permalink

Given the lack of investment, upgrade and rebuild with critical infrastructure, and with dams, bridges, power stations and transmission lines in the US at peak shelf life, many of it past it's best by date, it wouldn't be hard to start crippling America. But it won't matter will it? The reasons the malfunctions manifest themselves are Russia and China, it's their fault. Everyone gets behind their players in a shooting war.

flapdoodle Gravatomic Tue, 08/08/2017 - 14:37 Permalink

The best way to think about what has happened to the US is to think of it as a corporation that was sold by its previous owners to (((new owners))) These (((new owners))) are stripping the old USA of all its valuable assets until there is nothing left, then the (((new owners))) then move on to the next victim.Classic in the corporate world...Why bother upgrading infrastructure if these isn't going to be anythingleft anyway???

In reply to by Gravatomic

Last of the Mi… Tue, 08/08/2017 - 10:54 Permalink

Trade war goes to full on propaganda war, then to full scale weaponized software internet war, then to CIA drone war, then to back to propaganda war before finally ending in shots fired. Unless you're a muslim immigrant then it goes directly to the shots fired, violence thingy for "Allah".

JailBanksters Tue, 08/08/2017 - 10:58 Permalink

The USA is now involved inShooting Wars,Tweeting WarsTrade WarsCurrency WarsSanction WarsDrug WarsBorder Wars That's 7, well 8 if you include Star Wars later this year 

Agent44 Tue, 08/08/2017 - 10:59 Permalink

not gonna be a shooting war 'tween USA Russkies n Commie China because NUKES but they WILL make ugly faces at each other, do mean trade thingies and flip the bird and stroke their missiles while going NEENER NEENER NEENER. One does hope an errant finger doesn't hit a red button while stroking their missiles.

TuPhat DeadFred Tue, 08/08/2017 - 12:12 Permalink

I used to think Rickards was OK but this article changes that.  He mentions that WW3 is probably almost here and then states that his biggest problem with that is, that the markets will go down.  He also seems to think that trade restrictions are all bad but that is not correct.  Some trade restrictions are necessary.  For instance, should we allow China to be the only producer of rare earth metals or should we mine some ourselves.  We should not let anyone have exteme leverage over us.  Unfortunately we have been doing just that.

In reply to by DeadFred

robertocarlos Tue, 08/08/2017 - 11:00 Permalink

I still don't understand how a Chinese toaster can cost as little as 7 dollars. Seven fucking dollars! And it came all the way from fucking China. That's 7 dollars retail.

BandGap Tue, 08/08/2017 - 11:00 Permalink

One of the bigger points here should be the mention of frustration. Also missing is domestic impact on the countries themselves. If China doesn't keep the ball rolling they will have hundreds of millions of frustrated citizens. I am sure the US will get blamed for them eating insects and having no water.Here in the states it might be the EBT systems is greatly curtailed (Section 8 housing has already been trimmed dramatically). Any guesses what happens when some people can't get they welfare? After all the government owes them they money.In view of the fact that Russians have been through this in the 1990s (those drunks in the park yoga pics were fabulous) and they have no debt makes it appear they will have less of a problem with all of this. Hence, we go after Russia to bring them back into the mix.People in the Weimar ate all sorts of things, including the neighbor's pet. Don't think PETA makes it through the last round of these "wars".

Consuelo Tue, 08/08/2017 - 11:01 Permalink

  "Russia needs Western technology to meet the challenges of Arctic exploration."I'd beg to see some validation of that 'need'... Of course, the real 'need' is for continued Full Cooperation in SWIFT trade using the $USD and global oil market continuity in $USD.   Or else...

besnook Tue, 08/08/2017 - 11:26 Permalink

all china has to do is announce sanctions against the usa stopping all exports to the usa for one week. the market crash would destroy the financial system and the finances of every american. gs and jp morgan would be screaming for trillions of worthless dollars in bailout money from congress while bailing in all of your assets.