Jim Rickards: "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.

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 repressing 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 against Russia.

This law provided that U.S. companies may not participate in Russian efforts to explore for oil and gas in the Arctic. But it went further and said 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 has vowed to retaliate.

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.

On Monday, Jan. 22, President Trump announced steep 30% U.S. tariffs on imports of solar panels and washing machines.

The tariffs were not aimed at China alone, but China is by far the largest source of solar panels shipped to the U.S., and one of the largest sources of washing machines.

So while Trump can claim that these tariffs were not specifically targeted at China, that is exactly what they were.

After Trump announced the tariffs on solar panels and washing machines. the Chinese Commerce Ministry expressed “strong dissatisfaction” and said it “aggravates the global trade environment.”

Now yesterday, the Trump administration announced plans to impose tariffs on steel and aluminum. The plan slaps a 25% tariff on steel and 10% on aluminum. While the tariffs are expected to apply to all countries, China was certainly a strong consideration. Trump plans to sign the trade measure next week and said they would be in effect “for a long period of time.”

Incidentally, the announcement came the same day when senior officials were scheduled to meet with China’s top economic adviser, Liu He.

I expect the U.S. will soon label China a currency manipulator, which will lead 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.

China leaked an announcement recently that the People’s Bank of China was considering allocating its reserves away from additional purchases of U.S. Treasury securities. That should be taken not as an immediate threat but as a shot across the bow indicating how China could retaliate for U.S. tariffs or other trade penalties.

Get ready for an all-out financial war between the U.S. and China.

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.

A full-scale trade war is now upon us. It will shake markets and be a major headwind for world growth. It will get ugly fast and the world economy will be collateral damage.

Today looks like a replay of the 1930s. As Mark Twain reputedly remarked, “History does not repeat, but it does rhyme.”

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.

Now is a good time to reduce your allocation to stocks, increase your cash allocation to reduce volatility and increase your exposure to gold as a safe haven.

Comments

IH8OBAMA Looney Sat, 03/03/2018 - 16:56 Permalink

"Next comes the shooting war with North Korea, which will inevitably draw in Russia, China, South Korea and Japan."

What's that got to do with the trade war?  Are they all going to attack the U.S. because we won't buy their stuff?  LOL

In reply to by Looney

Dickweed Wang TomGregg Mon, 03/05/2018 - 15:54 Permalink

Either way we may get a demonstration of Russia's mach 10 missiles.

 

Maybe that internet time traveler guy, John Titor, wasn't wrong after all (maybe on the date in this reality).  He said the USA would be returned to its founder's "roots" after a short but intense WWIII where the Russian's take out the major power centers of the "cabal" (that illegitimately runs the USA) with nukes . . . and ultimately the people of the US thank them for freeing them.

In reply to by TomGregg

BobEore Bingo Hammer Sat, 03/03/2018 - 17:57 Permalink

" No imbecile"

Your Orange Puppet will follow his instructions - to stick America in an impossible situation in a variety of places around the world...

and then the other puppet Princes will follow theirs... to fall upon the staggering giant and do what no unplanned mistake could do. The Death of the West was organized from within, by fools who prayed for their own extinction, and brayed for its extension - to everybody else. Cause misery loves company... and complicit fifth columnists love to pull the columns...

of society down upon themselves.

In reply to by Bingo Hammer

BobEore philipat Sat, 03/03/2018 - 19:12 Permalink

The implicit arrogance of Empire..

The implicit ignorance of the really real story... invoked by those whose fetish for cheering one "Empire" over another ... is designed to disguise their paucity of understanding.

The battle between competing factions of RUSSO-TALMUDIC mafiyas which takes the form of a Russ-based/ neo-bolshevik directed psyop

pitted against an Amerika-based neo-trotskyite faction now fully in control of government/media/military complexes... takes place daily before the sightless gaze of a complicit ONEMEDIA tasked with misdirecting attentions away from

the fall out of these machinations - in the muddled east and elsewhere.

Rattled by the now compelling evidence that their former means of controlling the dialogue and removing pesky opponents to their monoculture of mendacious media-driven drivel ... has conclusively crashed and died

our remaining hard core of dead enders with dysfunctional suspenders will continue to invoke thru empty ritual the now demolished god of popularity... to the end.

And that end - is nigh.

Nigh ty night!

In reply to by philipat

BobEore philipat Sat, 03/03/2018 - 19:13 Permalink

The implicit arrogance of Empire..

The implicit ignorance of the really real story... invoked by those whose fetish for cheering one "Empire" over another ... is designed to disguise their paucity of understanding.

The battle between competing factions of RUSSO-TALMUDIC mafiyas which takes the form of a Russ-based/ neo-bolshevik directed psyop

pitted against an Amerika-based neo-trotskyite faction now fully in control of government/media/military complexes... takes place daily before the sightless gaze of a complicit ONEMEDIA tasked with misdirecting attentions away from

the fall out of these machinations - in the muddled east and elsewhere.

Rattled by the now compelling evidence that their former means of controlling the dialogue and removing pesky opponents to their monoculture of mendacious media-driven drivel ... has conclusively crashed and died

our remaining hard core of dead enders with dysfunctional suspenders will continue to invoke thru empty ritual the now demolished god of popularity... to the end.

And that end - is nigh.

Nigh ty nigh t!

In reply to by philipat

GIVJetMech BobEore Sun, 03/04/2018 - 10:05 Permalink

So the US is supposed to just accept huge trade imbalances with the rest of the world?   No. Trump is doing what SHOULD have been done by prior presidents.  He is righting wrongs that have simply been accepted by prior presidents. 

Of course we are seeing the displeasure of other nations.  They have enjoyed these huge trade imbalances for years.  It isn’t fair to the US, its businesses or its citizens and should be addressed.  

In reply to by BobEore

MD IH8OBAMA Sat, 03/03/2018 - 19:52 Permalink

The progression from trade war to military war doesn't make any sense to me, either. In the article, Mr Rickards mentions some famous tariffs from the 30's, then some famous military actions in subsequent years. But he failed to establish causality - how specifically did the tariffs lead to the wars? That is never established. 

 

Frankly it looks like a coincidence of history that WW2 followed these trade wars. 

In reply to by IH8OBAMA

websitefound MD Sun, 03/04/2018 - 09:30 Permalink

Because trade wars extend to more than just imposing tariff's. They include economic sanctions and restricting supply of commodaties to target countries.  (note North Korea, Russia, Iran as present day examples).  This is the reason Japan bombed Pearl Harbour (no they werent just the bad guys).  U.S had cut off all imports to Japan of Oil and Scrap Steel to prevent Japan's military build up and has punishment for the indochina invasion.

The British also had naval blockades to stop food, cotton, steel and oil from getting to Germany.  This had been an ongoing blockade since WW1 and the Treaty of Versailles.  Germany manipulated it's currency, printed huge amounts of money leading to hyper-inflation.  The combination of economic woes and restricted trade is what allowed Hitler & Herman Goering to seize control and prepare Germany for the invasion of Poland.

 

This should all sound very familar, except it's U.S and Japan who are printing obscene amounts of currency.  Trade sanctions are being placed on North Korea, Russia and soon to be China.  Middle East is currently the testing ground for U.S & Russia before a larger war kicks off over the Pacific and Europe (Ukraine)

In reply to by MD

Harry Lightning Bumpo Sat, 03/03/2018 - 19:47 Permalink

You are absolutely correct. The premise that trade wars start shooting wars is nonsense. Would the Japanese have been any less willing to control Asia if the US had traded more with them in the 1930s ? Would Germany have given up hundreds of years of wanting to dominate Europe if its neighbors had traded more with it ?

Of course the answer to these questions is no. The wars that engulfed the planet at various times during the last several hundred years have been about factors more associated with theft than with trade.

The amount of crying over the US seeking to make its trade fair rather than free is comical. The countries that have been making fortunes off the American consumer are loathe to give up those profits. The shareholders who's shares increase in value from the employment of cheap overseas labor cannot reconcile how they'll be able to make more fortunes while American workers have to accept lower standards of living to finance the gains of those shareholders. Frankly if there is going to be a shooting war it rightfully should begin by giving a gun to every American who lost a good job because some shareholder wanted their business to make more profit by paying less for labor. Lets see the greedy bastards on their knees begging for their lives after ruining the lives of millions of factory workers in America. 

This is the ugly side of capitalism, the side the vultures love until they become a carcass. There is no law that says capitalism must be left to exist in an unfettered and unregulated way. What usually happens is that the people making the laws side with the vultures of capitalism because it is those vultures who pay for the campaigns with political contributions. But inevitably the lawmakers have no choice to see the writing on the wall, when all the money they can possibly raise cannot convince the majority that laissez faire capitalism is a good thing while it reduces paychecks and increases foreclosures. That time has come in the US, and now someone is willing to do something about it for the good of his country.

The US today does not have the factory strength internally to build the armaments that it needed to win the Second World War in nearly the same amount of time. There are few opportunities for entrepreneurs to start businesses in the US, since the competition from low wage countries is making many businesses relatively unprofitable to perform in the US. The proponents of this madness point to the presence of low inflation as the benefit to be derived from such policies, when in point of fact those alleged benefits pale in comparison to what the company owners earn at the expense of the displaced American workers. The American economy does not benefit from the export of so many quality jobs, as the costs of paying for transfer payments to the unemployed, along with the costs of re-training workers and the lost tax revenues from the lower wages the former manufacturing workers now pay at lower paying jobs, all contribute to a net result where the shareholders profit and the government looses. That is not a policy worth pursuing. 

For every tariff the US puts up, some portion of its massive trade deficit is reduced. Just that fact alone argues forcefully for the US to proceed full speed with the imposition of tariffs. The threat of other countries to put up retaliatory tariffs is a joke, because that would only tilt trade in the direction of American consumers buying more of what American workers produce. Yes, the American people will pay more for the products they buy. But they already are paying a monumentally heavy cost in the portion of the fiscal deficit they accrue every day that their government looses money as described above. 

America never did better than when it made its own products and did not have to rely on the world for anything. The inner cities produced factory jobs for those who were not keen on higher education, and the college educated walked out of college and into middle manager track careers that lasted until retirement. The US had a trade surplus and a budget surplus, and the stock market was not the core of the country's wealth as the wealth was spread across a much broader spectrum of the American public. Today China has amassed savings of trillions of dollars because American politicians allowed that country's merchants and manufacturers to steal America's businesses just for the relative pittance of campaign contributions that were valuable to the politician but harmful to the country. Those trillions that China has in its coffers represents the loss America took for its stupid trade policies. And that just the losses with one country. Counting all of the rest of its trade imbalances, the loss to the American economy is probably twice the loss taken with China alone. Those trillions of dollars belong in the bank accounts of American workers, they were supposed to be the funds that would pay for college educations and mortgages and summer homes and new cars and increased standards of living., Instead they sit in the investment accounts of a minuscule number of industrialists who paid off the American political class pennies so they could earn thousands of dollars for each penny spent. 

The time has come for the American people to wake up. Stop being raped by the stock jockeys whose only interest is their own greed even if it means the destruction of your economy and your lives. Pay no attention to the crocodile tears of your trading vultures who claim to be partners receiving the cold end of an unfair tariff. Its those "partners" who have destroyed your manufacturing base and its time for you to divorce them. Recognize that your politicians would sell their mothers and make delivery and vote them out of office, favoring instead the candidates who will bring opportunity back to your country. Fuck the rest of the world, you have no obligation to allow then to take what is rightfully earned by your intellect and hard work. Keep your profits for yourself, let the rest of the world starve. For as you have seen for the last thirty something years, they have no problem with seeing you starve as they take away your jobs. 

 

In reply to by Bumpo

Buckaroo Banzai Looney Sat, 03/03/2018 - 17:02 Permalink

Calling the erection of a reasonable set of tarriffs a "trade war" is pretty absurd. And you can't compare so-called "trade wars" of the past to whatever is happening today, because the world has literally never been on a global fiat money standard before. The US  began to systematically eliminate its tariffs after Nixon closed the gold window and the US became the Purveyor Of Dollars To The World. What's the point of tariffs, when your country exists to supply dollars to the world in exchange for their crap? "Here, have these dollars..but wait give us some back" doesn't make much sense when you can print the dollars willy-nilly in the first place.

But now, it's become clear that the US dollar is on the verge of collapse, which means the days of the US being the sole supplier of global currency is coming to an end, which means we are going to need to have tariffs in place again, just like a normal country does.

Of course, one wonders what the plan is to replace the dollar. Because you KNOW that there is a plan that we aren't being told about.

In reply to by Looney

gregga777 daveO Sat, 03/03/2018 - 17:31 Permalink

The Chinese would have to print massive amounts of the yuan/renminbi to replace the US dollar as the world reserve currency. In the process, they would go from a massive mercantilist exporter to a massive lazy-assed importer. That would eliminate tens of millions of Chinese jobs creating massive unemployment. That's hardly a recipe for stability in a nation of approximately 1.3 billion people. 

In reply to by daveO

giovanni_f gregga777 Sat, 03/03/2018 - 17:43 Permalink

"Trump is evening the trade imbalance"

US has been buying goods with printed money. To the benefit of the Americans who could consume more than they could afford, for decades. It could do it bc it has had an unfair advantage, the reserve currency privilege. When this advantage will have been gone, the trade imbalance will go away as a consequence.

Trump is an accelerator of this process.

In reply to by gregga777

Stuck on Zero giovanni_f Sat, 03/03/2018 - 18:29 Permalink

All trade wars could be eliminated by the introduction of a "Trade Dollar." The trade dollar would decrease in value by 5% per year and could be used to purchase a product exported by a country but could not be used to buy anything inside the country. China could sell us a ton of crap but they'd soon be sitting on a pile of worthless cash unless they bought some US exports.

In reply to by giovanni_f

philipat Stuck on Zero Sat, 03/03/2018 - 18:50 Permalink

China understands all this very well and has no intention of trying to replace the Dollar with CNY/H as the world's reserve currency. China's biggest advantage over Western "strategists" is that it is able to play a (very) long game. IMHO, China will slowly push world trade towards an SDR-type arrangement which includes Gold at which point, the proportion of Dollars in the basket would steadily further erode over time.

In reply to by Stuck on Zero

cantscratchfever Buckaroo Banzai Sat, 03/03/2018 - 18:02 Permalink

The plan by the CFR and the UN is the PHOENIX...Google it

But that was with Clinton or Bush in the white house

Hard to say what they will do

The Shit eaters over in China think they are going to be the reserve currency by backing the Wyan with gold.... but they have little in natural resources they import more than 50% of their energy. A whole shit load of people and not a large percentage that are part of the industrial workforce most are on an agricultural economy.

If they stop buying treasuries? well let the fed explode ... China is going to hurt the worst . Where are they going to sell there shit?

We will have much unrest here but with out Obungo in power ...going to be a different out come

Trump doesn't go with the Shit eaters ,the Marxist Europeans and the Phoenix

He abolishises the FED takes back the printing of money and creates his own money supply call it whatever except the phoenix.

If he does that and abolishes all debt nation wide...well then the country will rise out of the ashes much better and a sovereign nation still.

In reply to by Buckaroo Banzai

TeethVillage88s Buckaroo Banzai Sat, 03/03/2018 - 18:36 Permalink

True. ^

I like what you said.  "... never been on a global fiat money standard before. ..."

- 2017 - 1971 = 46 years.  2017 - 1987 = Stable years?  30 years is short time for history or Fiat.  1999 - 1987 = short time for stable fiat = 12 years of USA Glorious Stock Market & Consumer Market Glory!

- 2017 - 2007 = 10 years of screwed up Fiat!  2017 - 1998 =19 Years short term Utopia Fraud = 19 Years!

Any other Versions ZH?

2017 - 1987 = 30 years of Stock Market Easy Money!

In reply to by Buckaroo Banzai