Rickards: First, Currency War; Now, Trade War; Is Shooting War Next?

Authored by James Rickards via The Daily Reckoning,

My thesis is that currency wars are followed by trade wars and then finally shooting wars among major powers.

This happened in the 1930s and it seems to be happening again.

Currency wars begin in a condition of too much debt and not enough growth. Countries steal growth from their trading partners by cheapening their currencies to promote exports and import inflation.

The present currency war started in January 2010. The problem with currency wars is that all advantage is temporary and is quickly erased by retaliation. Trading partners retaliate with their own devaluations. Currency cross-rates end up back where they started, with costs imposed due to the uncertainties.

Not only is the world not better off but it is worse off because of the costs and uncertainty resulting from the currency manipulations.

Eventually, the world wakes up to this reality and moves to the trade war stage. Once countries realize that currency wars don’t work, they turn quickly to trade wars through tariffs and other trade barriers.

The problem is that trade wars don’t work either, for the same reason currency wars don’t work — retaliation or tit-for-tat tariffs soon puts everyone back where they started.

The new trade war started in January 2018 with the announcement of tariffs, and those tariffs actually began to take effect last week. Just because trade wars have started does not mean the currency wars are over. Not at all. The currency wars and trade wars continue side by side. In fact, they are related.

If the U.S. puts tariffs on China, which we have, then China can fight back two ways.

The first is to impose their own tariffs on U.S. exports, which they have.

The second is to cheapen their currency to offset the impact of the tariffs. If the U.S. imposes a 25% tariff on China but China cheapens its currency by 25%, then everyone is back where they started in terms of the costs of Chinese goods to U.S. consumers.

This would be a potentially devastating development for markets.

A shock yuan maxi-devaluation will be the shot heard round the world as it was in August and December 2015 (both times, U.S. stocks fell over 10% in a matter of weeks).

There are individual winners and losers from the currency and trade wars, but the global economy as a whole is definitely a loser. This new trade war will get ugly fast and the world economy will be collateral damage. I believe it will get much worse before it is resolved.

We should look for slower growth and possibly a recession as the trade and currency wars play out. Let’s hope that history does not repeat and that we don’t end up in a Third World War, as the currency/trade wars of the 1930s helped lead to WWII.

Comments

brushhog cheka Thu, 07/12/2018 - 14:09 Permalink

Well, according to Rickards, the currency war was supposed to lead us to an economic crisis that never happened. The "trade war" doesnt exist since the tariffs havent even been implemented yet, so Im guessing no shooting war either.

If the first two premises are wrong then the conclusion must also be wrong.

In reply to by cheka

Antifaschistische brushhog Thu, 07/12/2018 - 14:25 Permalink

agreed...there is so much ignorance in this timeline that keeps getting repeated over and over by talking heads that can't come up with their own creative projection.

trade "imbalances" will always self correct if you just let them run their course.  You can't stockpile fiat forever.  The only value in fiat, is to spend it...and when  you spend it you begin the correction (see Japan where we listened to the 'trade imbalance' cry babies for 25-30 years)

In reply to by brushhog

gdpetti InflammatoryResponse Thu, 07/12/2018 - 15:49 Permalink

Didn't CHina let one in Europe go to some rich investor? Westerners love them their sports teams... like Japan loved them the movie studios and other 'artsy' type assets... CHinese mostly offshoring their profits into basic real estate... and their govt has learned enough from the Japan/American/Europe lessons in the past to start putting the brakes on.... which is hard when they are playing the same debt game, thus sharing the risk/rewards of the game.... but Xi is playing his hand closer to the chest... trying to have his cake and eat it too.... the best way to prevent war is to be prepared for it and let your enemy know it... not just South China Sea, but closer to the weak spots on our coast lines... but Mother Nature's approach will present difficulties there... not that most are watching... but isn't that always the case?

Again, I'll say it... the wild card is Mother Nature... whose role in the rise and fall of civilizations has been excised from our history books.. for a good reason... hard for the puppet show to play as it does in empire building when the herd knows Mother Nature is arriving soon to 'clean house'.

So, article after article appears that omits this extremely large variable from the equation... because the authors simply don't know anything about it... the science's, like all the rest of the vectors of society, have been kept apart... so they can't share notes and opinions, theories, and anyone that does gets the outcast treatment of any who dissent... but that variable is so large, and will become rather obvious soon enough, to the point of not needing any govt to publicly declare the obvious... just like in those Hollywood disaster movies....

In reply to by InflammatoryResponse

Rothbardian in… Government nee… Thu, 07/12/2018 - 13:17 Permalink

 

Let's look at what is happening globally and look at our role in it:

 

1.  Mexico Cartel Wars -- Make drugs legal and watch the profit fall out of being a mobster.  Will it go to zero?  No, but this war could end tomorrow for the most part.  Nice job on the War on Drugs.  Great outcome.

 

2.  Civil War in Lybia --- Hmmmm, seems there wasn't a civil war there until we started running guns out of there and our CIA sodomized their leader.

 

3.  Nigeria battle with Boko Haram. -- Who, is aligned with ISIS who we created.  But that is still pretty small scale.

 

4.  Yemen War -- Being conducted by our Petrodollar partners against our Petrodollar adversaries.  

 

5.  Iraq/Syria civil wars and ISIS -- Yay!  We made another terrorist org, gave them US weapons and sent them out to topple a country so we could come behind them and kill them and build a pipeline.  See number 4.  Fortunately, this one looks to be in the final stages.  Throw in Turkey vs the Kurds into the pot just to be accurate.

 

6.  Battle in Ukraine -- The country was toppled by the west (CIA) and is literally run by neo-nazi's.  WTF?!  The regions fighting voted to peacefully leave and the neo-nazi's would have none of it.  It is at a stalemate now.

 

7.  War in Afhanistan -- Where we invaded and then left a political vacuum and now it's a never ending drone ordinance impact area.

 

8.  South China Sea -- no shots fired there but certainly tensions exist with guess who?  US!

 

So some observations:

A) there really aren't any real wars underway right now.  Maybe Yemen.  Maybe Syria.  Both though seem to be at a stable or near victory moment.  On the entire planet that list is our current War situation.  That is really really good historically speaking.

B)  Of all the war on earth, the US is in 100% of it somehow.  Just let that sink in.  

C)  This doesn't even put a dent into the conflicts of the 1930's  Just to name a few:

   Spanish Civil War

   Chinese Civil War

   Argentina Coup

   Brazil / Bolivia Revolutions

   Austrian Civil War

   Italy Ethiopian War

   Palestinian Conflicts

   The Nanking Massacre (Japan/China)

   Invasion of Poland

In reply to by Government nee…

Lordflin Rothbardian in… Thu, 07/12/2018 - 13:41 Permalink

Hmmm.... seems you missed India vs Pakistan, India vs China, Greece vs Turkey, China vs Taiwan, China vs almost everyone else in the South Pacific, Israel vs much of the Middle East... just to name a few off the top of my head... gotta run, but love your America vs the world meme... and I am no fan of the Deep State driving us to war, but war is in the air my friend, whether we start it or someone else does. We have come way to close to the edge...

In reply to by Rothbardian in…

Jim in MN Thu, 07/12/2018 - 12:20 Permalink

The Mexican drug war, and the chance of civil war in the US, make North America the riskiest continent on Earth.

Funny isn't it.  Until it isn't.

el buitre rrrr Thu, 07/12/2018 - 15:43 Permalink

Jim Rickards, the lawyer-in-chief for Long Term Capital Management, after their scams precipitated the first GFC in 1998.  That time the banks coughed up the $3.6 billion to put out the fire, chump change in today's markets.  A real smooth talker, a man I would trust anywhere, anytime. /s

Speaking of LTCM, from the CIA Factbook we have:

Members of LTCM's board of directors included Myron S. Scholes and Robert C. Merton, who shared the 1997 Nobel Memorial Prize in Economic Sciences for a "new method to determine the value of derivatives".[3Even the inventor of modern warfare high explosives, Alfred Nobel, had the decency not to offer a Nobel Prize in economics, but this act of decency was overturned by Sweden itself with Swedish National Bank's Prize in Economic Sciences in Memory of Alfred Nobel) or otherwise as the Faux Nobel.  Adding insult to injury, they referred to economics as a science.

In reply to by rrrr

LawsofPhysics Thu, 07/12/2018 - 12:22 Permalink

Send Jim and his children to the front line ASAP!

Fuck all these useless overcompensated paper-pushing fucks that have stolen real wealth from all the producers of the world.

The eCONomy and the oligarchs have been global for quite some time now.  fuck em! Don't overthink this as it has and ultimately will always be a competition for real resources that are required to do anything fucking real! Producers versus consumers, creditors versus debtors etc. etc.

...soon enough, if you don't perform real work and face real risk then you won't eat.
 

In the meantime...

"Full Faith and Credit"

same as it ever was!

Government nee… Thu, 07/12/2018 - 12:22 Permalink

I'm just waiting for the pace car, i.e. the joke of a US justice system, to pull off to the side so I can go get some payback.  Time to wave the green flag, and start 'racing @ Daytona'.

beenlauding Thu, 07/12/2018 - 12:30 Permalink

This article is baloney.

Tariffs protect manufacturing and bring jobs back.  They don't 'put everyone back where they started' like this retard article states.

carbonmutant Thu, 07/12/2018 - 12:32 Permalink

The media wants war for the same reason MIC wants war.

"There money to be made by supplying the troops with the tools of the trade." - Country Joe and the Fish

 

VWAndy Thu, 07/12/2018 - 12:33 Permalink

 So when does the war on bankers start? Just saying we could prolly skip all them other wars an just do the bankers. Id feel pretty good about that kinda war.