Tuesday, 10 September 2019

The global financial system

Are we at the beginning of the biggest global financial meltdown yet to be recorded in human history?

The American president Donald Trump is focused on and obsessed with the fact that we bought $543 billion worth of stuff from China last year, and we sold $120 billion. It is not because of bad trade deals The Donald thinks that his predecessor made, or because the Chinese are the worst kind of trade cheats in world history. The reason is the economic differential [the economic cost and wage gap between the two countries is so great], that we have this huge imbalance. The Fed is the partial cause of that economic and cost differential.

If you look at manufacturing, the average wage is over $30, which includes the cash wage plus the health benefits, retirement, and Social Security taxes, and all the rest of it. In China, it is about $5. When you have $30 versus $5, it tells you all you need to know.

So, we have this huge gap overall, which is $423 billion, in other words, exports minus imports. Now almost 55% of that is accounted for by two trade code categories that really focus on smartphones, laptops, desktops, other computer equipment, electronics, and so forth.

Apple iPhones and the whole rest of it [the supply chain has been entirely transplanted to China. That’s because of a wage arbitrage. Last year, in those categories, the US imported $275 billion worth of stuff, including about $90 billion worth of cell phones] and then exported to them only $27 billion worth of stuff. So, there is a massive 10-to-1 ratio of imports to exports, and it is due to wage and cost differences, not because the Chinese cheat. The point is you are not going to negotiate that away.

Donald Trump has identified the problem of $423 billion merchandise trade deficit of one country. He is only going to blow up the global trading system and supply chains with these idiotic tariffs. They are really getting pretty serious.

After the 2008 crisis, the Fed kept interest rates artificially low, as a “temporary” measure. All this did was create easy money and pump up the stock market. The Fed’s attempt to normalize interest rates caused the stock market to tank. They’ve since capitulated and ended the tightening cycle.

You could say they will go to quantitative easing [QE]. I doubt that. The QE experiment has failed entirely. We have had massive increases in the Fed’s balance sheet, which went from about $850 billion on the eve of the subprime crisis to a peak of $4.5 trillion. Ben Bernanke promised at the time and said it over and over: This is an emergency. It is the 100-year flood. It is a one-time thing. We will normalise as soon as the economy has stabilised.

There is no doubt that this is not going to stop anytime soon.

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