Category Archives: china

Memo to The Donald: Cut Tariffs NOT Rates

trump tariff

So far, President Trump’s economic response to a potential coronavirus outbreak and a further stock market sell off has been expected – calls for more interest rate cuts and an additional round of monetary stimulus.  For the stock market, economy, and the virus itself, neither measure will have their desired effect and, in fact, may exacerbate things.

Further rate cuts and more money printing will not alleviate the situation since it has been the Federal Reserve’s recent “repo operations” which has pushed the market to its unsustainable highs.  For President Trump’s re-election hopes, the current “correction” better be short lived since he has repeatedly boasted about the stock market and has tied its success with the supposed health of the economy.  He will pay a political price if the market continues to tank and brings the economy down with it.

While President Trump and economic nationalists have bashed China for its trade practices, they are now going to see first hand how dependent the US and the West are on Chinese exports, as supply chains are disrupted over the coronavirus.

A Bloomberg article describes China’s weakest factory activity ever recorded:

The manufacturing purchasing managers’ index plunged to 35.7 in

February form 50 the previous month, according to data received by the

National bureau Statistics on Saturday, much lower than the median

estimate of economists.  Both were well below 50, which denotes

contraction.*

The expected reduction of Chinese goods will mean higher US domestic prices, however, the increase in prices can be offset somewhat not by rate cuts, but by tariff reductions, or, better still, elimination of duties on imports.  Increasing the money supply or cutting interest rates, which is what Trump, the market, and 95% of economists favor, will only mean higher prices for dwindling imports as greater amounts of money will chase fewer goods.

In the President’s comments on the coronavirus and the stock market plunge, he has repeatedly cited other nations’ (Japan, Germany) – lower interest rates as a policy that the Fed should pursue.  Apparently, the President is not aware that recent data out of Japan has shown that the economy shrank at an annualized rate of 6.3% for the fourth quarter of 2019 while the German economy only grew at 0.6% last year.**  Low rates have not helped either economy or anywhere else where they have been foolishly tried.

What President Trump, world policy makers, and central bankers do not understand, whether deliberately or from willful ignorance, is that the artificial suppression of interest rates and money printing does not lead to economic growth. Instead, prosperity can only come about by the arduous process of saving (abstention from consumption), which provides the means for capital formation, which leads to production.  Employment, wage growth, and income are also ultimately tied to savings.  For the creation of wealth, there is no way around this elementary economic principle – one that few profession economists comprehend.

For saving and investment to have their most efficacious impact and for individuals to engage in such sacrificial behavior, a sound monetary order must be in place.  Unfortunately, ever since the US went off the gold standard internationally in 1971, its monetary system has grown increasingly unstable.

If the Trump Administration would eliminate, or at least reduce significantly, tariffs, it would more than likely induce China to do the same.  The benefits of lower import prices for the millions of out of work Chinese due to the coronavirus shut downs would be a tremendous help and would also boost America’s export industries.  Such action would show to those who elected him that Donald Trump was not a typical politician, but one who thought outside the box.

While it did not cause the Great Depression, the Smoot-Hawley Tariff of 1930 contributed to its severity.  If the recent sell-off is indeed the beginning of the long anticipated bust, following a supposed decade long expansion, then policy makers should do all in their power to alleviate the coming suffering.  The reduction of tariffs not only on Chinese goods, but those the world over would be a step in the right direction.

Let us hope that someone will convince Donald Trump that tariff reduction and not rate cuts will help Americans better deal with the troublesome and potentially economic and socially devastating coronavirus.

*China Posts Weakest Factory Activity on Record,” Bloomberg News, 29 February 2020.  https://www.bloomberg.com/news/articles/2020-02-29/china-feb-manufacturing-pmi-at-35-7-est-45-0

**Megumi Fujikawa, “Japan’s Economy Shrinks Faster Than Expected.”  Market Watch.  16 February 2020.  https://www.marketwatch.com/story/japans-economy-shrinks-faster-than-expected-2020-02-16;  “German Economy Stagnates as Eurozone Growth Hits Seven-Year-Low,”  The Guardian,  14 February 2020, https://www.theguardian.com/business/live/2020/feb/14/german-economy-stagnates-growth-eurozone-gdp-business-live

Antonius Aquinas@AntoniusAquinas

https://antoniusaquinas.com

What President Trump and the West Can Learn from China

Trump Trip China

Instead of a demonstration of its overwhelming military might intended to intimidate tiny North Korea and pressure China to lean on its defiant communist neighbor, President Trump and the West should try to learn a few things from China.

The President’s trip to the Far East came on the heels of the completion of China’s 19th National Congress where the current president, Xi Jinping, has cunningly positioned himself as China’s unchallenged leader.  In an address at the opening of the Congress, Xi cautioned that the country faced “challenges” that are “extremely grim” yet, despite these, the nation’s future is “extremely bright.”*

While Western politicos and pundits bemoan the lack of political pluralism that exists within China and President Trump complained about bad trade “deals,” they miss an important factor as to why China has transformed itself from a socialist basket case some three decades ago into an economic powerhouse which now boasts over a third of the world’s billionaires!

China’s economic ascendancy can be attributed not only to the implementation of market reforms in the 1990s, but also its lack of “political competition.”  As a one-party state, resources, time, energy, and capital are not allowed to be channeled into wasteful political processes, but instead are used and “invested” in wealth-creation activities – construction, factories, plants, equipment, research, technology – all of which leads to more and cheaper consumer goods.

The US and the West spend too much on elections, campaigns, polling, political consultation, etc., which diverts scarce resources away from the private wealth sectors of society.  For example, in her last failed presidential campaign run, the Wicked Witch of Chappaqua alone spent over a half of billion dollars.

Under Western democratic pluralism, public debt and state spending have increased to unsustainable levels.  In the US alone – history’s greatest debtor nation – the national debt is in excess of $20 trillion, while its total debt officially is $68 billion with a federal deficit (GAAP) running yearly at $5 ½ trillion.

Such staggering numbers are the result, in part, from political parties seeking public office and once elected exploiting their position to enrich themselves, their constituents, and create dependent classes among the ever shrinking productive segments of society.

China’s foreign policy – an extension of politics – has also been conducive for wealth creation.  Instead of wasteful spending on military hardware, the maintenance of a far-flung global empire, and involvement in incessant wars, China has a rather meek military compared to its national income and has conducted a pretty much non-interventionist foreign policy – witness its diplomacy with North Korea.

The US is almost the polar opposite.  It spends more on “defense” than the next eight countries combined.** Instead of the production of useful consumer goods, billions are siphoned off into the military/security industrial complex.  Not only does this impoverish Americans at home, but it leads to never ending involvement in wars, conflicts, and disputes, most of which are created or exacerbated by US spy organizations.

Def spending

After meeting with Chinese leadership, President Trump tweeted:

I don’t blame China, I blame the incompetence

of past Admins for allowing China to take advantage

of the U.S. on trade leading up to a point where the

U.S. is losing $100’s of billions.  How can you blame

China for taking advantage of people that had no clue?

I would’ve done the same!

Making better trade deals will not revitalize the moribund US economy.  Instead, there should be less politicization of society and adoption of market reforms as China has done.  The most important plank of such a policy would be the encouragement of real savings – not the creation of bank credit – through the normalization of interest rates.  This would begin the arduous process of capital accumulation, the basis upon which any economy can be built.

Another sign of the divergence between the two is China’s continued push to make the yuan the world’s reserve currency with apparently some sort of gold backing to it.  Contrarily, the Trump Administration has continued the same disastrous policies of its predecessors and has chosen a Janet Yellen clone to head the Federal Reserve with a continuation, no doubt, of the suppression of interest rates.  On the other hand, China continues to import massive quantities of gold and encourages its citizens to own the yellow metal while the West is in the midst of a crypto currency mania, another fraudulent monetary scheme.

China’s economic miracle, while certainly impressive, would not look as astounding if Western economies had not been in a state of stagnation and decline over the past half century.  It was not political liberalization that led to China’s phenomenal growth, but economic freedom which used to be a staple of Western life.  The lesson that should be taken from President Trump’s trip is less politics domestically and more free markets.

*Chris Buckley, “Xi Jinping Opens China’s Party Congress, His Hold Tighter Than Ever.”  The New York Times, 17 October 2017.   https://www.nytimes.com/2017/10/17/world/asia/xi-jinping-communist-party-china.html

**Peter G. Peterson Foundation.  “US Defense Spending Compared to Other Countries.”  1 June 2017.  https://www.pgpf.org/chart-archive/0053_defense-comparison

Antonius Aquinas@AntoniusAquinas

https://antoniusaquinas.com