Don’t Rule Out A Trade War Yet

armageddon

When time permits I read a lot of blogs. When it’s tight I make sure to visit a couple selected sites. One is Yves Smith’s Naked Capitalism. I frequently disagree with her and she often sets my blood boiling but she never fails to get past the trivial and key in on real issues.

Her post today covering the growing tensions between the Chinese and the Obama administration over interest and exchange rates is a case in point. I disagree with some of her statements but the overall conclusion that low interest rates, artificially managed yuan exchange rates and persistent economic lethargy in the U.S. will lead to no good is one with which I am in complete agreement.

She quotes from Krugman’s latest missive on the subject, though I find him to be more of an echo chamber these days than a forward thinker. She also cites Ambrose Evans-Pritchard who has never been shy about going out on a limb. Here is a snippet of his thoughts on the subject:

If provoked, the US has the economic depth to retreat into near autarky (with NAFTA) and retool its industries behind tariff walls – as Britain did in the 1930s under Imperial Preference. In such circumstances, China would collapse. Mao statues would be toppled by street riots.

Evans-Pritchard has been sounding this sort of alarm since the beginning of the crisis. That his sometimes dire view of the outcome has not yet come to pass is no reason to suppose that it won’t. So far governments have been able to muddle along and avert the unthinkable, yet in doing so the West and the U.S. in particular have not succeeded in engendering any sort of meaningful economic  rebound.

Unemployment at the level that currently exists in this country is politically untenable. If it continues for even a few more months or as some postulate actually deteriorates further then the unthinkable can quickly become a political movement. When Smith or Evans-Pritchard talk about capital controls or extreme protectionist measures it might sound like fear mongering but it might well prove to be highly prescient.

The fact is that during times of extreme global economic duress the end game of mutual destruction usually favors the more developed countries that tend to be net importers. The 1930s pretty much proved this point. While the results are less wealth for everyone the pain is not evenly distributed. That lesson has not been forgotten and the plan is one that any politician will wheel out when their survival depends upon it.

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