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Great Depression Online Archive Issue:

Starting a Trade War with China

Great Depression Online
Long Beach, CA
October 19, 2010

Inside This Issue You Will Discover…

*** Doing the World a Fabulous Deed
*** Delaying the Clash
*** Starting a Trade War with China
*** And More

Doing the World a Fabulous Deed

Unbalanced trade between China and the U.S. has been going on for years.  You know how it works.  China manufactures cheaply made doohickeys at slave wages and the American consumer buys them at everyday discounts.  Overtime this has led to a decrease in U.S. manufacturing capacity and a massive U.S. trade deficit.

Each month the U.S. buys more than it sells abroad.  In August of this year the U.S. trade deficit was $46 billion; of that, $28 billion was with China alone.  In other words, the U.S. transferred nearly $1 billion a day to China during the month of August in exchange for consumable products.

The wealth transfer, nonetheless, consists of a paper promise.  Yet everyone, including China, accepts the U.S. currency as real money.  For shipments of toys, bed sheets, glass and plastic containers, Halloween costumes, and more, China takes loads of $20 dollar bills.  In a relationship of symbiotic disharmony, China then takes the $20 dollar bills and buys U.S. Treasury Bonds.

~~~~~~How To Prepare?~~~~~~

The shocking 1990 collapse of the Japanese Market.  The extraordinary U.S. economic boom of the ‘90s and early 2000s.  The devastating global recession that began in 2008.  These impacted everyone’s lives, investments, and fortunes.  The signs of their arrival were visible years and years in advance.  And yet…Almost No One Predicted Them.

The mainstream media didn’t.  The top economists didn’t.  The great financial advisers didn’t.  But One Man Did.

What’s coming Next?  When will it happen?  What should you do to Prepare for it?

Click Here for the Answers 

~~~~~~~~~~~~~~~~~~~~~~~~~

Spending more than you make, for individuals and nations alike, is a good way to go broke.  But for a time, the increased spending, and the goodies you get in return, makes you feel wealthier…and economists and policy makers come up with absurd theories to justify it.

Back in 2005, when the U.S. economy was humming along, and everyone was getting rich selling houses to each other, this system of international finance was seen as a marvelous thing.  Ben Bernanke commented that the American consumer was doing the world a fabulous deed by borrowing its excess savings.  There was a “global savings glut,” he explained, international savers needed American consumers to borrow and spend their money.

How the world has changed since 2005…

Delaying the Clash

With the U.S. economy flailing along, the U.S. trade deficit is no longer so marvelous.  China is now called a currency manipulator…and, in an election year, this has become a political rallying point for candidates of all stripes.

Last Friday the U.S. Treasury Department delayed an impending currency clash with China.  AFP reports…

“The United States’ complex trade relations with China were laid bare Friday as Washington struggled to balance pre-election anger at home with efforts to give US firms a fair shake against Chinese rivals.

“Amid rising anger that Chinese policies are putting Americans out of work, US officials moved to forestall a currency battle with Beijing while probing its subsidies to green technology companies.

“The Treasury Department delayed publishing a controversial report on China’s currency policies until after mid-term elections and a key G20 meeting in mid-November.

“The report, which could have labeled China a currency manipulator and opened the path for US sanctions on Chinese goods, was due to be released by Friday.

“The delay avoids the prospect of a bitter trade dispute between two powers, who have faced off over accusations that Beijing keeps the yuan undervalued to gain an unfair trade advantage.”

So where does this all lead?

Starting a Trade War with China

In June 1930, Senator’s Reed Smoot and Willis C. Hawley helped make a downturn in the business cycle into a Great Depression.  With passage of the Smoot-Hawley Tariff Act, U.S. tariffs on over 20,000 imported goods were raised to record levels.  A trade war ensued and retaliatory tariffs by U.S. trading partners reduced American exports and imports by more than half.

One of the curious things about the world we live is that there’s hardly a cause or a program too stupid not to try twice.  Faced with the choice of doing something foolish or losing votes a good politician will always huff and puff and behave like an imbecile.

“The House voted overwhelmingly last week [September 29] to give President Obama sweeping authority to impose steep tariffs on Chinese imports,” reported Eric Weiner in the Los Angeles Times.  “The move was aimed at retaliating against Beijing’s monetary policy, which essentially keeps the value of the nation's currency artificially low so Chinese manufacturers can dump cheap exports on developed economies.

“Whether the Senate will go along with the plan is still open to debate.  But it’s probably more pertinent to ask exactly what China would do if the U.S. actually did slap harsh tariffs on its goods?  Based on China’s recent behavior, any rash moves along those lines could trigger a deeply bitter reaction and possibly an outright trade war that, frighteningly, the U.S. would not win.”

Maybe so…but we’re confident the Senate will start a trade war with China just to find out for good.

Sincerely,

M.N Gordon
Great Depression Online

P.S.  “We’ve seen the greatest credit bubble and greatest real estate bubble in modern history, which means we have inflated asset values and, more importantly, way too much debt in our system,” warned financial author and publisher Harry Dent recently to Moneynews.com.

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