Richard Duncan, writer and publisher at Macro Watch, warned on FS Insider that a full-blown trade war between the US and China would lead to a spike in inflation, interest rates, and, if pushed too far, a cratering of the global economy into another Great Depression. Sound sensational? Here's what he had to say...
China Vulnerable, But It Can’t Back Down
President Trump appears to be sincere and determined in his intention to bring down the US-China trade deficit, and he’s probably willing to hold China’s feet to the fire to accomplish his goal.
China, however, really can't afford to meet Trump's demands, Duncan noted, and has to fight back, driving the likelihood that the trade war’s seriousness escalates further.
For one, China's economy is already in a crisis to begin with, he said, and it is probably in the greatest economic bubble in history. This happened because China an export-led strategy since the 1980s, that saw total investment skyrocket, leading to tremendous excess capacity across every industry in China.
For example, Duncan noted, between 2010 and 2012, China produced more cement than the United States did during the entire 20th century. Now, however, the world can no longer soak up this excess production capacity, and China isn’t close to being able to make up the difference.
“One world is just not big enough to absorb everything that China can produce,” Duncan said. “It's very difficult to see how China is going to grow as matters are now, even without a trade war with the U.S. If we bring in a trade war … (where) President Trump has demanded that China reduce its trade surplus with the U.S. by $200 billion a year. … This would be enough to tip China's already fragile economy into a very severe economic downturn. There's no possibility that China is going to agree. That's what makes this crisis so serious.”
Potential Great Depression, Outright War
A protracted trade war between the United States and China would likely represent a major turning point in history, Duncan warned.
It could kill China's economic rise and even trigger an economic crisis, similar to what we saw in Japan after 1998.
A serious, prolonged trade war would also do a great deal of damage to the United States economy, Duncan noted. Once the US started running large trade deficits with other countries in the early 1980s, inflationary pressures were dramatically reduced due to two primary factors: cheaper goods and cheaper workers, particularly from China, Taiwan, and other emerging markets.
As the inflation rate came down, interest rates fell from double-digit levels, making credit and borrowing more affordable. Consequently, this led to a multi-decade, credit-led economic boom in the US and other nations as well.
Duncan warns that a full-blown, all-out trade war between China and the US would change this dramatically...and that investors don't quite understand the risks that are at stake.
If we see President Trump put 25 percent tariffs on everything imported from China, the inflation rate is likely to spike to 8 or 10 percent, and interest rates will likely shoot higher to around 13 percent, Duncan warned.
Such a scenario could potentially throw the world into a new Great Depression and even into outright war, said Duncan.
“If interest rates spike higher, that would, of course, make credit much less affordable,” Duncan said. “Rather than driving economic growth through credit expansion, we would see extreme credit contraction. The credit contraction alone would be enough to throw the U.S. into severe recession.”
In addition, higher interest rates would cause the stock market and property market to crash, Duncan added, and we would experience an extreme negative wealth effect that would also by itself throw the U.S. into a severe recession.
“Combined, the crashing asset prices and the contract of credit would be enough to throw the U.S. into a depression, most probably,” Duncan said. “At that point, it’s uncertain whether President Trump’s supporters would continue to support him or not, because they would lose their jobs and they would have to pay much higher prices for the goods that they bought as inflation rose. So there's a possibility that President Trump will not have the power to carry out this trade war long enough to really make it significant.”
Listen to this full interview with Richard Duncan by clicking here. For more information about Financial Sense® Wealth Management and our current investment strategies, click here. For a free trial to our FS Insider podcast, click here.