Common Cents & “What In The [heck] Was That” on August 23, 2019

August 23, 2019, by John Norris

Up until about 10:00 CDT this morning, I struggled with a topic for today’s newsletter. Everything was variations on a theme or similar to something I had read elsewhere. I mean, how many different articles can you read about Fed Chairman Jay Powell’s comments on monetary policy after a meeting of academics? The answer is: as many as you would like, and there isn’t a nickel’s difference between the lot of them.

At about that time, the President posted his two cents about the Fed onto Twitter, and the investing world’s collective jaw hit the floor. Here is the two-part tweet:

“As usual, the Fed did NOTHING! It is incredible that they can “speak” without knowing or asking what I am doing, which will be announced shortly. We have a very strong dollar and a very weak Fed. I will work “brilliantly” with both, and the U.S. will do great…My only question is, who is our bigger enemy, Jay Powell or Chairman Xi?”

After that, the President went on the warpath against the Chinese, which had earlier in the morning announced additional tariffs against the US. I will simply paste them here, and all the grammatical errors are his and not mine:

“Our Country has lost, stupidly, Trillions of Dollars with China over many years. They have stolen our Intellectual Property at a rate of Hundreds of Billions of Dollars a year, & they want to continue. I won’t let that happen! We don’t need China and, frankly, would be far…better off without them. The vast amounts of money made and stolen by China from the United States, year after year, for decades, will and must STOP. Our great American companies are hereby ordered to immediately start looking for an alternative to China, including bringing…your companies HOME and making your products in the USA. I will be responding to China’s Tariffs this afternoon. This is a GREAT opportunity for the United States. Also, I am ordering all carriers, including Fed Ex, Amazon, UPS and the Post Office, to SEARCH FOR & REFUSE,…all deliveries of Fentanyl from China (or anywhere else!). Fentanyl kills 100,000 Americans a year. President Xi said this would stop – it didn’t. Our Economy, because of our gains in the last 2 1/2 years, is MUCH larger than that of China. We will keep it that way!”

Those are really strong words from a national leader, kind of shockingly so. Consequently, IF that is the way POTUS feels about the Chinese, maybe the comment “my only question is, who is our bigger enemy, Jay Powell or Chairman Xi?” isn’t the best way of venting. I can’t imagine either Xi or Powell would care much for it. You think? Even so, I think Trump might be right about the Fentanyl. It is really nasty stuff, and we need to get rid of it.

Doing what I do for a living, I often view the world through an ‘economic lens.’ What is the economic impact of this or that? That sort of thing. So, I have disliked the President’s use of tariffs against the Chinese, let alone the rest of the world, as what I perceive to be a foreign policy tool. I have viewed this like the kid who takes his football home when he can’t be the quarterback. If not that, it is akin to Flick’s breach of etiquette in “A Christmas Story” by going right for the throat with a ‘triple-dog-dare.’

What’s more, who hasn’t wondered what the real objective is here. It can’t be all economic, no way. Perhaps some manufacturing will come back to the US, and, anecdotally, I have heard some is in the process of doing so. Nor could it be completely xenophobic, could it? The President’s detractors would certainly argue it is.

In last week’s ‘The Saturday Essay’ in the Wall Street Journal, Yaroslav Trofimov wrote an excellent article titled “Has Xi Jinping Stirred a Backlash?” He is the chief foreign-affairs correspondent for the paper, and has served around the world. Not that is matters all that much, he also has 27.9K followers on Twitter. So, he isn’t some crackpot the Journal pulled out of the ether to write an opinion piece.

In the fourth paragraph, Trofimov wrote something I had not previously read. In truth, it is hard to easily find corroborating evidence of it, which is why I went to the trouble of mentioning the man’s credentials. Here it is:

“China’s assertiveness predates Mr. Xi’s ascent to power in 2012. But the 66-year-old leader has turned this new nationalism into the hallmark of his presidency. As far back as his 2013 summit meeting with President Barack Obama in California, U.S. officials were surprised by what they understood as Mr. Xi’s vision to essentially divide the world into two spheres of influence, with China overseeing Asia in exchange for not challenging U.S. dominance elsewhere.”

This got my attention, but, admittedly, I don’t travel in foreign policy circles. As far back as 2013, the US has understood Xi’s vision is to divide the world into two spheres of influence? With China dominating Asia and the US everywhere else? Ah…a return to China being the Middle Kingdom and exercising suzerainty over tributary states in its orbit? Huh. History buffs might agree this isn’t as far-fetched as it might seem to economists, as that was the system for centuries prior to the last one.

In the next paragraph, he added:

“In a 2017 speech to the Communist Party Congress, Mr. Xi celebrated the fact that China “has stood up, grown rich and is becoming strong.” Beijing’s ultimate goal, he added, was to become a “global leader in terms of composite national strength and international influence.”

Okay, I didn’t read the transcripts for the 2017 Chinese Communist Party Congress. Who does that other than this guy Trofimov? So, this was news to me as well. Regardless, he was setting the table nicely for the remainder of the article, which included:

“The 2008 financial crisis, which Beijing helped to alleviate by pumping liquidity into Western markets, shook such beliefs. The crisis convinced many in China’s establishment that the Western system was about to collapse—and that the time had come for Beijing to emerge from the shadows and propose an alternative.

‘In 2008, socialism with Chinese characteristics saved capitalism,” said Hu Angang, dean of the Institute for Contemporary China Studies at Tsinghua University in Beijing and an influential voice in China’s hawkish policy circles. “Before 2008, many Chinese economists saw the U.S. as the best model for macroeconomic regulation. But the financial crisis broke their perceptions.”

So, if Chinese perception of US economic might really shattered, as implied, how does this loss of face manifest itself in Chinese politics and foreign strategy? Again, the writer seemed to have an answer, or a theory at the least.

“The voices of doves in China’s policy community, state-run think tanks and private businesses are at least partially offset by the cries of nationalist hawks. The latter group includes retired generals who have recently urged Beijing to take an even more aggressive approach, including invading Taiwan and sinking U.S. aircraft carriers. In a June speech at a conference attended by his U.S. counterpart, Chinese Defense Minister Wei Fenghe vowed that Beijing wouldn’t succumb to American pressure. “The more severe the pressure and difficulties are, the stronger and braver the Chinese people become. Adversity only brings our nation greater solidarity and strength,” Gen. Wei said. “As for what the general public of China says these days: A talk? Welcome. A fight? Ready. Bully us? No way.””

I won’t bore you with more snippets, but I would recommend reading the article if you can. Just google the following: yaroslav trofimov china. It pops up as the second item.

Clearly, no one in the world wants the US and China to come to physical blows, let alone the father of a soon to be 18-year young man. So, trade policy as foreign policy? Hmm. This isn’t a new concept; in fact, it is very old. However, I can’t remember anything to this degree, targeting such a formidable foreign power, since the US grain embargo against the USSR back in 1980. This was in response to the Soviet invasion of Afghanistan. But is THIS a good idea in 2019?

In regards to this brouhaha with the Chinese, I have found something kind of interesting: the relative lack of political outrage and condemnation. Seriously. Donald Trump couldn’t throw Reese’s cups out of a second story window without public outcry and battle lines drawn in the sand, such is the state of political discourse in our country. The man provokes extreme emotions. But get into a trade war with China, and where are the shrill voices in Europe or Washington?

Go to Bernie Sanders or Elizabeth Warren’s Twitter accounts. Now, I won’t say either Democratic hopeful hasn’t posted anything very negative about the Trump tariffs. However, it isn’t much, it isn’t a major topic, and it isn’t an apparent campaign issue. Headlines out of Europe? I have done some google searches, and couldn’t find anything meaningful about it…other than fear Europe was next.

So, this begs the question: if this trade war could ultimately lead to a global economic recession, why aren’t more global politicians up in arms about it? Why does it seem the folks who care the most investors and people who make a living talking about investments?

There are only three possible answers I can envision: 1) global politicians are fine with Trump butting heads with the Chinese if the likely outcome is a recession and the end of Trump next November; 2) lesser foreign powers don’t want to stick their necks out too far, and; 2) everyone knows some kind of showdown with the Chinese was going to eventually happen, and this is better than most of the alternatives. Hmm.

You know, perhaps the truth is a combination of the three, and I suspect it is. If I were calculating the weights, I would put them at: 35% / 15% / 50%. I also suspect this battle of wills between the strong-willed leaders of the world’s two most dominant countries will probably last a little longer than we would all like. This means the folks who decide monetary policy and those that use trade policy as foreign policy should probably geehaw a little better than they currently are.

Geehaw? Yeah, look it up.

Have a great weekend.

 

John Norris