All the time we’ve been hearing how bad president Donald Trump implements new tariffs and thanks to that economy keeps tanking. I think we don’t fully understand what’s hidden behind the curtain as history of last cycles will give us a hint how to interpret the tariffs from the past 1929-1932 cycle.
I’ll risk a thesis that :
Trade war is just a new monetary policy tool, when the old is no longer working
When the economy cycles turn (up or down) it is very weird that most of the situations were seen previously. We live hundreds of years in the same economy cycles which were classified and described quite detailed, but still we treat the economy not like a math but rather like a history with some free interpretation.
Have you seen people telling the gravity rules are changed? Or maybe you heard that 2+2 today is 200? Physics and math laws were created long time ago and they are unchanged and not even questionable, but we love to create free interpretation of the basic economy equation : demand and supply, just because today the rule of authority (Dr. Cialdini 6 principles) forced us to think Central Banks can reverse the physics (economy).
Central Banks are being played by the economy and economy cycles, not opposite
When we move back to the basic rules of the disinflationary cycles (officially started in 1980 till today), where debt keeps raising, interest rates keep going down, even 100 years ago true economists came to conclusions that those cycles always end in tears and they were described step by step thanks to previous cycles. Let’s take a look how disinflation ends :
0/ Raising inequality and trade imbalances (lowering interest rates and raising debt)
1/ Financial crisis (first and last warning, debt finishes it’s productivity)
2/ Currency wars (need to try to steal export from others and weaken currency to be competitive, mostly money printing) – this happens when point 0 and 1 no longer works
3/ Trade wars (it is just a next round, when point 0,1,2 no longer works to support export)
4/ Global depression
5/ World war
Every time I try to explain it to other people I’m drawing this kind of a chart :
Too cheap money not only not cleaned the economy, but it caused a huge overproduction and overcapacity to the demand (basic law demand vs supply). Demand saturates in a moment when trade wars and trade protectionism appear on the economy, and it’s replacing previous monetary policy tool called “currency wars” aka QE, “stimulus packages” etc. Not worth mentioning that “interest rates” tool has not been working since the beginning of currency wars (most countries were not even able to raise the rates during currency wars, so this tool is obsolete and not boosting credit growth anymore).
So today we can say analysing still the same chart that :
Trade wars are the next step in the monetary policy tools, when interest rates and QE no longer works
Let’s move back 20 years. During this time let’s say the demand is 100 but the amount of companies producing cars, concrete, bicycles, phones, water (place whatever you want here) is 50. It means that each company can be productive and they are profitable because 100 demand divided to 50 means 2.
Now let’s move back 10 years. During this time let’s say the demand is 200, but the amount of the same companies moved to 500. So now you see the price deflationary mechanism. There is no way to maintain 500 companies with just 200 demand, but easy money allows the saturation to keep going. On this level let’s say 30% of companies are losing money and fighting with cost effectiveness like outsourcing factories to … China or India. Stress in credit is ongoing and financial crisis hits here.
Today thanks to stimulus we have demand 250 but the amount of companies is on 2000 level. Looks like 80% of companies are money losing businesses because the demand is being hampered by debt saturation and progressing deterioration of the middle / low class.
We still have to say that the key disinflationary period con is that wealth is being transferred to top 10% and bottom 90% is being robbed from the wealth, so in the previous cycle again on the political scene appeared a guy who said that middle class was robbed by Jews and money transfer went to them and vote on me and I’ll deal with that… You know who that guy was of course. He was a transfer tool created by the economy to clear the disinflationary cycle. Great to understand the key reason of the previous problems in just 5 minute summary :
The global depression by nature means that despite a very big liquidity and availability of very cheap money the demand for those money totally collapses. Imagine, why I should create company 2001st which produces cars or bicycles or marketing agency when demand is just 250 and declining from now on?
So in reality depression works differently than recessions (recession is just the end of business credit cycle, when middle class spends too much raising inflation, in depression you don’t have middle class so it works differently)
- You can’t have for a long time credit stress in credit
- Data macro keeps going lower and lower in tact with easier and easier financial conditions
- The more you try to inject money into the system, the stronger response from the economy (faster contraction in customer loans)
Remember depression is created by too cheap money kept for too long, when you lost control over monetary policy and it’s being replaced by currency wars trying to rescue financial crisis.
I have somewhere newer chart, but does not matter it’s only a bigger minus :
Till 2009 monetary policy worked really well. Lowered rates gave credit boom which in productive way gave boom to economy, but after 2009 the situation went upside down. The economy asked Central Banks to help and do what it wants to finalize the cycle, so … go ahead and print (currency wars). When printing started to generate a negative growth asked again to switch to the next point – trade wars what Trump did perfectly (and he didn’t have any choice). Last time the same period between 2009 till today was called “Roaring 20s” – the magic vision of common wealth built on a totally unproductive debt. If we would have thought what type of mistakes were made in 1929 and today … they were same, because economy steers chasing all to a place of no return, chasing Hoover in May 1929 to start raising tariffs – because that was a moment when economy couldn’t handle more demand on more cheap money and give a power of the new monetary policy tool trade wars to Hoover ignoring FED and money supply.
When demand dries up you have to react in some ways to limit your deficits and implement protectionism. Because export is collapsing (what do you want to export if demand for goods dries up?) the key role in the economy is being played by governments and tariffs which must be intensified, mostly due to the fact to protect my own businesses and economy against bankruptcy and force other 1800 companies to collapse first (from our 2000 companies that produce bicycles).
The economy will not move forward until a drastic cleaning occurs. The more we will hamper it (trying to rescue, because from now on more money supply hampers economy creating deflationary bust in the background and slowing very hard velocity of money) the more we’ll pay for it. In 1929 thanks we had gold standard and thanks they were not able to stimulate economy to the extreme (they loved infrastructure spending between 1924-1929) after 1921 financial crisis. Thanks to that we had only 25% unemployment, but it could have been worse.
I mentioned that a key role in stimulation is being played by infrastructure spending. Mostly we can observe that in currency wars period. It’s a phase where global demand for goods starts weakening and economy is saturated by wealth and social inequality and also by a technology of the current cycle. In 1929 we had productivity raised by first electric amenities like dryers, washing machines etc, in 2019 you have productivity raised by the cloud and internet tools. In 1929 they believed demand for their products will never go down, today we believe the demand for internet related items will never go down.
Because today we don’t have any breaks in creating artificial money supply looks like the depression might be even worse than the one in 1929. The more you created money – the more you have to give back. Like in physics – action and reaction.
When people who survived 1929 were asked what they will do to avoid depression, the answer is more than stupid :
So let’s move back today. OK, go ahead and take next 3 houses on a credit, buy next 3 cars. You can’t because your credit card is full, or maybe you are in the top 10% of society and you realize you just need 1-2 houses and more cars in your garage is just a worthless hobby while its prices keep going down in time? People in 1929 were not able to run away from the economy no matter how they wanted to run.
Nothing was helping, despite extremely cheap money people were not able to take more loans and velocity of money was dropping much faster than they were able to ease!
Saying other way – banks were floating with liquidity so the blood of the disinflationary cycle, but the demand for loans (blood) has just dried up. Banks wanted to lend to 2001st company which should produce washing machines, but nobody wanted to borrow anymore and nobody was even classified for a loan.
Hoover took more and more responsibility as a key leader in new monetary policy tool :
Trump like Hoover he must escalate trade wars, even some time ago Japan joined with a trade war against South Korea (semiconductor business vs semiconductor business – who will bankrupt first) and probably we’ll soon see EU with US, US vs South Korea etc… In reality we start shooting to each other because that is what economy wants to happen, urging to clean so it can restart next cycle – inflationary. Now the game is not how to stimulate the economy and steal more export (because trade has collapsed due to weakening demand for goods), but who will survive. US wants to kill China because in the next cycle it will be easier for the US to be a leader, so they have to protect (save) their own companies till the demand for goods start picking up and economy starts bottoming, while others will have to start everything from scratch – that is a key message from depression – Save yourself or die and you can only do it bankrupting others.
That’s a key message from Apple vs Huawei battle – it’s so easy to understand what is the game is about – just survive.
In each disinflationary cycle there is a country that is responsible for exporting deflation. In 1929 we had US and in 2019 we had China. In the middle between 1932-1949 we had deflation and 1949-1980 we had inflation – but that’s not about how cycles work as we concentrate only on disinflationary cycles. It looks like China must be a first country that will go towards depressionary bust. Countries who stimulated most their economies should be decimated the most today.
China has to repay 3.5T$ in a moment of a corporate debt, while real Chinese reserves are like 1.5T$, rest is illiquid or the same type of reserves like 6% GDP growth, so we can observe deeper and deeper contraction in Chinese banking sector, or mostly all banking sectors of countries mostly living from export and loved to stimulate growth by money printing.
China during last 10 years collected so huge amount of unproductive debt that today they need 6.5 amount of credit to generate 1 amount of growth (that is just impossible). The capitalism in a communism way is still a miracle. Fast growth of debt and much faster collapse like in USSR in late 90s.
The USA when the cycle started to move down said check, lifting up some tariffs on really small amount of goods, if China really has a power to dominate the world and replace $ with Yuan (China was so sure it’s so easy, like Trump was so sure trade wars are so easy to win), but it seems China keeps failing each time economy keeps slowing. Food prices skyrocketed in China, demand for goods collapsing and employment drop is a ticking bomb. Three banks passed away and more to come.
Many companies are money losing companies paying bonds by ham and run out of pigs today. The domino keeps falling and it’s not really hard to observe the path :
China => Asia => India => EU => USA
Today everybody looks for easing, but normally to boost loans you need 5-6% rate cuts, we don’t have it today. First example has been seen in China :
Despite easing, demand for money is not picking up it means economy has enough of the overcapacity and keeps busting faster than Central Banks can do QE trying to destroy currencies to support export which has vanished as economy went into pure saturation on too cheap money.
Do you remember when FED cut rates and DXY went up? Normally that would have been a correct reaction but if DXY climbs higher with each FED cut it means economy is screwed. It means with each tick of cut FED forces capital to outflow ex-US to US as $$$ keeps its reserve status, what is not so good with 250T$ debt which is today so unproductive and is around 100T$ more than in 2008. FED will have really big problems trying to weaken the $$$ when economy cycle turned down – I’d say it is impossible. That is why to kill the opponents as demand keeps drying up I assume like in 1930 we’re going to see lots and lots of new tariffs. Those who will resist from easing at the end will win, but that will be extremely painful winning process.