Trump and China Are on the Same, Wrong Side

china and US

This week, we’ve been exploring how mock battles can go wrong.

In one corner, we have The American Dreamer: the Blond Bombshell himself, Donald J. Trump.

In the other, there is Xi Jinping of the Great Red Hope, determined not to be the Last Emperor of the Middle Kingdom.

Like pro wrestlers, the two have been entertaining the folks in the cheap seats with their ‘Mongolian chops’…‘body avalanches’…and the always-popular ‘spinning elbow corkscrew drops’.

Pretending to do battle, both are really on the same team…working together towards the same goal — separating the fans from their money.

One spends money he doesn’t have. The other takes the fake money and pretends it is real. Both believe they are getting fabulously rich.

The Chinese now have dozens of cities and shopping malls that didn’t exist in 1982 — though these still may have no clients, no buyers, and no revenues.

The Americans have stocks they think are worth 24 times as much as they were in 1982 — even though the typical customer has not a penny more of real purchasing power.

Cluster of colossal frauds

The whole fantasy on both sides of the Pacific is based on a cluster of colossal frauds — that fake money is just as good as the real thing, that debt is as good as savings, that the feds can improve an economy by lending fake money out at real rates below zero, and that people with PhDs and claptrap theories can do a better job of guiding an economy than market-set prices.

But in order for the flimflam to work, both sides have to cooperate to keep the hustle going. If the two go off script…the whole show could turn into a flop.

Here’s more from China’s state-run Global Times:

‘The Chinese side will follow suit to the end and at any cost, and will firmly attack, using new comprehensive countermeasures, to firmly defend the interest of the nation and its people… China will “retaliate immediately, intensively, without any hesitation” if the U.S. releases a new list of tariffs on $100 billion worth of additional imports, Chinese Ministry of Commerce spokesman Gao Feng says, adding:

‘“We Chinese won’t pick fights, but if someone picks a fight, we’ll resolutely meet them head-on. We Chinese always take things seriously; we’ll act as we say.”’

What happens next? It is hard to say. The two sides are improvising. Mr. Trump — the self-described ‘King of Debt’ — doesn’t seem to understand China’s role in keeping the debt flowing.

And Mr. Xi doesn’t seem to realise that his economy rests largely on Americans’ sham money. 

Awash in debt

The American Dreamer and the Great Red Hope can exchange ‘flying forearm smashes’ — and pretend to wallop each other in fake-news outlets. But if they begin hitting each other in earnest, the whole world economy could crash.

The reason: too many borrowers and not enough lenders.

Already, the Fed is letting its portfolio of debt ‘run off’…at a projected rate of $600 billion per year. The federal government, meanwhile, is selling debt (borrowing) — on a huge scale. Forbes reports:

‘The new U.S. normal of $1 trillion or more annual federal budget deficits will officially begin this week when the Congressional Budget Office releases its economic and budget outlook report showing that the deficit will be at least that high every year Donald Trump is president.’

For the record (and before the trolls come out to play), there were indeed four consecutive trillion-dollar federal deficits during the Obama administration from fiscal 2009–2012. Those deficits were primarily caused by the Great Recession, and they were temporary.

By contrast, the trillion-dollar Trump deficits are permanent changes to the federal budget outlook caused by enacted reductions in revenues and increases in spending.

All of a sudden, the debt market is awash in supply. Between the US government and the Fed alone, nearly $2 trillion a year of savings will be absorbed.

But China is the largest single holder of US debt — with $1.3 trillion worth. Imagine what would happen if China, maybe in retaliation for US trade war provocations, decided to dump US bonds, too.

Who would buy so much debt? Where would the money come from? And what would happen to the price of debt (interest rate yields) with so many big sellers and no big buyers?

How could a world financial system accustomed to ‘performance art’ battles adapt to a real one?

How would millions of borrowers — already maxed out at 3% interest — survive in a world of 5% rates?

The federal government, to take one important example, is already scheduled to spend more on debt service than on defence…by the 2020s.

And that assumes that rates won’t rise significantly. Raise rates back to ‘normal’ levels…and the whole shebang blows up.

In the Pittsburgh Civic Arena in 1998, Mankind crashed into the mat in a stunt gone wrong. Bruised, broken, and battered, the pro wrestler survived. And the fans loved it.

But when the world’s phony financial system comes crashing down…

…we doubt that mankind will like it much.

Regards,

Bill Bonner,
For Markets & Money

Bill Bonner

Bill Bonner

Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries. A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America's most respected authorities.

Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind Markets and MoneyDice Have No Memory: Big Bets & Bad Economics from Paris to the Pampas, the newest book from Bill Bonner, is the definitive compendium of Bill's daily reckonings from more than a decade: 1999-2010. 

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