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Countries to Fight Over Shrinking Economic Pie During 2009

Economics / Recession 2008 - 2010 Dec 05, 2008 - 05:07 AM GMT

By: Christopher_Laird

Economics Best Financial Markets Analysis ArticleTrade and Currency Tensions in 2009 - Most people know that, in recent years, there have been tensions between the US and China over two big issues. One is that China runs big trade surpluses with the US, which the Democrats have been wanting to do sanctions on. The other is they keep their currency, the Yuan/RMB, weak compared to the USD, and that is also something the Democrats have wanted to sanction.

Now that the US economy is basically imploding, these tensions are getting worse. And that is a dangerous mix because, in the Great Depression in the 1930's, world trade and economies imploded and that led to big trade barriers and import taxes. It's said that those made the Depression longer and deeper.

Shrinking pie, fighting over the table scraps

There are many reasons the great depression happened, too much easy credit, bubbles in stocks and real estate, US monetary policies, etc. But these outcomes that led to trade wars were probably inevitable as each country tried to fight the economic collapse. We are about to see a repeat of the same trade wars, in a collapsing world economy in 09, as each country desperately tries to hold onto a share of an increasingly shrinking world economy pie.

And the Democrats, if they do what they have said before, will be very pro US domestic jobs, and will likely to demand China allow the Yuan to rise further against the USD. But that is like pulling the pin on a hand grenade, maybe while holding the lever down just before you throw it. That is because the US needs China to buy our ever increasing stream of Treasury bonds. This is particularly so in 09 and on because the US fiscal deficit will exceed $1trillion in 09 alone with all the economic stimulus and bailouts.

And Europe is also complaining, and has been complaining, about cheap Asian imports and losing jobs to Asia. So the EU is going to be getting involved in the trade and currency wars too in 09.
As if the USD needed another reason to be threatened, it's likely the next US Administration will be more likely to post US sanctions on China, if they keep doing what they have been and keeping the Yuan weaker than it might be. And China is likely to then say, ‘well ok, then we won't buy your Treasuries anymore', etc.

And then, if the US initiates trade barriers or tariffs, so will China, and we go back into the Depression scenario where there are mutual trade tariff wars and then even worse collapsing of world exports, including the US exports.

China afraid of one thing

And, this trade/currency conflict is likely to happen because China is very afraid of one thing and one thing only, and that is if millions of migrant workers in the big cities like Shenzhen, Beijing and Southern China will riot, like they already are recently, with China seeing 100,000 factories close by the end of this year. And then the workers are not paid the months of back pay they are owed, and big riots occur. There are something like 130 million ‘migrant' factory workers alone in China, who moved from the rural areas to the big manufacturing cities, and who are not registered as residents of those cities. Many of them are now living under bridges in those cities, and that is scaring the hell out of those local governments.

If China allows the Yuan to rise then their manufacturers are really punished. It's more than you might think because they have razor thin profit margins. A higher Yuan means less profits/exports for them. So China is not going to allow the Yuan to strengthen.

Big trade/currency disputes to emerge in 09

So, we can expect big trade disputes emerging in 09, on top of worsening economic news in every country – and because of that. Trade/currency disputes and a collapsing world economy go hand in hand.

As I mentioned in the last public article, the ‘sense' that an actual depression is at hand happens about a year after the first big contraction in the economy. So, by the later months of 09, people will be talking in terms of an actual depression all over the world. And the coming layoffs in the US and everywhere else are going to be huge in 09. These have only started to be big now since October of 08.

US consumer wilts, USD is in trouble

There was an interesting statistic that US credit card debt grew hugely in the last two months, at about a 43% annualized rate of growth. US consumers have switched heavily to credit cards since October 08. But. combine that with the fact that a major US bank analyst Meridith Whitney says that credit card companies are going to cut net credit limits by an astounding $2 trillion in 09, or about a 40 pct plus cut. So look for a huge fall in US consumer spending in 09. As they say, ‘we have seen nothing yet'.

Then consider that German 10 year Bund yields have dropped to the lowest levels since before the fall of the Berlin wall, and US Treasuries have dropped to practically zero in short term maturities – it seems everyone just wants to sit in government bonds. IE no one expects this recession to be a short one.

The only safe place to be is in cash, short term, it seems (to include US Treasuries for instance).

US bond market the last bubble?

But, one interesting comment was that the US bond market is the ‘last bubble', ie the super low rates being accepted means everyone wants them.

But if the US and China get into a trade/currency battle, that US Treasury bond bubble just might burst in 09 too, with drastic consquences for the USD. So it's all rather dicey at the moment. We at PrudentSquirrel are definitely watching this situation.

By Christopher Laird

Copyright © 2008 Christopher Laird

Chris Laird has been an Oracle systems engineer, database administrator, and math teacher. He has a BS in mathematics from UCLA and is a certified Oracle database administrator. He has been an avid follower of financial news since childhood. His father is Jere Laird, former business editor of KNX news AM 1070, Los Angeles (ret). He has grown up immersed in financial news. His Grandmother was Alice Widener, publisher of USA magazine in the 60's to 80's, a newsletter that covered many of the topics you find today at the preeminent gold sites. Chris is the publisher of the Prudent Squirrel newsletter, an economic and gold commentary.

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