Trump’s trade tantrum triggers slump

Jan 24, 2019·Alasdair Macleod


For decades, Western governments have been pursuing a policy of transferring wealth from the public to themselves, their licensed banks and the banks’ favoured customers by means of interest rate suppression and monetary inflation. Consequently, inflation of financial asset prices has benefited the financial sector to the detriment of those employed in the productive economy. Over time, this has badly weakened productive capacity and the long-term ability of the market economy to fund future government spending.

It is a situation which seems bound to eventually lead to major economic and monetary problems. Additionally, global economic prospects have worsened considerably as a result of President Trump’s tariff wars against China and others. Empirical evidence from the 1930s as well as economic analysis illustrate how trade tariffs have a devastating effect on domestic economic activity, a prospect wholly unexpected by today’s economists.

The coming together of a trade-induced slump and the public’s discovery of its true losses through underreported wealth transfer by means of monetary inflation is set to become a major issue for fiat currencies worldwide, risking a catastrophic loss of confidence in them.

We shall commence by explaining why trade tariffs are likely to be the trigger for a possible slump before moving on to the important issues that arise from the public’s discovery of its own financial precariousness, the discrediting of macroeconomic theories and the likely reactions in currency markets.

The trade tariff problem

Those worried by the bigger picture cannot fail to have noticed that globally, there are now geopolitical shifts on a tectonic scale. The American government is alienating China, its key Eurasian creditor, which with its principal Asian partners has been planning to reduce exposure to the dollar. The influence of this movement against the dollar extends to China’s trade counterparties nearly everywhere outside the United States. This even includes Japan, which remains officially on side with America for now, but her zaibatsu are being drawn into China’s sphere of influence. Good Europeans such as Poland and Hungary are hedging their dollar bets by accumulating gold reserves, now that the silk road is transiting goods to and from the Far East.

Meanwhile, there is no sign of America’s twin deficits reducing and they are more likely to increase (explained below), particularly given an emerging global recession. China will still have its trade surpluses with America, but America is restricting Chinese re-investment in America and wherever it still has influence. It is a deliberate policy to contain China’s technological development but will have the effect of forcing Chinese entities to instruct the People’s Bank (PBOC) to swap their surplus dollars for yuan or another currency. The PBOC then has to decide whether to reinvest them in US Treasuries, leave them on deposit in American banks or just sell them.

The row over trade deficits and the introduction of tariffs by America is underestimated as a major cause of the global economic slowdown. To guide us, we have the precedent of the Smoot-Hawley Tariff Act of 1930, which played a major part in driving the world into the depression. China’s economy is now contracting rapidly, and while analysts are blaming China’s shadow banking squeeze, there can be no doubt that its export markets have contracted sharply as well. It is this dimension, one of contracting global trade for which China is the bellwether, which few analysts know how to analyse and even fewer governments know how to handle.

Let us walk through an example. A welfare-spending state (such as the US) facing a contraction in economic activity, will experience a significant increase in government welfare spending at a time of falling tax revenues. The budget deficit rapidly escalates. Unless it is offset by an increase in savings, a rapidly increasing budget deficit must lead to a broadly matching increase in the trade deficit. We can explain this with the following national accounting identity, for which there can be no other result.

(Imports – Exports) = (Investment - Savings) + (Government Spending – Taxes)

In other words, a trade deficit is the net result of a shortfall in the combination of savings and budget deficits. More correctly it applies to both capital and goods without distinction and is captured by balance of payments statistics.

The US has two problems with this issue. Not only does the budget deficit need funding by foreign investors recirculating their capital, but the trade deficit will continue to rise irrespective of tariffs. If the currency was to be fully recirculated from the trade deficit to fund the budget deficit, the cost of that funding would be set mainly by domestic considerations. This is unlikely to happen in America for political reasons.

We have seen President Trump try to reduce the trade deficit by imposing tariffs. It is clear he does not understand that his government is causing the trade deficit by running a budget deficit. And when the trade deficit widens further as a consequence of the rising budget deficit in the coming year, further restrictions on trade will also be unsuccessful and counterproductive. Assuming there is no increase in savings (they are discouraged by neo-Keynesian government economists anyway) then with the trade deficit still increasing, it will be domestic production that ends up being curtailed. It is the only way the sums can add up.

Given the parlous condition of state finances in most advanced nations, escalating deficits and tariffs in combination will end up squeezing both consumers and manufacturing businesses in all net importing countries. Unemployment then rises rapidly, and as the Smoot-Hawley episode informed us, before long a recession becomes a deepening slump as all nations are sucked into a trade vortex.

In other words, President Trump’s tariff wars are in large part responsible for the global economic slowdown. Worse, the slowdown can be expected to feed on itself as an increasing trade deficit ends up collapsing domestic output. This is the nightmare yet to come. But it is not all. We must put the trade issue to one side while we delve into an even larger issue that has undermined the economic performance of high-spending welfare states for a considerable time and is likely to be exposed by the impending slump in international trade.

A conventional analysis of the current global outlook

Government statistics round the world, which are alarming financial commentators, now reflect stalling GDP growth. Those few of us who have been beating the drum of credit cycle theory and the inevitability of a destructive economic and monetary crisis a magnitude larger than any recently experienced are not yet being taken seriously.

Our financial and economic futures are beginning to coalesce perhaps, but the route towards and extent of a new credit cycle termination are unclear. There are likely to be two broad possibilities. The first suggests that central banks will attempt to save the world from recession through a renewed expansion of their balance sheets if necessary. Interest rate rises will be put on hold, or perhaps temporarily reversed. The creation of wealth through asset price inflation will resume, and the credit crisis which ends all periods of credit expansion deferred perhaps for another year or so.

If the bull market in financial assets cannot be rescued in this manner, the alternative may be brutal. Financial troubles surface, stock markets crash, and financial, economic and monetary collapse are suddenly upon us, perhaps in a different variation from the Lehman crisis.

That’s the white and black of it, without much grey in between. Government economists and commentators are obviously preparing themselves for the first possibility with an easing of monetary policy enough to prevent anything worse than a brief mild recession. Collectively, central banks have quietly been doing this since mid-November. Unfortunately, the policy often fails, because a self-feeding momentum of deteriorating conditions is already under way and it is too late. There is therefore an element of hope over experience in the belief that an easing of monetary policy is all that is needed to keep economies bubbling along.

The businesses primarily affected by current conditions are the 80% (measured by GDP) that make up the small and medium-size enterprises (SMEs) not normally worthy of macroeconomic headlines. They are the riskier loans that offer banks the best lending margins. Banks, whose confidence in the business outlook has improved in recent years, have been increasing their loans of working capital to SMEs. Mark Carney, Governor of the Bank of England, recently warned MPs on the UK’s Treasury Select Committee that leveraged loans (which are strongly related to bank credit leant to SMEs) have all the hallmarks of the subprime mortgage bubble twelve years ago. Until last month, Carney also chaired the Financial Stability Board, hosted by the Bank for International Settlements, so speaks for the wider banking community. Any lender who has ignored this danger is now on notice and will be more likely to withdraw loan facilities from its SME customers.

Fear spreading over lending risk is why monetary easing following signs of trouble in credit markets often precipitates the crisis the authorities are trying to prevent. The Bank of England, or the Fed for that matter, could even halve interest rates and announce a resumption of quantitative easing, and despite a brief euphoric valuation moment in financial markets, the signal sent of escalating credit risk could still become self-fulfilling.

It appears financial markets and events generally have arrived close to this point. Having fallen sharply since last September, stocks have had a brief recovery. The recent fall in US Treasury yields, reflecting a flight into low risk bonds, has now paused and yields have risen slightly. Central banks hope the process of bank credit creation will resume, but based on experience from earlier credit cycles, the next signal will probably come from the banks trying to reduce lending risk even further. Furthermore, a central bank buying government debt from the banks, which is what QE amounts to, misdiagnoses the failure.

Dealing with an evolving credit crisis is not helped by the establishment’s self-serving approach to economics, and its belief that risk is caused entirely by free markets, when the crisis is always the consequence of failed government economic and financial policies.

This article now proceeds to not only point out the dangers posed by trade tariffs, but to draw the reader’s attention to the most important failures of mainstream economic analysis and monetary policy, in the context of what lies ahead. We can identify the future risks to our savings and lifestyles through a combination of empirical precedence and the lodestar of sound economic theory, as distinct from being misled by the Government’s self-serving macroeconomics.

Timing will then become the principal issue for investors and savers, which must be assessed by them in the context of their own situations as time progresses. But so that potential outcomes can be better understood, an investor or saver must first appreciate how the state finances itself at his or her expense. Furthermore, it must be recognised that state finances everywhere are rapidly deteriorating, and the ability of their peoples to continue to support them are diminishing towards a destructive singularity.

The growth myth

The common assumption that economic progress equates to growth in GDP is a fallacy and is only relevant to the state’s finances. A state’s finances improve when GDP grows. It is therefore hardly surprising that the arms of the state would have everyone believe that growth in GDP is synonymous with economic progress.

GDP is no more than a money-total. If you create more money in the form of base money or bank credit issued out of thin air, the extent to which it ends up in the non-financial economy simply inflates the GDP number. The extra money can be spent uselessly or even destructively, but GDP will still increase. Furthermore, the inclusion of a government’s economically destructive activities in GDP is a grievous error, ranking closely with the carelessness of financial analysts not recognising that the only productive part of the economy is the private sector providing goods and services.[i]

GDP therefore has nothing to do with an overall increase in prosperity. It is the mirror opposite, because monetary inflation, the means by which GDP increases, transfers wealth from ordinary people to the government, the banks and their favoured customers. So even though extra money leads to an increase in nominal GDP, the average person employed in the non-financial private sector is made poorer.

For governments and their epigones in the economics profession, this is a truth too inconvenient to address. They would rather pursue the tired Keynesian argument that a little monetary and deficit stimulus benefits the private sector. It was a seductive argument when this story evolved from the Thornton-Bagehot concept of a central bank being the lender of last resort. But today, it has become increasingly clear that what was intended to be a one-off stimulus to get things going has become both a continual failure and an accelerating currency debasement to boot.

Not only is it in a government’s perceived interest to look no further than an increase in GDP, but the abuse of statistics by way of the introduction of a price deflator has reached remarkable levels. In the Alice-in-Wonderland of government economics a price deflator is necessary to measure the increase in welfare liabilities arising from indexation. Indexation has simply become a cost to be controlled by fiddling the figures.

The art of concealing price inflation

Independent estimates of price inflation in the United States are in the region of nine or ten percent annually, compared with the most recent official estimate of 1.9%[i]. Governments can cheat in this way because there is no such thing as an indisputable price index. Each person has an experience of prices that is personal, and the variation of price inflation experiences differs widely. This means governments can construct an index which cannot be challenged on the basis it is wrong, because any alternative calculation is similarly flawed. And as we all know, the government is always assumed to be right by default.

Government calculations of price inflation around the world are also harmonised, which means they draw further credibility from being standardised internationally, and the flaws are ubiquitous. It amounts to a global concealment of the effects of monetary inflation on the wealth producers in non-financial economies, allowing almost unlimited creation of new currency. Because government statisticians say the price effect of monetary inflation is minimal does not mean that it is so. It is inevitable that at some point this fraudulent representation of the effect of monetary debasement on prices risks leading to a systemic shock and thus fatally undermines any residual trust in fiat currencies.

John Williams of has been pointing out the corruption of US Government inflation statistics for years.[iii] The process of deliberate data corruption started in 1980, and Williams estimates price inflation today to be in line with Chapwood’s calculation of nine or ten per cent, when all the changes to the state’s calculation methods are removed. Furthermore, according to Shadowstats, annual price inflation averaging close to these levels has existed since 2001, admittedly with some variation, severely denting the purchasing-power of the salaries of ordinary people. It is no wonder so many families resort to consumer credit to finance their day-to-day subsistence and life-styles.

Therefore, the transfer of wealth from the productive economy by means of monetary debasement, including the reduction in real terms of the value of wages, has been compounding at a far greater rate than official statistics would have us believe. Consequently, the US’s non-financial, non-government economy has been in a long-term decline in absolute terms for some time. The depredations on personal wealth and wages in the productive sector are only made tolerable by economic progress, which as we have noted above cannot be captured in GDP statistics. Economic progress always emanates from free markets, which are under increasing suppression from tax demands and escalating currency debasement.

The erosion of wealth in the productive base might appear to have been moderated by the price inflation of financial assets, itself another source of tax revenue. By excluding financial assets from price inflation statistics, the illusion of wealth-creation through rising financial asset prices acts as a convenient cover for currency dilution. The expansion of mortgage finance subsidised by suppressed interest rates creates a similar effect by driving up house prices, which then become eligible as collateral for further personal loans.

If you want an explanation of income and wealth disparities, look no further. Monetary inflation benefits people employed in financial activities at the expense of genuine producers of goods and services. This can only work until the productive, non-government non-financial sector runs too low on its collective wealth to support the burden of the rest, then the whole economy enters a catatonic state. Vide Greece, Italy, Spain, France…

A rough guide to the cumulative wealth transfer effect and loss of true wage income in America can be obtained by deflating the GDP figure by a number closer to the Chapwood and Shadowstats estimates, instead of those of the Bureau of Economic Analysis. If we make a rough assessment based on an annual compounding loss of the dollar’s domestic purchasing power averaging a conservative seven per cent since 2000, today’s price level is about 250% higher than then, which feels more correct than the BEA’s official estimate of a cumulative rise in prices of only 48%.

Eventually, the wider public is bound to rumble the deceit: discontent is already on the increase from a general public aware something is badly wrong, but it is not yet sure what it is. It should then be no surprise that the accumulation of currency debasement since 1980 will lead sooner or later to a larger crisis than seen in the last thirty years, and possibly over the entire course of the fiat money experience.

The end of macroeconomic posturing

We are considering the broadest of policy overviews, broader even than a trade-induced slump. They are the result of decades of monetary corruption, the consequences of which are being increasingly covered up by statistical manipulation. Failures of banking systems, whole countries and even entire economic blocs such as the EU are concerns for individual credit crises. The true problem lies buried more deeply in the tension created between wealth destruction and monetary creation. It can only end with the myth that free markets can be managed and improved by monetary manipulation and government intervention finally being overturned.

The economics of free markets had to be discredited for government control and intervention to be credible. The abandonment of free markets has been a gradual process that dates on some measures to before the creation of the Fed in December 1913. That event marked the first successful attempt by the leading American banks to gain full monetary control and was further consolidated when the Fed became operationally integrated with the US Government.

The economic justification for the creation of a monetary monopoly followed later, with mathematical economists in the 1930s such as Irvin Fisher and JM Keynes working up ideas to provide theoretical cover. Central to the implementation of their ideas was a split from what was subsequently termed microeconomics, which reflects our day-to-day experience. The new social science of macroeconomics was somehow above both our experiences and established classical economics. The creation of macroeconomic theory was the method by which Say’s law was deliberately abandoned[iv].

The development of national statistics was with the intention of feeding the equations of the new mathematically-based macroeconomics. The abandonment of sound money was the next step, necessary to permit the further advancement of the mathematical illusion by feeding in monetary inflation. That was justified by claiming that dispensing with gold backing was necessary to remove the risk of price deflation. It was then consolidated with an unproved assertion that rising prices stimulate consumption, when in fact they are simply the primary consequence of monetary debasement.

The expansion of money and bank credit creates a temporary illusion of prosperity, while concealing the wealth transfer from ordinary people to the government, its licensed banks and their favoured customers. The economic progress that has benefited us all has emanated entirely from an increasingly supressed and diminishing free market, despite all government depredations upon it. The pace of depredation has accelerated in recent years but is now at a rate where widespread economic destruction is becoming visible, notably in failing statist nations within the European Union. America and Britain are treading the same path, with the supposed trade-off between wealth destruction and asset inflation increasingly difficult to sustain.

Macroeconomics as an economic subject was invented by agents of the state to justify giving the state control over free markets. It has ended up fooling everyone, but just as communism undermined itself by ignoring the socialist calculation issue, macroeconomics also appears to be moving towards its finality.


There are warning signals that the crisis that ends all monetary expansions may be upon us, with an obvious slowdown in global economic activity. It follows an unprecedented period of monetary debasement, the price effects of which have been concealed through the subterfuge of government statistical manipulation. It is a problem that has been growing over several credit cycles since the 1980s.

The consequence has been an accelerating wealth transfer from the productive segment of economies to governments, the banks and their preferred customers. Over time, this has undermined core economic activity, leaving governments with twin deficits in a precarious position.

Revelation of the full debilitating effects of the prolonged wealth transfer from productive economic sectors in the welfare-driven nations is only a matter of time, but probably requires a trigger for it to be widely understood. That trigger seems set to evolve from a potentially rapid contraction of global trade, brought about in large measure by American tariff policies. The combination of a trade-induced slump and a public realisation that it has been a longstanding victim of a multi-government Ponzi scheme is likely not only to worsen the upcoming credit crisis, but to fatally undermine unbacked fiat currencies to boot.

[i] It should be noted that commissions and fees earned by banks and other participants in the finance sector are included in the productive economy, for the purpose of this analysis.

[ii] See and

[iii] See

[iv] Say’s law defined the relationship between production and consumption and was the bedrock of classical economic theory until Keynes dismissed it in his General Theory, published in 1936.

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