by Jim Rickards, Daily Reckoning:
With so much attention focused on U.S. stock markets, it seems timely to pivot away from stocks for the moment and consider the global perspective. Globalization may be dying in terms of trade and supply chains, but financial markets are inextricably linked in ways that relatively few understand.
King Dollar Still Rules
The dollar still dominates the global financial system despite the cracks in the foundation and the valid criticisms. If there’s a dollar problem in Eurodollar banks, it’s sure to echo from Tokyo to Shanghai and New York. And problems in those locales affect everything else.
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I’ve just returned from separate visits to India, Japan and Jekyll Island, Georgia. India has the largest population in the world, has the fifth largest economy, is a nuclear power and a key member of BRICS. Japan is the fourth largest economy in the world and is a key geopolitical ally of the United States in its faceoff with China. Jekyll Island is a lovely ocean resort but is best known as the site of a secret meeting in 1910 where the Morgan, Rockefeller and Warburg interests dreamed up the Federal Reserve System.
I continually urge people to get away from their desks, stop staring at screens and go out and talk to real people. There’s no substitute for walking the streets around the world (including the poorest areas) if you really want to know what’s going on.
While India, Japan and Jekyll Island could hardly be more diverse and geographically scattered, they share a common thread. It’s their economic linkage through the U.S. dollar. The following are some impressions I gathered during these visits that reflect the volatile situation facing markets today.
A Reasonable Response to Tariffs
India and Japan had the most reasoned response to Trump’s new tariff policies. Trump quickly backed off his high “reciprocal” tariffs (27% for India and 24% for Japan) and reverted to his blanket 10% tariff on all imports for every country in the world except China.
Responses varied from retaliation tariffs (proposed by Canada, China and the EU) to a much more reasonable approach of simply asking the White House for a meeting to sit down and discuss the issue amicably with a view to lowering tariffs in both directions. Japan and India fell into this latter category and are being rewarded by being included among the first countries that will actually have that opportunity. (Mexico has also taken the moderate route by engaging in discussions rather than retaliation).
There will be some give and take. Some U.S. tariffs on certain items are likely to remain in place. But the optimal solution is not to cut down on U.S. purchases from those countries but for them to buy more from the U.S.
That trims the U.S. trade deficit without reducing world trade and so constitutes a win-win resolution with both India and Japan. India will likely buy more military hardware and semiconductors from the U.S. Japan will likely buy more agricultural goods including soybeans and beef. The result will be higher growth in the U.S.
Bilateral deals like this have losers. Taiwan may miss out on some semiconductor sales (although they are investing hundreds of billions of dollars to build semiconductors in the U.S.). Russia may miss out on military sales to India although they will remain a major energy supplier. Still, the U.S. is done being the “consumer of last resort” to the world and wants to increase its profile as a seller. Trump’s policies move the U.S. in that direction.
Take Care of Your Own
There is little question that the new U.S. tariff policy will hurt some countries around the world. Not to sound harsh, but that’s their problem. Trump’s job is to make America great again. President Xi’s job is to make China great again. Chancellor-in-waiting Merz’s job is to make Germany great again.
The U.S. cannot carry the world on its back. If other countries (rich or poor) took Trump’s growth-oriented approach instead of free riding on America, the entire world would be better off. That’s certainly the view from the White House and is a good guide to U.S. policy going forward.
Defenders of China point to the fact that Chinese exports are not a particularly large percentage of their total GDP. (Germany is the worst offender by that metric). The problem with that data point does not come from the Chinese export number; I’m sure that’s roughly correct. The distortion comes from the GDP denominator. Chinese GDP is overstated by 100% (at least) perhaps more, and China may already be in a recession.
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