Thursday, July 19, 2018

King Kong versus Godzilla: US and Chinese Central Banks Go to War over Trade

Tariffs are a mistaken policy---unless you find a trading partner who's even dumber than you are and is willing to foot the bill for you. President Trump may have done that. The strengthening dollar suggests a deflationary effect of the tariffs arising from Chinese dollar purchases. The dollar gets stronger, Americans can buy more; the yuan renminbi gets weaker, the Chinese can buy less but sell more. American goods will be harder to sell, but Americans will be richer and have more money to spend. If this pattern continues, some of the effects of Fed monetary policy--reduced interest rates--will be counteracted. The stock market may be in for a roller coaster as Chinese and Fed manipulation--King Kong versus Godzilla--battle it out. Americans may at least temporarily benefit. In the long term, we would have been much better off without the manipulation, without the Fed, and with a market-based system free of central bankers and Wall Street subsidization.

I have temporarily reduced my gold holdings on the chance that dollar strengthening continues and gold continues to fall. A few days ago $1240 was a technical resistance point. Gold is now down to $1217, and it looks like the drop will continue.  I suspect that the collapse in the commodity sector will continue down to the point where the Chinese stop subsidizing the dollar, probably when the dollar rises another five to ten percent. 

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