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In This Trade War, The End Game is Default (by Binkius Hippo)

This is a syndicated repost published with the permission of Slope of Hope. To view original, click here. Opinions herein are not those of the Wall Street Examiner or Lee Adler. Reposting does not imply endorsement. The information presented is for educational or entertainment purposes and is not individual investment advice.

Well, this is what happens when you think that any kind of war is easy to win and you attack without any kind of plan. Raging dumpster fire.

Trump was hoping to scam China like one of his subcontractors but didn’t realize that China has the second largest economy (largest by some esoteric economic measures) and enough nuclear weapons to ensure MAD. Instead of backing down like a subcontractor facing bankruptcy and ruin, China said “bring it” and here we are.

This is going to become a war of attrition. Who can take the most pain.

Trump has to keep the bubble going until he can win the election. If he loses, he ends up in prison.  Trump’s strategy is a race to the bottom. Lower interest rates, lower currency, more stimulus, eventually more QE and absolutely crush the American middle class into debt slavery.

Xi is going to devalue as long as China’s capital controls can hold. If Xi loses control of the devaluation, the RMB drops 40-60% and we’re all in Great Depression 2. If Xi loses the trade war, Chinese politics will make Xi wish he had Trump’s prison cell.

The idiots talk about the economic pain China is suffering. You need to realize that China is NOT a capitalist country. It’s ruled by the Chinese COMMUNIST Party. They run China like UBER. Like UBER, they don’t care if they make a profit. China’s goals are: employment, industrialization, technology transfer and social stability. NOT profit. China probably loses money on nearly everything it exports.

Even with 25% tariffs, China is still the lowest cost manufacturer in most industries because like UBER, it doesn’t need to make a profit because it isn’t functioning under capitalistic rules. UBER is powered by venture capital and credit. China is powered by global QE and is the engine of global growth. The more you hurt China’s economy the closer you send the global economy into recession.

My guess is that the tariffs are going to 25%. At that point, the weakest link in the American economy, the marginal American consumer is going to get slaughtered. Since I’ve left America ten years ago, healthy food prices are up about 200%, medical care and education are up about 300%-500% and vehicles are up over 100%.

The government claims that there is no inflation. But when I go back everything is much, much more expensive than when I left and wages have only gone up about 50% (for menial workers, less for most professionals). This is why the developed world is going crazy. Massive, rampant inflation that the American and European governments deny vehemently. Except for the wealthy, people’s purchasing power is being destroyed.

So, when the marginal American consumer is hit with a 25% increase on basically everything they buy (in America, the poorer you are, the more of your consumption is made in China), this is going to send the USA into recession. Recession means QE which is fuel for China’s UBER economy. QE also means more inflation (M1 and M2 are now 3x above pre-2008 levels) which means more pain for anyone not in the upper class.

The Chinese economy is an absolute mess (like UBER’s accounting). They just did more stimulus in January, equivalent to 12 months of American QE, and it’s seemed to haveworn off already. They need the USA and Europe to QE again to feed the hole. This is where Xi needs Trump. As long as he can blame Trump for China’s economic problems, he can keep the country unified and he can keep the mandate of heaven. I think Xi knows they’ve had a good run and now it’s time to pay the bill. Anything short of an absolute victory in the trade war will make him look weak and focus the blame for China’s economic problems on the CCP. The CCP needs Trump as a bogey-man.

Trump vacillates incredibly. Trade talks are going well, but there’s going to be no solution. It’s like double-speak from 1984. Now, this is where it starts to get interesting. Rumors from the Trump White House say that the USA is thinking about cancelling trade talks and sanctions if the CCP attacks Hong Kong. This is one of the few brilliant things coming out of the White House. If the trade talks are dead anyways, playing the moral high ground gives Trump some deflection of criticism because he’s defending democracy in Hong Kong.

China is terrified of Hong Kong. They know a color revolution is one of the few things that can bring down the CCP. My guess is that the CCP will go full Tiananmen in Hong Kong. That gives Trump an excuse to scupper the already dead trade talks with a very positive political spin.

So this whole mess in incredibly interconnected and intertwined. Both leaders are fighting for their survival and they’re both willing to throw their populations into the economic grinder to stay alive.

This is like just before the first world war. An incomprehensible web of politics and economics that will turn a small incident into a global catastrophe.

All of the capitalists are going to ask: “Why would China manufacture at a loss?” The answer is: industrialization. There are basically three ways to industrialize your nation.

Solution 1: Save, save, save. Tax your population into starvation and take the money to build all the infrastructure necessary to drag your nation out of the iron age and into modernity. Education, science, medicine, manufacturing, etc. Pay for it all by the sweat of the citizenry. Collect their earnings through taxation and invest it into modernizing the nation. The starvation taxation keeps the population under control, concentrating all resources into economic/scientific development. Japan did this in the Meiji Restoration. Five generations from great-great-grand-dad in samurai armor riding a horse into battle to his great-great-grand-son achieving air superiority over Pearl Harbor in a Mitsubishi Zero. The fastest technological uplift in the history of man.

Solution 2: The Marshall Plan. Have a rich nation pay for everything. Requires that the national culture isn’t kleptocratic and turns your country into Africa.

Solution 3: Economic bubble. Buy everything on credit then default. After you default all the stuff of modernity is in your country and still usable. Possession is 9/10ths of the law. The buildings, the factories, the intellectual property all paid for by credit. All of it remains in your nation. The banksters can’t get it because instead of an assault rifle for home defense, you have ICBMs with MIRVed warheads. This is why China is manufacturing at a loss. To get the tech. To get the factories. To get the infrastructure. All paid for by global QE. The accounting doesn’t matter. What matters is who has possession and control of the assets at the end. China will have industrialized faster than any other nation on earth due running an unsustainable economic bubble.

Remember. China is NOT a capitalist country. If you view it as such, you will arrive at fallacious conclusions.

Economic pain means nothing to the CCP. They want a modernized China. They want to rule a modernized China. This is the only way to reach their goals in one or two generations (remember, the fastest way to do it organically, Solution 1, took Japan 5 generations. And no one is going to gift China with Solution 2). The end game is economic default, but you still retain all the industrial, intellectual, scientific, military and medical infrastructure you were able to buy on credit.

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