How Donald Trump and his trade wars could turn the global asset bubble into a weapon of mass destruction
Anthony Rowley says the surge in the value of global trade is underpinned by buoyant financial markets. However, all this could be wiped out by a crisis of confidence triggered by the US president’s trade disputes
US President Donald Trump’s assertion that trade wars are “easy to win” seems too fatuous to merit a response: there are no winners, only losers, in such conflicts. But more worrying are the common and simplistic assumptions that there can be “limited” trade wars; battles carried on only at the periphery of the global economy.
This would be true only if a couple of relatively small economies that are not of “systemic” importance were to slap tariffs on imports from each other. When the world’s biggest economies engage in such actions, that is something else – for reasons that are not immediately obvious when viewed only in terms of trade statistics.
Trade obviously is a critical factor in creating and sustaining global economic activity. But it is money that makes the world go around and money critically impacts trade, not only by virtue of its role as a medium of exchange but also because of the “wealth effect” that financial markets exert on supply and demand.
A few figures illustrate this point. World trade in goods is worth around US$16 trillion a year, plus another US$4 trillion in services trade – making some US$20 trillion in all. This is sizeable when stacked up against world gross domestic product of US$80 trillion. But the total value of global financial assets towers massively over both figures at near US$300 trillion.
“Paper” wealth of the kind represented by stocks, bonds and other financial securities obviously affects purchasing power. When the prices of these securities rise, that creates a “wealth effect” which in turn boosts purchasing power, and thus also the volume and value of trade. The reverse applies when securities prices fall. Trade then declines.
The risk now of this “reverse wealth effect” triggering a plunge in trade and economic activity is acute. Global financial assets have soared in value by nearly 50 per cent from their level just before the global financial crisis, despite very sluggish growth in global GDP and trade since that time.
This represents a huge surge in paper (rather than real) wealth and most of the value is concentrated in stocks (US$70 trillion) and in sovereign and corporate bonds (US$90 trillion). These “stretched” valuations, to use a term employed by the International Monetary Fund, among others, were vulnerable to a correction even before Trump embarked upon his reckless trade wars.
As these battles progress from the “phoney war” to the real war stage (as they are doing now) and their impact on corporate sales and profits, as well as capital investment, begin to show, the correction in financial asset valuations is likely to be savage. A whiff of gunshot could lead to a loss of confidence, then panic, followed by a crash.
Trade would crumble under its own (loss of) momentum without any further help from the “destroyer” in the White House. He, too, would panic at that point and try to reverse his crass trade moves but with asset valuations and business confidence flat on the floor, his attempts would be to little avail.
This is not to mention that debt levels around the world – in the corporate sector especially – are at record highs. Even if the Fed is ordered by the hapless Trump to throw its monetary tightening into reverse, and other central banks loosen further, debt distress could rear up like Godzilla against a background of falling corporate profits.
If all this sounds potentially apocalyptic, that is precisely what it is. Jim Rogers, a veteran financial investor who co-founded the Quantum Fund with George Soros and whose views carry equal weight, predicted recently that the worst financial crash in his (seven-and-a-half decades) lifetime is on its way, and it is probably closer than most people think.
The financial Sword of Damocles hanging over the global economy has grown massive during the 10 years of record low interest rates experienced since the last global financial crisis. In the hands of Trump, it seems likely to become a weapon of mass destruction rather than the righteous sword of Greek legend.
The shape of the global trading system in the post-Trump era, once the damage has been done, is difficult to discern. If there is a revolt against political populism of the kind he represents, then it is possible that the vast and complex supply networks that underpin the system could be restored painstakingly. But, equally, a retreat into economic autarky is possible.
Anthony Rowley is a veteran journalist specialising in Asian economic and financial affairs