Trade

On “Cooler Heads”

By David Stockman  |  January 9, 2019

In his essay “Perpetual Peace,” the philosopher Immanuel Kant argued that perpetual peace would eventually come to the world in one of two ways, by human insight or by conflicts and catastrophes of a magnitude that left humanity no other choice. We are at such a juncture.

– Henry Kissinger, On China (2011)

Editor’s Note: We’re at a critical point in history, a period of uncertainty perhaps unmatched in the postwar era. More than ever since 1945, the role of United States of America on the world stage is in serious question.

So, over the next five days, I’m going to describe five steps that could lead to war with China and the end of the American Empire. This is, of course, a hypothetical. But here’s one way the question, “Where do we go from here?” might be answered…

On Monday, we talked about President Trump’s transition from “The Donald” to “The Great Disruptor.”

We have a good sense of the response he draws on the domestic front. In short, Imperial Washington hates his “style.” Main Street, meanwhile, can’t get enough of it.

Meanwhile, we’re starting to understand how the Orange Swan’s “Art of the Deal”/seat-of-the-pants approach plays in Beijing. Signs are not positive.

That raises a big question: Are we just a tweet away from turning this Trade War into the global conflagration threatened but never realized during the second half of the last century?

It would be easy to put it all on the Tweeter-in-Chief – indeed, that’s what Imperial Washington’s propagandists want.

It’s not quite that simple.

On Tuesday, we discussed the “hot” idea that the United States and China – the “ruling” power and the “rising” power – are indeed destined for war. This is the “Thucydides’s Trap” frame.

Of course, Imperial Washington’s intellectuals cast the U.S. as the “ruling” power, telegraphing both the hubris of the “Indispensable Nation” as well as the very fear that is the true cause of conflict.

As I noted yesterday, neither the “ruling power” nor the “rising power” is able to withstand the winds of Trade War:

Three decades of egregious money-printing by the Federal Reserve ballooned U.S. demand for merchandise imports. And it led to the offshoring of America’s supply base of the same.

That’s even as break-neck credit expansion in China drained its rice paddies of cheap labor and massively subsidized the construction of gleaming new export factories and the related supply-chain infrastructure.

The risk now is China maintain control of its runaway $40 trillion credit machine while also staving off a serious economic downturn.

At the same time, the only thing that can even begin to wean America’s borrow-and-shop-until you-drop economy from its $526 billion China import habit is a rip-roaring recession brought on by a return to sound money.

I’m not talking about Jerome Powell’s version of “normalization,” which means creating the “dry powder” his institution will need to combat the next crisis of its own making.

I mean a genuine purge.

What we really have here is a failing American Empire dueling with a faltering Red Ponzi.

Pressure points are multiplying.

And it’s all because “free money” has trumped “free trade” as the elixir of global economy. That means this ain’t your grandfather’s garden-variety trade war.

Bad money is a debilitating affliction. And it can’t be bargained away by cooler heads…

We know all about the Great Disruptor’s communications strategy; there is none. He tweets his passions.

The problem is that the “adults in the room” – neocons and interventionists, all – aren’t even “cooler heads”…

The syndicated columnist and war correspondent Eric Margolis – according to the BBC “the man who got it right” about the dangers the U.S. faced heading into the second Iraq war – offers a compelling overview of the “state of play”:

The United States and China look like two punch-drunk prizefighters squaring off for a major championship fight. They have no good reason to fight and every reason to cooperate now that both their stock markets have been in turmoil….

Factions in both nations are beating the war drums, putting presidents Donald Trump and Xi Jinping under growing pressure to be more aggressive.

Trump shoulders much of the blame for having started this unnecessary confrontation by imposing heavy duties on Chinese goods. The U.S. president has turned the old maxim on its head that nations that trade heavily don’t go to war….

Trump was clearly trying to bully China into major trade concessions and better commercial behavior. He is right about this. I’ve done business in China for over 15 years and seen every kind of chicanery, fakery, and double-dealing imaginable. China learned from the French that the First Commandment is “Thou Shalt Not Import.”….

Theft of technology is indeed rampant, as Trump asserts. But has he looked into CIA and NSA’s techno spying recently?….

Beijing has pulled the rug out from under Apple sales in China, causing a near panic on the U.S. stock market. In his quest for power and glory, Trump may have fatally wounded U.S. financial markets. Apple was the shining example of fruitful cooperation between the U.S. and China….

Xi Jinping, has gotten sufficiently annoyed with Trump to rekindle his nation’s strident claims to “renegade province” Taiwan….

In the midst of all these tensions, the U.S. chose to get Canada to arrest the daughter of China’s leading high tech firm, Meng Wanzhou, on charges of trading with Iran….

That last act of escalation was not a Trump operation.

In fact, as Margolis notes, “There is a very strong suspicion that the rabid hawks in the White House, John Bolton and Mike Pompeo, hatched this incident to keep the U.S. and China in confrontation.”

And, thus, the Warfare State makes a patsy of the president…

Harden Your Portfolio Defenses

Desperate times call for… “common sense” measures.

These are desperate times… how else to explain 600- and 800-point swings for the Dow Jones Industrial Average on what seems a daily basis?

This is not “normal.”

Markets are corrupted by monetary central planning. They’re confused. And the road back is going to be treacherous.

We’re looking at a major re-pricing for all financial assets. And thousand-point intraday or day-to-day swings are part of that equation. Those can be frightening… for “buy and hold” investors.

I have a different approach, one that combines strategy and tactics into a plan flexible enough for you to survive and thrive amid the coming chaos. It’s called “The Stockman Model.”

All we’re after is a little stability, perhaps a chance to pocket a windfall when opportunity presents…

Sincerely,

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David Stockman

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David Stockman

David Stockman is the ultimate Washington insider turned iconoclast. He began his career in Washington as a young man and quickly rose through the ranks of the Republican Party to become the Director of the Office of Management and Budget under President Ronald Reagan. After leaving the White House, Stockman had a 20-year career on Wall Street.MORE FROM AUTHOR