US Treasury designates China a currency manipulator.
A simmering trade war has now crossed the rubicon. We should now be in period of sustained disequilibrium in financial markets and highly interventionist and unconventional policies from central banks and governments.
The path is un-forecastable and highly reflexive. My guess:
In a world that was pre unconventional monetary policy and had a sense of fiscal orthodoxy full blown currency war between China and US would likely be deflationary. But now with our acute awareness of financial contagion and aversion to any economic pain it is highly likely the path runs rapidly to a resurgence of inflationary pressures. This occurs in a world highly dependent on Chinese production and US consumption. Conventional financial wisdom says the USD is the least dirty fiat currency shirt. This is really heuristic over any tangible logic. The established pattern is that crisis strikes and dollar strengthens....
However in a world of super high imbalances and debts with inflationary pressure emerging (in the need to fight deflation) it seems that the US can’t afford a strong USD. And Trump has made it very clear that the dollar should be in play as a tool to fight China.
China let the yuan fall as it is facing massive internal financial pressures. But ultimately it probably has more fortitude and control to manage these pressures directly than the ‘free world’. China a wealthy at western level 300m people (under govt capture) with a further 1.2bn of attached indentured labour. It can command a new internal currency and economic regime. The US cannot. It must save the system it has. That system is intrinsically now linked to the level of the US market. A significant proportion of tax receipts is linked to share market wealth. To save the market the USD must be sacrificed. We already see this clue in how a hawkish Fed has eased on very limited wobble.
We are in a new crisis phase. But the last crisis never repeats. This crisis will be inflation plus lack of USD strength (and perhaps ultimately its demise as global king pin currency). In this world you want to own real productive assets - i.e. companies and resources.
Thanks mojomogoz. I agree. Whilst there's a whole lot of macro-economic unravelling yet to take place, not all of it predictable, I think the US has a fundamentally strong economy and is in a position to control its level of inflation with fiscal measures - indeed it might welcome a short term rise to 2.5 or 3% before raising interest rates. Over the next few days or weeks it looks as if share prices have further to fall as highly leveraged investors start panic selling. Whether the fall will be 5% or 20% I don't think anyone can guess, but for retail investors with some spare cash, there could be some excellent buying opportunities soon.
