E Trump's Punishment Of China: The Start Of A Radical Rejection Of Foreign Capital?

Donald Trump really wants to punish China and the world. We can focus on China and see what will happen to our relationship with the world. Tariffs keep escalating. Chinese stocks are leveraged as collateral to other deals and are subject to margin calls. There may be some weakness in China.

The one thing we need to know about Donald Trump is that he has certain principles. They can be dangerous, and against all sound economic reasoning. But that doesn't matter to him. His tariffs are one manifestation. His desire to buy back treasuries on the cheap is another manifestation.

As the stock markets in China continue to decline, China will likely sell a lot of US Treasuries at some point, because of needed cash and to inflict some pain on the adversary. It will likely be measured. But Donald Trump has said he wants to buy back treasuries at a discount. He originally said he wanted to default but it was changed to buy back at a discount. He has never refuted this position.

There are problems associated with discounting American debt.

1. Central banks could care less about stock markets. This is why stocks are really speculative investments. The PBOC and the Fed simply do not care if markets crash. They do, however, care about their government bonds. As for the Fed, well it would not look kindly on discounting precious treasury bonds.

2. The US government would then issue new bonds to China, at a lesser value on paper but with higher interest rates. This, of course, would put all US programs in jeopardy. All safety net programs, Social Security, etc, could be affected. It would put at least some collateral in jeopardy. It would unsettle all financial markets. It would bludgeon the new normal as I wrote could happen based on the administration's planning papers.

I think undoing world collateral is a goal of this administration. In the above article Peter Navarro and Wilbur Ross are quoted:

Most recently, the 2012 South Korea trade deal was negotiated by Secretary of State Hillary Clinton – she called it “cutting edge.” It was sold to the American public by President Obama with the promise it would create 70,000 jobs. Instead, it has led to the loss of 95,000 jobs and roughly doubled America’s trade deficit with South Korea. Corporate America does not oppose these deals. They both allow and encourage corporations to put their factories anywhere. However, Mr. and Ms. America are left back home without high-paying jobs. There is nothing inevitable about poorly negotiated trade deals, over-regulation, and an excessive tax burden – this is a politician-made malaise. Therefore, nothing about the “new normal” is permanent. [Emphasis mine]

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Disclaimer: I have no financial interest in any companies or industries mentioned. I am not an investment counselor nor am I an attorney so my views are not to be considered investment advice. The ...

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Alpha Stockman 2 years ago Member's comment

Lot's of food for thought here!