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Trade Secretary Wilbur Ross said something the other day, either at the source or profoundly stupid.
Only time will tell who it is.
Ross said China was "bulletproof" in the trade war that the Trump administration had stepped up this week by placing $ 200 billion in tariffs – mostly taxes – on products. Chinese entering the United States.
What Ross meant was that since China sends more goods to the United States than we send to China, the United States will eventually win a titanic trade battle. We can tax more goods than they can.
In Ross's words, we can shoot more fare on the rates than they can do it.
President Trump's strategy is no secret: to squeeze China until it is ready to negotiate a fairer deal that will reduce the $ 375 billion trade deficit the United States has had with China last year and is more aptly involved with intellectual property.
Bravo! How can you discuss with the intention of this if you are American?
If the United States can change the trade imbalance with China (and the other countries Trump is fighting with), it will mean more jobs for Americans, more business for our businesses, and another star on the news bulletin. the White House Trump. – for the moment, at least – economy even if it fails in the field of driving.
But there is a bigger problem here that I would be careless in ignoring.
If Ross is right on the issue of bullets related to the trade war, does that mean that China will have to resort to its financial missiles to fight against what Trump does?
And by that, I mean the $ 1.7 trillion in US securities that Beijing had in July.
And if the Chinese decided to sharply reduce their holdings in US debt? And if Beijing decided to launch some financial missiles by selling its holdings of US Treasury bonds – or just no longer buy them? A small missile that could still do a lot of damage would simply be publicly threatened by China to sell US debt, which has already been implied.
This would certainly attract the attention of Wall Street.
First of all, let me say that there is a school of thought that believes that this will never happen. Why? Because by simply threatening to sell US stocks in large quantities – or by doing so – the Chinese would drop the value of US bonds and interest rates would rise here and around the world.
And the Chinese, who hold so much of this US debt, would suffer heavy losses. In addition, higher interest rates would make financing their country's deficit more difficult for the Chinese.
In other words, the optimists of this trade war say that the Chinese may have financial missiles, but they can not launch them in the United States.
So what happens if today the Chinese decide to become irrational because they are short of bullets? What happens if they start selling tons of US state bonds?
If this happens, Washington will either have to: a) sharply reduce its spending so that we do not need the money the Chinese give us through bond purchases or b) find other buyers of our debt.
Since Washington never cuts spending, the second choice is probably the best option. But where to find other customers?
Japan is the second largest buyer of US debt, but Tokyo has only a little more than $ 1 trillion. The Japanese economy is not in good shape and can not afford to send more capital abroad.
The second largest holder of US government bonds, if we can believe it, is Ireland with only $ 300 billion. The OPEC countries are small investors in our bonds: Saudi Arabia has 167 billion, the United Arab Emirates 60 billion and Kuwait 43 billion. Money from abroad is not going to do the trick.
And if the United States will encourage other countries to invest in our debt, the bonds will have to be made more attractive. This is another way of saying that interest rates will have to rise.
You've already heard that the Federal Reserve is raising interest rates, but what might be needed to attract other buyers is a different trend: a rate hike in addition to the Fed-driven hike.
But this will result in higher costs for anyone borrowing money – from Uncle Sam, who already has a deficit of nearly $ 1 trillion a year, up to Aunt Tilly. who is looking to buy a house.
To be sure, there is another option – but that would be controversial.
The Fed could start another quantitative easing program that has in the past easily created new funds to buy bonds. The intention of QE at the end of the month was to make interest rates extremely low.
The next QE could be launched to make up for the lack of interest in US government bonds. QE, in this case, would be the same as Washington printing money so that it can again act as a buyer of shill at auctions of Treasury bonds.
It would be a fraud and it would raise big questions about the health of the US currency and put our country in a difficult situation.
People laughed when Trump reportedly said the solution to US financial problems was to print more money. If the Fed is to get rid of the bond market problem, it will be as hilarious and scary as what Trump would have proposed.
Which brings us back to my original question: are the Chinese really safe from bullets or are the fighting only calm before the release of the big arms?
