China has a silver bullet in its trade-war arsenal: OPINION
Idioms are defined as fascinating phrases that add color to otherwise more complex discussions — a way to make them more understandable to a broad audience.
Japan, as you may know, has had some very serious issues with long-term deflation, a shrinking and aging population, credit bubbles, a busted financial system and a Nikkei 225 Index that is still just half the peak level it registered in 1989 — 30 years ago. That is the kind of future China could face.
The Great Depression, starting in 1929, could have been only a bad recession if it were not for the collapse of global trade caused by the 1930 Smoot-Hawley Tariff Act. The longer name of this disastrous Act was: “An Act To provide revenue, to regulate commerce with foreign countries, to encourage the industries of the United States, to protect American labor, and for other purposes.”
Sun Tzu-style maneuver Unlike the 1930s, it is unlikely that a bilateral trade war can cause a recession in the U.S., although a heightened degree of uncertainty can disrupt the savings and investment cycles, which would ultimately disrupt economic activity. In China, however, there is too much debt in the system and too much reliance on exports.
The yuan was once devalued by 34%, in December 1993. Such a devaluation today would put it near 9.31 per dollar . It closed Friday at 6.95. Such a devaluation, if it comes, would be a profoundly deflationary event for the global financial system, after which I would expect the 10-year Treasury TY00, +0.10% to drop below 1%. The 34% overnight drop capped a period of yuan devaluation that had started in 1989 when the dollar-yuan was 3.73 and ended up at 8.73 in January 1994.
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