It isn't necessarily the fear of a trade war that crashed the market over the last few days. It is the fact that while many are not talking about it, China holds a large card that is a considerable threat to the U.S economy.
Donald Trump had better scale back till he develops a plan to deal with the China trade imbalance lest they play their trump card, one he will regret. One should take CNBC's Jim Cramer's assessment that Trump is out of his league seriously. The president seems to not understand the implications of his shoot-from-the-hip inept handling of trade with China.
It was surprising that most of the traditional mainstream media spent most of their time talking about tariffs and retaliation when China is holding the trump card. The real threat is that China destabilizes the world financial markets by threatening to dump U.S. bonds or stop purchasing them altogether. Yes, that will hurt China too, but it will hurt us worse. Moreover, as a repressive society, their country has a higher tolerance for pain than ours.
We discussed just that on Politics Done Right last week on an episode we titled "Is it time that we stop Trump now - Albright is right." Following is a snippet from the show where we detail the repercussions.
CNBC elaborated on the implications recently as well.
In a tit-for-tat response to the Trump administration's plan for 25 percent duties on $50 billion of Chinese imports, China hit back with its own list of similar duties on key American imports including soybeans, planes, cars, beef and chemicals. But officials signaled no interest for now in bringing their vast holdings of U.S. Treasurys to the fight.
China held around $1.17 trillion of Treasurys as of the end of January, making it the largest of America's foreign creditors and the No. 2 overall owner of U.S. government bonds after the Federal Reserve. Any move by China to chop its Treasury portfolio could inflict significant harm on U.S. finances and global investors, driving bond yields higher and making it more costly to finance the federal government.
Jeffrey Gundlach, the chief executive of DoubleLine Capital LP, said China can use its Treasury holdings as leverage, but only if they keep holding them.
The article concluded with the following.
Even if the likelihood of a change in Chinese policy regarding its Treasurys portfolio remains low, investors are sensitive to the risk any big shift would pose to world financial markets, where Treasurys are a global benchmark asset.
A January report that China might halt its purchases of Treasurys forced yields higher, but China disputed the news and said it was only diversifying its foreign exchange reserves to safeguard their value.
America is not in the driver's seat in this Trump fiasco. One hopes he gets some schooling on the defective capitalist tenets that currently govern our economy. After all, until Americans wake up to the ills of the current economic model, this is all we have, and it's best to play the game sensibly.