Tags: donald trump | inflation | economy | china

Don't Blame Trump as Inflation Roars Out of Control

Don't Blame Trump as Inflation Roars Out of Control

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Thursday, 19 January 2017 08:00 AM Current | Bio | Archive

Donald Trump's U.S. trade representative nominee Robert Lighthizer (a former Reagan administration official and longtime international trade attorney) has been saying some rather sharp things about China.

The comments by Lighthizer, a former Reagan administration official and longtime international trade attorney, have sparked investor fears that an escalation of trade tensions with China is about to begin.

One could argue that this is simply a more direct style of an administration that has little experience with government.

On the other hand, diplomacy exists for a reason. The coded language of diplomacy and diplomatic norms allow sentiments to be expressed without provoking outright anger in the population of other countries.

Blunt language is not a problem of itself. It is blunt language in a setting where blunt language is not normal and is not expected that is concerning.

The risk is that there is an unnecessary negative reaction to the blunt language and that unnecessary negative reaction causes unnecessary negative consequences.

Investors should better not forget that the price of bluntness could potentially be measured in billions of dollars.

China is not without weapons in any escalation of tensions. Data from the U.S. Treasury indicated yet another in Chinese official holdings of U.S. Treasury bonds.

This data are more than a little dubious.

The decline may be a genuine decline, or it may be because China is diversifying into third party asset managers, or it may be because the reserves are being re-used to aid Chinese banks to pay contributions to institutions like the Asian Infrastructure Investment Bank (AIIB), which is an international financial institution that aims to support the building of infrastructure in the Asia-Pacific region.

Nonetheless, if the United States escalates the problems on the current account side of the balance of payment, China does have the ability to threaten to retaliate on the capital account side.

The U.S. dollar as well as the U.S. Treasury market are only where they are today because China’s official reserve managers were willing to pump billions of dollars into the U.S. currency and the U.S. bond markets.

If China to would reverse that position, it is almost impossible to see how U.S. asset values could be maintained.

There are of course economic ramifications more of this. One of them is the wealth effects may come under pressure as already the post-Trump slump in global asset prices wiped out over a trillion dollars of financial wealth in the weeks after the November election result. The loss in value of bond markets dwarfing the gains in equity markets.

Meanwhile Fed Chair Janet Yellen gave a relatively hawkish speech titled “The Goals of Monetary Policy and How We Pursue Them,” warning of the dangers of delaying rate increases too long.

Some might argue that the Fed has already delayed too long, but the warning was well taken.

This came as the headline consumer inflation numbers in the United States continue to power upward with the headline rate reaching 2 percent year-over-year, and it does not stop there.

The Fed’s beige book also signaled tighter labor markets and some pricing pressures.

None of this is surprising and the writing of the inflation story has been on the walls for some time. This is an inflation story that is entirely independent of whatever fiscal stimulus emerges from the new Trump administration.

However, bond markets do seem to be slowly waking up after this fact now.

Watch out ...

Etienne "Hans" Parisis is a bank economist who has advised global billionaires and governments on the financial markets and international investments.

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HansParisis
This is an inflation story that is entirely independent of whatever fiscal stimulus emerges from the new Trump administration.
donald trump, inflation, economy, china
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2017-00-19
Thursday, 19 January 2017 08:00 AM
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