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Greenspan: 'There Are No Winners in a Trade War'

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By    |   Wednesday, 17 October 2018 05:53 PM

Former Federal Reserve Chairman Alan Greenspan warned that the surging budget deficit and the lingering trade war with China are among many potential economic disasters facing the United States.

Greenspan, in a wide-ranging Barron’s interview, warned about the bond-market bubble and the rising costs of entitlement programs like Social Security and Medicare.

“[Tariffs] are exactly the same as an excise tax. If you think you are going to raise the excise taxes in your country to beat the country over here—the people trying to ship into you—you are shooting yourself in the foot,” he said.

“[President Donald] Trump would say that if China loses more than we do, that we won. Well, good luck. Tell that to your taxpayers. There are no winners in a trade war,” he said.

He also warned that even more trouble could be brewing.

“Crises gets generated after a period of time when you disregard [something]. Most recently, we’ve disregarded the federal budget. We are going to have a $1 trillion deficit in the next fiscal year, and there is no screaming and yelling. The reason? There’s this idea that [the deficit] doesn’t affect my pocketbook. You have to wait until the consequences of the deficit emerge,” he said.

“No politician gets out on the stump and says to constituents, ‘Our budget deficit is X trillion dollars.’ One person in 100 knows what he is talking about. But when inflation goes up to 4%, to 5%, it is politically disastrous. That’s when it becomes an issue. But when it starts rising, it’s already too late in the game to stabilize it,” he said.

To be sure, Greenspan doesn’t agree Trump administration’s target of 3% economic growth is sustainable.

While he refused to give a specific number, he explained that “each $1 in entitlement spending crowds out $1 in savings. And gross domestic savings is what historically has gone to finance domestic investments [such as infrastructure like roads and bridges, and private-sector capital spending on things like plants and equipment]—hence, productivity growth,” he said.

“Entitlements are slowing the rate of productivity growth, and that is a critical factor suppressing GDP growth. Entitlements are mandated, and their volume is largely unrelated to overall economic activity. Add that to our borrowing from everyone who will lend us a nickel, and it has put us into a serious straitjacket,” he said.

“Clearly, entitlements are going to rise further as the population ages. There has never been an inclination to cut the benefit. It’s impossible to get around it, and we are seeing the effects of that [with productivity growth],” he said.

He also warned investors to avoid the bond market.

“I’ve been saying for a while we have a bond market bubble—and we still have one. It’s the nature of a bubble that it continues to inflate with nothing happening. That’s the problem,” he said.

Greenspan obviously isn't alone in his pessimism about the U.S. economy.

To be sure, veteran emerging-markets investor Mark Mobius warns that the trade-tariff war between America and China will continue to linger and only turn nastier.

"(China is) going to be tough to begin with and they are not going to give in easily, because you're talking about (a $)300 million trade deficit in China's favor, so they are not going to give up that easily," the founding partner at Mobius Capital Partners recently told CNBC's "Squawk Box Europe."

"But I would say, maybe after six months they will come to some agreement and that will be done. But in the meantime, there will a lot of blood on the streets," said Mobius, who left Franklin Templeton Investments earlier this year to set up Mobius Capital Partners LLP.

President Donald Trump slapped tariffs last month on $200 billion in Chinese goods, bringing the total to $250 billion. Beijing retaliated by imposing duties on $60 billion in U.S. products, raising its total to $110 billion. China also rejected a U.S. offer to hold another round of formal negotiations.

Jack Ma, the co-founder of Alibaba Group Holding Ltd. and China’s richest man, also is a member of the same choir.

Ma recently predicted that the escalating trade war with the U.S. is going to be severe and long-lived, Bloomberg reported.

“It’s going to destroy not only China-U.S. trade, it will destroy a lot of small businesses,” Ma said during a speech at the World Trade Organization on Tuesday. “This thing may last for 20 years, unfortunately.”

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Former Federal Reserve Chairman Alan Greenspan warned that the surging budget deficit and the lingering trade war with China are among many potential economic disasters facing the United States.
greenspan, winners, trade, war
Wednesday, 17 October 2018 05:53 PM
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