Trade Wars Are Class Wars
Rising inequality within countries heightens trade conflicts between them.
Countries with large trade surpluses only have them because they cannot consume all that they produce, making them more vulnerable to a decline in international trade.
Corporations escape a significant portion of taxes through carefully strategized supply chains that take advantage of various tax haven regions, such as Ireland, the cayman islands, or Bermuda. This is why business today must be understood in the context of global trade.
Increasing value in a country’s currency leads capital and manufacturing to leave as imports become cheaper and exports struggle in foreign markets.
With bank yields held low and inflation motivating higher returns, the US and international banks came up with money market funds where they sold commercial paper to mutual funds for higher interest rates.
Global demand = global production; demand = consumption + investment; production = consumption + savings; domestic demand = GDP + imports - exports; exports - imports = domestic saving - domestic investment; investment = GDP + imports - consumption - exports.
High savings lead to trade surpluses because they raise production relative to domestic demand. High wages tend to produce trade deficits because they raise domestic demand above existing domestic production.
Higher savings among citizens generally translates to lower consumption and living standards. People save less when times are good and demand is high.
Rising inequality means the value of assets leading to such inequality is contingent on deficit spending or an increase in spending by those who have progressively lower shares of national income. Poor people buy goods and services, rich people buy assets.
Asset values go down when investors believe they need more compensation for the risk they are taking.
One way or another, a balance of payments always balances.
An important detail when considering trade is trilateral flows (ex: US money that goes to Europe only to end up in China). Trade in these instances is nominally between A & B but actually between A & C and should be reflected as such when calculating trade flows.
Many foreign nations like Japan and China have built manufacturing in Mexico to better meet US demand. Only about 60% of imports from Mexico are actually from Mexico.
Investments are worthwhile only if they satisfy unmet consumption needs. Otherwise, they are wasted resources that could have been directed elsewhere, like ways to increase domestic demand/consumption.
Income flowing in or out of a country must be matched by savings flowing out or in.
Nearly all households benefit from a rise in their currency because they are net importers. This means wealth is transferred from domestic manufacturers to consumers when a nation’s currency appreciates.
The Chinese have a hukou system where migrants within China are considered illegal immigrants if they leave the region in which they were born. This helps suppress wages in rural China, contributes to higher savings for the wealthy, and helps quickly grow the economy.
China must manage its debt by reducing its investments and increasing domestic consumption if it wants more sustainable growth.
Though Germany is a surplus nation, what has largely contributed to that surplus is excessive austerity, suppressed domestic consumption, and underinvestment in the private sector.
The distribution of purchasing power within a society affects its economic relations with the rest of the world. People who can’t afford to buy what they produce mostly rely on foreign demand for their output. Without sufficient foreign or domestic demand, they will be forced to produce less.
The mere possibility of devaluation will prompt locals and foreign investors to move their money out of a country, which would push up its interest rates and make maintaining a peg increasingly more difficult. This self-reinforcing process is what George Soros called reflexivity.
Investor demand for safe and liquid bonds leading up to the GFC was a major driver of the lending of dangerous loans/mortgages packed in MBSs. Banks wanted to meet the demand that was out there and disguised poor credit-based securities as the safe and liquid assets they were seeking.
Trade wars are often presented as wars between countries, but they are mainly between bankers and owners of financial assets on one side and ordinary households on the other. The rich vs everyone else.
If the United States weren’t such an open economy, surplus nations would be forced to store their surplus assets in other countries or watch their production outstretch demand and eventually limit their ability to generate such surpluses.
Persistent surpluses are almost always the consequence of unbalanced distributions of income in favor of businesses and the rich.