The debt clock pounds on, Trump & Xi use different decks of cards, Lagarde wants illusions to come true

I did a longer count on Sunday morning to see if my 36 seconds estimate of how long it takes the US Debt Clock to add $US1 million to the country’s national public debt was correct. From 8.55am, my estimate put the tick over to a total $US21.8 trillion at 9.14am. It was right on time.

While this is a game that can amuse a small mind, it’s also a deadly serious game.

The US Federal Reserve will feel obliged to lift its funds rate at least once in its next 3 scheduled meetings and has warned of a possible 3 raises in 2019, but…. And it’s a big but.

Inconvenient for Trump’s power game

President Donald Trump doesn’t want to add $US55 billion/year to the interest bill through one quarter-percent raise, let alone 2 or 3 of them. But his primary target at the moment is to get a trade deal with China, primarily requiring a step back from technology transfer which US officialdom has deemed illicit.

The answer to the question, which will be posed in Buenos Aires this afternoon NZ time as Mr Trump & China’s president-for-life, Xi Jinping, sit down to dinner, will require an answer from the Chinese leader: How long does he want to be president for life?

If his answer is (1), a short time, he can acquiesce to every Trump demand, or even just that main one.

If his answer is (2), a long time, he can tell Mr Trump there is no way he can acquiesce, because he would be out of office, and probably out of breath, around the time his plane lands in Beijing. For that answer he needs a backup plan that saves face, puts a convoluted timeframe in place for technology change, reduces some US tariffs and involves at least some US oversight of change plus agreement allowing a better deal for US exports to China.

Even if China isn’t breaking US & Word Trade Organisation trade agreements, Mr Xi is in no position to disagree. His country’s trade position is worsening, China is spending reserves propping up malfunctioning businesses, and he doesn’t have a tariff response to match Mr Trump’s.

One Xi option: distractions

Mr Xi can look to alternatives while simply smiling with his lips pursed, as he does in all his photos with Mr Trump. He can widen China’s South China Sea military presence by adding drills in the North Pacific Ocean, where the only notable dot of land between China & California is Hawaii, and increasing investment in the South Pacific, perhaps along with some military presence.

If he relaxes the debt arrangements for Belt & Road investment, China will be able to advance that programme more rapidly. African nations are an open target and less of a focus for the US.

There is thus scope for Mr Xi to ease tension and create distractions, probably in timeframes to suit himself so long as he indicates a confirm response on addressing technology transfer.

For Mr Trump, that leaves the question of the growing US debt, which he needs to address while avoiding tipping the stock markets into reversal. He can do that by agreeing a China trade deal that sees more industrial activity in the US, lifting trade & stock positions on the one hand while at least slowing the rise of national debt on the other.

As Trump talks proprietary, Lagarde talks propriety

International Monetary Fund manging director Christine Lagarde was plainly focused on these issues when she sent out a release this morning NZ time calling for “decisive & collaborative action” by Group of 20 leaders “as global growth moderates and risks increase”.

She didn’t name anybody, certainly didn’t propose any specific
solutions, but did throw a couple of figures into the air to show effects if the trade war spreads.

She said the IMF estimated 0.75% of global gdp could be lost by 2020 (that’s a year away) “if recently raised & threatened tariffs were to remain in place and announced tariffs were implemented”.

On the other hand, she said, “If, instead, trade restrictions in services were reduced by 15%, global gdp could be higher by 0.5%. The choice is clear: there is an urgent need to de-escalate trade tensions, reverse recent tariff increases and modernise the rules-based multilateral trade system.”

For Mr Trump, Ms Lagarde’s recipe is easy: Mr Xi accedes to his primary demand, in some form, and US trade will be rising in crucial markets ahead of the 2020 presidential election.

For Mr Xi, it’s harder. He needs to turn China’s domestic markets around but also reduce depletion of reserves, and he can only do both of those by agreeing some sort of external change. The trick will be to turn the technology transfer dispute into a win, which he can do by negotiating terms that appear favourable.

He can put some pressure back on Mr Trump by delaying change, and thereby delaying the impetus of business growth back home, which Mr Trump will be focused on heading to November 2020.

Ms Lagarde also had her eye on an issue which the 2 trade giants have been setting aside, “the excessive level of global debt – about $US182 trillion by the IMF’s estimate”. That debt total is international, public & private, and disguised because much of it is in the form of derivatives. A small tumble could quickly escalate into a worldwide collapse.

Her solution is one the “highly indebted emerging-market & low-income countries” she spoke of on one side of the balance sheet are unable to dictate, and one derivative marketeers are unlikely to support wholeheartedly while they’re making mega-returns from scalping their clients.

She said: “It is important, particularly for highly indebted emerging-market & low-income countries, to rebuild buffers and reverse procyclical fiscal policies. Increasing debt transparency, such as on the volumes & terms of loans, by borrowers as well as lenders, is as important as supporting debt sustainability.”

Ms Lagarde recommended 5 policies to the G-20’s members:

  1. Fix trade – priority No 1 to boost growth & jobs
  2. Continue to normalise monetary policy in a well communicated, gradual, data-driven manner – and with due regard to potential spillover effects
  3. Address financial risks, using micro- & macro-prudential tools to tackle problems related to leveraged lending, deteriorating credit quality & high exposure to foreign currency or foreign-owned debt
  4. Use exchange rate flexibility to mitigate external pressures, avoiding tariffs & other policies that could weaken market confidence, and
  5. Eliminate legal obstacles to the participation of women in the economy. This is key to tackling high & persistent inequality, and would add to the growth potential of all G-20 countries.

Realistically, what chance?

The first of those policies is less about trade, more about a power struggle deep into the 21st century. The big players will treat innocent bystanders like roadkill.

“Normalising” monetary policy is about handing to future politicians the gloss the incumbents want for themselves. Few will heed Ms Lagarde’s call. The debt mountain will grow.

Bankers can adopt more conservative practices – but what happens when competitors don’t? Or if a bailout is a prospect?

A large financial player – say, one of the world’s big banks – can adjust a small country’s exchange rate at will. Ms Lagarde is talking about exchange rates floating on the tide, untainted by sharp practices. Wholesome, unmanipulated. In short, an illusion.

And last, Ms Lagarde is talking about unravelling the deeply embedded misogyny that ensures inequality is the norm in much of the world. Her recommendation is to be rational, but she’s talking about upending centuries of religious & cultural dogma that it’s been convenient for males to uphold.

As Mrs Brown of Irish TV programme fame would say: “That’s nice.”

US Debt Clock

Attribution: IMF release.

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