This article is a summary about position-taking, influences, and the broad impacts on New Zealand. It doesn’t quote anybody, but contains conclusions derived from wide reading. That’s time-consuming, but I figure this is a valuable exercise if you’re looking beyond your nose for pointers of economic direction & property market changes.
Donald Trump’s role in both his campaign for the US presidency and as president has been to disrupt the status quo.
Although he’s hired many people with experience in “deep state” roles, their tasks have been to support his disruptive campaign. Some failed the adjustment.
Mr Trump’s additional roles have been to pump up the US’s prospects as an economic performer, and to continue the US’s insistence on holding hegemonic international power.
Mr Trump has had a privileged upbringing, and in business he’s used other people’s money. Where there’s been failure, as in business bankruptcy, he’s loaded the consequences on to his lenders.
He’s taken the same approach internationally, hence his battles with China, and he’s in the process of changing the economic rules.
The US had a public debt mountain when he took office, and he’s grown it, even before you count the huge expansion in military spending. The US Federal Reserve wants to reduce the debt it created through quantitative easing and has been slowly clawing back treasury stock, and cautiously lifting its target interest rate.
Neither of those practices suits Mr Trump, who wants a low interest rate to keep public debt repayments down, which also keeps asset prices up, and wants plenty of money available for business to thrive.
Since Mr Trump started his trade war with China, the suggestion has frequently been made that China might slash its holdings of US treasuries to spite him, but that prospect looks less & less likely. China has already found it doesn’t have the same volume of exports on which to place tit-for-tat tariffs, has seen its international reserve decline and faces a worsening economy at home. One thing it has achieved is to shift some international transactions into other currencies – its own & Russia’s in particular.
China is in the middle of a transformation from mass exporter of low value goods to a more intelligent economy based on greater skilled input, but on that journey it has to deal with performances by local government entities which have spotted investment opportunities, both locally & internationally, only to find the glitter can wear off.
Like many Chinese investors keen to shift cash offshore and into assets, Chinese corporates went shopping around the world, outbidding each other as they searched for chest-thumping acquisitions, only to find that the return on overpriced assets tends to be unsustainable.
New Zealand developers have employed Asian investors for 2 decades as seed investors in apartment projects, which wouldn’t have been built if local investors were the only source of funds. But market downturns, as is happening now, mean the off-the-plan investor is more likely to lose (or make much less) with a sale on project completion. Apartment developments are still being planned, but their timing will depend to a large extent on how these bigger international manoeuvres work out.
China has used devaluation to combat the Trump trade war manoeuvres. US commentators are loud in describing devaluation as currency manipulation, but not calling out the strong-arm tariffs as equal manipulation.
Both these countries – and many others, including New Zealand – want their currencies down to encourage exports and discourage imports, but devaluations only work if other countries you trade with aren’t doing the same thing.
As this currency battle spreads, trading relationships will change. China can end the Trump trade war by conceding on intellectual property allegations – the most likely outcome, although it will take some time to occur as China looks for ways to circumvent the concessions – or it can look for alternative markets.
In that alternative pursuit, China & Japan have become friendlier, China is looking to conduct more trade with South-east Asia, and China & India are looking at stronger relations, replacing their animosity.
China’s Belt & Road initiative, a project with long-term structural consequences for international trade and also for political power strategies, is winning initial positives despite allegations of abuse of debt positions. But the Belt & Road enters the hegemony fray: while the colonial & subsequent western dealing with Africa was largely a matter of take with little give, China is going in offering sorely needed infrastructure development.
The same difference is going to apply in the Pacific Ocean, where western support for small island nations was begrudging. Now those dots in the ocean are becoming important spots in the hegemony struggle, and support will switch from donations to highly priced access fees.
All of these battles will have serious impacts on New Zealand’s economy – some positive, some negative.
Although New Zealand is big compared to the other island nations, this country will also become a target in the hegemony battles. We are never going to be a military power, so we will need other means of defence. One of those is likely to be to trade with both sides in other battles. Another will be to grant access without allowing domination. Our moralistic streak may have to be subdued and our historic allegiances further tested.
If you look at the international & New Zealand pictures as I’ve painted them here, you will see potential for very good times – and also harrowing periods if we get it wrong.
One of the big questions in international finance at the moment is the worldwide bubble in investment, pumped up by national debt, along with negligible interest rates which encourage asset price escalation. How long can it last? And what happens when the merry-go-round stops?
Factors affecting the answers to those 2 questions are numerous, but those you can most rely on are the outcomes of 2 elections – the pending mid-term vote in the US, scheduled for next Tuesday their time, and the 2020 US presidential campaign.
The mid-term vote could see the Democrats locked in a power struggle with the president, or Mr Trump set free to continue as he pleases. Whatever the outcome internally, US dealings with the rest of the world are unlikely to change radically in the short term. No matter who is in power in the US, it is a country that fronts the world with a self-belief that nobody matches; it’s a nation born to be in charge, no matter that so often it does this badly.
New Zealand is likely to become a sanctuary, and therefore a target for investment. That will place New Zealand in a positive light, at least for the short term.
Feel free to disagree, open my eyes, suggest other options.
Attribution: Bob Dey.