By Michael Every of Rabobank
There is a lot going on right now but take a step back and try to see the bigger picture.
In the US, Trump --iconically-- survived a “mostly peaceful attempted assassination” (as the first, wildly mild headlines implied it); his Florida documents court case was dropped over the unconstitutionality of Special Counsel Smith, and the latter’s appeal won’t impact the November election; and, as the Republican convention gets underway with the head of the Teamsters union speaking(!), JD ‘Hillbilly Elegy’ Vance is Trump’s Vice-Presidential candidate, ensuring a MAGA policy tone if he wins. Vance is the first VP candidate with a beard since 1892, the last time a president --Cleveland-- won re-election after losing his first attempt, and that two incumbent presidents failed to win re-election back-to-back. Indeed, House Democrats reportedly admit, off record, that they are now resigned to a second Trump presidency; the question may soon be if it’s a Red sweep of Congress and the presidency – though we’ve seen that outcome fail to appear before, of course. Markets are already pricing for a ‘Trump Trade’ but aren’t yet grasping its full logical permutations. Nor that the White House’s new electoral strategy also appears to be populism: President Biden wants to cap rent increases at 5%. (And this is to be imposed how?)
In Europe, France is prepping for the Olympics and les grandes vacances with no sign of a new government: a split in the leftist NFP alliance, with the Far Left LFI unhappy not all sing its tune, is matched by a split in Macron’s centrists over whether they should potentially work with the Socialists or the Republicans to try to get a workable majority. Elsewhere, Brussels will work in parallel to the current EU Presidency of Hungary’s Orban, and the EU is also waiting for the re-election of EU Commission President von der Leyen on Thursday, which appears on a knife-edge. A speech she is to give that day is seen as crucial to swinging support, as is her meeting today with Italian PM Meloni, who may or may not back her. As such, the critical (and controversial) report VdL asked former Italian PM and ECB President Draghi to prepare on exactly how Europe can achieve strategic autonomy has to wait. Having looked at the subject ourselves, we understand it is going to have to sacrifice a lot of sacred policy cows to produce any real beef.
In China, the CCP’s Third Plenum is underway which, following weaker than seen Q2 GDP, and June data which underlined yet again that consumer demand is lagging far behind industrial production. While previous Third Plenums have unveiled huge structural changes, and the market hopes this one will see huge fiscal stimulus to boost domestic demand to better match domestic supply, this appears wide of the mark. The Marxist-based ideological message from Beijing so far has been clear: production, production, and production. Not consumption, consumption, and consumption. Hence, it’s all China exports, exports, and exports, not imports, imports, and imports. Which guarantees world protectionism, protectionism, and protectionism, as we will now see even more of in both the US and the EU, Latin America, India, Indonesia, Turkey, etc. The larger question that markets again aren’t asking is what China does then: and it’s a short short-list of options, most of which neither Beijing nor markets will like much at all.
The bigger picture here is not ‘geopolitics’, or ‘populism’, or that ‘economic reforms’ are needed. It is to see that the global economy isn’t working as currently constituted. As I argued in 2020, politics now needs a new ideological “-ism” to tell it what it can (and can’t) do to change things now the ‘Washington Consensus’ is crumbling. But what comes next, exactly?
Making one case, ‘China’s subsidies create, not destroy, value’ argues, “Nearly 250 years after the publication of Adam Smith’s ‘The Wealth of Nations’ and the West has lost the economic plot.” The argument is that China’s much-discussed state subsidies to its EV and solar industries produce massive increases in value creation, massive goods deflation for consumers, and massive geostrategic benefits (for China), at low cost, without accruing most benefits to a few large shareholders.
“To be unable to comprehend this crucial point is to never have properly understood Adam Smith. ‘The Wealth of Nations’ was never about the pursuit of profits,” as the article notes, echoing ‘Adam Smith in Beijing’. “It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own self-interest.” What we want from the butcher, the brewer, and the baker are beef, beer, and bread, not for them to be fabulously wealthy shop owners. What China wants from BYD and Jinko Solar (and the US from Tesla and First Solar) should be affordable EVs and solar panels, not trillion-dollar market-cap stocks. In fact, mega-cap valuations indicate that something has gone seriously awry. Do we really want tech billionaires, or do we really want tech?”
You know who this sounds like? JD Vance. Joe Biden and Janet Yellen. And, probably, Mario Draghi.
Yet, as I have argued since 2015, if everyone agrees this is the way forward, which it clearly is, then either we divide value chains globally via some kind of new Bretton Woods, which is not happening, or we enter into zero-sum competition that means rising protectionism and rival industrial policies; and that can end up in some very good, and some very bad, places. Think Potsdam/Yalta, at least. Think why we had Potsdam and Yalta at worst.
For Europe, it will have to mean if not tearing out, then folding down key pages in the rule books on fiscal, trade, industrial, labour, and monetary policy. Moreover, it implies massive rearmament, at speed. Some get this; many don’t - yet.
For the US, under a hypothetical Trump 2 presidency, it clearly means a neo-Hamiltonian policy of much higher tariffs and, perhaps in tandem, much looser liquidity conditions at home via leaning on the Fed. (The fact that I have not mentioned Powell’s speech yesterday until now is deliberate.)
It seems very unlikely that we would get anything as radical as Project 2025’s US return to the gold standard(!), but some already might see the above as dollar negative. Indeed, today I got the first tweet stating, “JD VANCE OPEN TO DEVALUING DOLLAR TO INCREASE EXPORTS”. However, it’s not that simple, especially as VPs don’t make policy.
Again, as noted here repeatedly, lower rates alone don’t direct capital towards value creation over billionaire creation: that needs regulation, suasion, or capital controls. Expect some! Moreover, lower US rates at home do not have to mean lower US rates abroad. US tariffs stops inflows of goods (for example, Asian and European firms may have to build factories and transfer tech to the US and produce there, as was the case with China until now). That means a halt in the outflow of trade-earned dollars to the global Eurodollar system; and that means a massive liquidity squeeze on the greenback abroad, even as the dollar is cheap(er) at home - you can almost see the fist pumping “USA! USA! USA!” The impact on commodity markets could also be ‘yuuge’.
Markets might get the dollar side of this argument to some extent, but I’m not sure they get all of what comes with it. After all, as the Asia Times article above also notes, “The business press has fallen into an at best lazy understanding of value creation. At worst, neoliberal befuddlement has damaged the brains of policymakers, rendering them incapable of diagnosing economic ills.“
Indeed. But perhaps 2024 marks a Hillbilly revival and a Silly Billy Elegy. Then again, if we mishandle what happens next geopolitically and geoeconomically, which will be hard to avoid, then we might yet all look back at today as a Silly Billy Eulogy.
