What happens when you create a cocktail of strong nationalistic and protectionist sentiments, thick-headed testosterone pumped old men and a complete and utter ignorance of basic economic principles? You guarantee the next big global recession.
Sometimes it is surprising that the common people do not see what the consequences of the actions of their elected leaders are. The basic problem with popular sentiment is that more often than not, it is very myopic. While most of America cheers the trade war with China very few realize that when you push the world order too much no one gains. It is American companies that stand to lose a large chunk of their business, including their manufacturing leverage. China stands to lose just as much, in lots of arguments we hear that the US is highly dependent on China and China is the largest investor in the US including US treasuries but, what would happen if China tried to dump their holding of treasuries? By the time they finish, their own investment will be worth nothing. Do you think China would do something that would wipe out their own interest?
Taking a deeper look, let’s see what happens to American corporates in such an environment, they wait and watch, they do not expand or invest in other countries due to the uncertainty in trade policies. This type of uncertainty adds risk and makes corporates risk averse thereby tightening an already strained investment sentiment. This is bad for both Corporate America and the potential beneficiaries of the intended investments. This leads to a significant downward spiral in the global investment markets. The trade war has led to China growing at only 4.8% in July. While this seems like a good growth rate when compared to the rest of the world, it is the lowest for China since 2002. The US farming sector which is highly reliant on China for selling their produce is taking a big hit as China retaliates and reduces consumption of US farm products. Even then, due to myopic mindsets they still support their leader giving him little incentive to course correct.
Now, let’s look at the contagion from this trade war. The largest economy in Europe relies on exports to both US and China and is facing severe issues in selling to these nations as these economies slow down. This can force Germany into recession. So, we already have three of the top 5 economies in the world on the brink.
Add political uncertainties in countries such as Italy with the far-right flexing muscles without real democratic support. Mexico is paying the price of reduced government spending and stalling as well as cancelling of mega infrastructure projects. Argentina is heading for another political and financial crisis with the return of a corrupt leader to the center. Singapore is slowing down due to what’s happening in China, so are Malaysia, and various other South East Asian economies. India seems to be heading to a slow down on its own due to the populist agenda of the re-elected government. A winning mandate does not mean majority appeasement, it could and should be used for making important strides to bring the economy back on track thereby benefitting all residents.
UK, heading for a no-deal Brexit will practically be the final nail in the coffin of a stuttering economy and in no way does their leader seem to have an idea of what the consequences of his actions are.
What happens when so many countries are simultaneously heading for the cliff? We face a global recession.
We hope now you see why political leaders need to be chosen with due consideration and sentiments should help build stronger economies and happier societies (not notionally stronger nations) or else all will be doomed.
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