Beggar Thy Neighbor: Death of Globalization and a New Protectionist Era

‘Beggar thy neighbor’ is a term for making economic policies which will benefit your country at the expense of other countries. It’s a form of protectionism which was employed by many countries during the 1930’s. The US enacted the Smoot-Hawley tariffs to protect the US economy. Naturally these methods are objected to by ‘free-traders’ all over the world. If you are not tough then you get taken advantage of.

Here at Macrotomi we are generally not political. We believe in trying to make as much money as possible from financial markets and to hold onto it by all legal means possible. If this recession becomes the ‘Z’ shaped one we believe it’s going to be (read our article: Recovery is Looking Like a 'Z'-shape Recovery, Here's Why)  then it’s pretty likely that we will get some of these type of policies. These will come more quickly if President Trump is re-elected, and more slowly if he is not. He has already shown willingness to put tariffs on Chinese goods and just recently slap 10% tarrifs on close ally Canada's alluminum.

In the kind of downturn we forecast there could be tariffs on Europe, Japan and other trading partners.

Now conventional ‘free trading’, free-wheeling’ and ‘free’ whatever else you want economists will tell you what a disaster for the world and the US this will be. A disaster for the rest of the world. Yes. A disaster for the US-not so much. They will tell you that US inflation will skyrocket because without foreign competition US manufacturers will hike their prices. Wrong. No-one will have the extra money to buy at higher prices. They will be begging for customers and remember “beggars can’t be choosers”. Conventional economists also believe this will cause a fall in the dollar and a sell off of Treasury bonds and higher interest rates. It’s a kind of a catechism which they keep repeating without thinking. Funny thing is that this is what happened in the thirties, so they think it will apply now. Yet on the other hand they tell you that things are now different from the thirties when they want to explain other things. So as you can see for most economists things are different if they want to interest you in something and similar if they want to interest you in something else. History is important because it’s a guide. It does repeat itself in a similar but not in the exact same way because of course times have changed.

There are literally trillions of dollars loans and bonds issued external to the US. Where are the borrowers going to get the dollars to repay these loans when world trade is at a standstill and the US trade deficit has shrunk considerably.

The demand for dollars would send its value up considerably. The US has a huge domestic economy and does not need to export or import much. It is practically energy self-sufficient which was not the case before. China and India may have large domestic economies but China desperately needs to export and the Indian domestic economy is still largely underdeveloped. The xenophobic Japanese economy remains moribund.

We believe the desperate exporting countries will have to absorb the tariffs the US puts on them. We also believe in a globalized depressionary environment, US manufacturers and suppliers and services will not be able to pass on their inflationary costs. We would like to remind you that a deflationary, depressionary environment is not great for stocks but is wonderful for treasury bonds, which has been our recent theme. It is not good for corporate bonds and a historic divide between the two is possible. This is really important because if you try to buy bonds from a broker they will naturally try to sell you the bond funds or the bonds which generate the highest commissions for themselves. Treasury bonds give poor commissions and so brokers don’t like them. The only thing they hate more is cash but of course there are times when cash is ‘king’.

This is a theme we will come back to.