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US Economy Not Strong Enough to Win New Cold War
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US Economy Not Strong Enough to Win New Cold War

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NEW YORK – April 5, 2019

President Trump said his country's economy remains strong despite "unnecessary and destructive actions" taken by the Federal Reserve.

“Despite the unnecessary and destructive actions taken by the Fed, the Economy is looking very strong, the China and USMCA deals are moving along nicely, there is little or no Inflation, and USA optimism is very high!”

USMCA is the trade agreement between the United States, Mexico and Canada, which will replace the North American Free Trade Agreement (NAFTA).

Trump has moved away from the practice of previous presidential administrations of not commenting on the Fed's interest rate policy, repeatedly criticizing the central bank for the rate-raising campaign, which the regulator abruptly ended last month.

Earlier, he said that the Fed made a mistake in raising interest rates, and his chief economic adviser said that the president believes that the Fed should change course and reduce the volume of borrowing.

In recent comments, several Fed officials spoke about the strength of the US economy, arguing that the flow of weak data may be fleeting. At the same time, none of them said that they support the rate cut.

At the end of March, Trump expressed the hope that the Fed had completed its interest rate increase cycle.

“I hope now we will not have tightening,” he said in an interview with Fox Business Network.

In addition, Trump noted that negotiations between the American and Chinese sides on trade issues are proceeding without any problems and the potential agreement "will have a very large impact, perhaps more substantial than is commonly believed."

"I think we are already very close (to an agreement). It’s not necessary that we reach it, but I think we are getting very close," he said.

Despite the winning tone of these statements, the future is not encouraging. The US and China are likely to reach a trade deal, but it is unlikely to be a breakthrough that will end the deep-rooted conflict  

Any deal is likely to focus primarily on multi-year narrowing of America’s outsize bilateral merchandise trade deficit with China which reached a record high of $419 billion in 2018, nearly half the total US trade gap.

However, the multilateral imbalance stems from the deep US domestic savings deficit, which will only worsen in the coming years due to the chronic and widening federal budget deficit. For the reasons listed above, Shinophobia has sharply worsened in Washington.

About a year ago, the so-called Section 301 complaint of the US Trade Representative made a case for China as an existential threat to America’s economic future. Although my analysis shows that the evidence for these allegations is weak, the United States seems to be determined to push ahead on the strategy of further escalating the conflict, which many now openly call war.

However, China cannot calmly look at this hysteria too. China has deep-rooted concerns that the US is fixated on a “China containment” strategy and they build their own economic strategy, based on these existential fears of America.

Since China is unlikely to capitulate to its main economic strategy, there is a strong chance of a protracted struggle between the two systems (let’s call it Cold War 2.0.) This, of course, would contrast with Cold War 1.0, more of a military struggle between the US and the former Soviet Union.

The thing is that the US is not ready for this war. Its economy is in much weaker shape to wage a cold war today than was the case from 1947 to 1991. Judge for yourselves. Here is the evaluation of American analysts of Wall Street:

The US economy has stalled: the effect of incentives is drying up, and the negative from trade wars, fed policy and the collapse of markets comes to the fore. Retail sales, relative to the end of last year to March 2019, fell by 1.2% against the forecast of +0, 1%. Within the control group (excluding gasoline, cars and building materials), the indicator fell by 1.7%. The forecast for GDP growth this year was reduced from 2,6% to 2%, while in 2018 the growth was 2.9%.  If we compare these data with the period of the Cold war 1,0 the picture is very unpleasant. Then GDP growth averaged 3.5% per year.

The US domestic saving position is woefully deficient – a 2.5 % net national saving rate since 2010 versus an 8.8 % average during cold war 1.0. Such a profound shortfall raises serious questions about America’s wherewithal to fund the investments in physical or human capital required for competitive revival.

In addition, in order to successfully confront the enemy, unity in society is necessary. Remember how it was during the Cold War 1.0 period. Now we see a completely opposite picture. A real war between elite groups has unfolded in the domestic political arena. Scandals follow one after another. Under these conditions, it is foolish to hope for any victory.

Currently, the U.S. statehood is inside the two most pressing conflicts - internal and external - simultaneously.

Along the outer contour, the US is squeezed out and, almost certainly, will no longer be able to gain a foothold in Southeast Asia, the Middle East and Africa. It can get away with the least loss, while putting its short-term interests above everything else. This is exactly what Donald Trump proposes, unreasonably claiming victory in Syria and intriguing in the Golan.

His line is to stay where it is simpler, in fact, narrowing the circle of influence to the region of America, to become a regional hegemon. So, for example, could be explained the US line for Venezuela. At the same time, the Trump suppoters, going from everywhere, intend to maximize tension. In fact, this is the only way for the US to gain in time, losing less in cost. However, about this, as well as about possible US strategies for overcoming the crisis, we wrote in detail here and here.

Elite groups that oppose Trump seek to remake the geopolitical map of the world in their own way, in the interests of international financiers. They are ready to save the US dollar as an international payment unit at the expense of the US economy. However, we have repeatedly written about this too.

If this side wins, the United States will surely repeat the path of the USSR, and in a more rigid form, right up to civil war. Resources for the preservation of the system in the form in which it existed in recent decades is simply not there. The United States today is inferior in economic, military and technological terms. In case of victory of financiers, all available resources will be thrown to preserve the dollar system. The US economy will collapse in a year or two. The country will be in chaos.

If Trump and those behind him win, the United States will remain on the world map, but already as a regional leader. They will give up their positions all over the world, although leaving, they will leave behind a multitude of local conflicts.

That is how empires die. And the US empire is dying. The retreating empire always dies, and the United States today is retreating on all fronts. The existing world order is falling apart And it is the United States that is breaking it up, although from the point of view of the world economy, the last thing the global economy needs is a breakdown of the post-second-world-war order. Collectively, only the US and China are in a position to neutralize this risk.

But the US and China are now actually at war, even if only trading.

Contrary to the view of the Trump administration, trade wars have no winners – especially between two codependent economies that rely so heavily on each other. Trump’s argument that the US has the upper hand in a trade war because China is already hurting could be a serious miscalculation.

Yes, the Chinese economy is weakening and likely to slow further in the months ahead. But China's GDP, even with an increase of 6.4%, is a booming economy that needs a lot of resources. If the US will "clip wings" to Chinese economy it is likely to grow, it will not stop, especially in light of recent policy stimulus  actions, both monetary and fiscal. We believe that this weakening could run its course by mid-year. On the other hand, the sharp plunge  in the US stock market in December 2018, in conjunction with a significant weakening in global trade, point to a test of US economic resilience in the months ahead.

Therefore, the Trump administration urgently needs to change the hard line policy against China and develop a more reasonable strategy. China at this stage, no matter how much we would like not to admit this, is the key to preserving the global hegemony of the United States. The officials now crafting the Trump administration’s approach to China would be wise to read the ancient Chinese philosopher Sun-tzu: “If you know the enemy and know yourself, you need not to fear the result of a hundred battles. If you know yourself but not the enemy, for every victory gained you will also suffer a defeat. If you know neither the enemy nor yourself, you will succumb in every battle.

Author: USA Really