The scared planet
Everybody's scared. After the Fed cut rates at the end of July, the pessimistic moves kept on coming, with India, New Zealand and Thailand all cutting rates on Wednesday alone. Safe-haven asset prices keep on hitting new highs: A record $15 trillion of bonds around the world now carry negative interest rates, and the price of gold has hit $1,500 per ounce, up 25% in the past 12 months.
The big picture: Sometimes, as in 2008, a global crisis feels like an exogenous shock — something that hits the world unexpectedly and requires a unified and coordinated response. This time is different: Insofar as the world is headed for recession, it's a recession where government actions are the problem rather than the solution.
Driving the news: The Trump administration this week declared China a currency manipulator, in a move that the FT's Alan Beattie described as "both incoherent and impotent — indeed, counterproductive." If anything, it was the U.S. government that caused the latest weakening of China's currency by imposing extra tariffs on Chinese exports, thereby reducing the demand for Chinese yuan and accelerating capital flight to the safety of the U.S. dollar.
- Threat level: The currency-manipulator designation has little practical effect beyond antagonizing the Chinese government — persuading them to buy even fewer U.S. agricultural exports and maximizing the probability that the trade war will escalate even further. It's now more likely than ever that all Chinese exports to the U.S. will end up being taxed at a punitive 25% rate.
- What they're saying: "Mr. Trump’s willy-nilly trade offensive could be the mistake that turns a slowdown into the Navarro recession," says the reliably Trump-supporting WSJ Editorial Board. (Peter Navarro is reportedly the only adviser who supported President Trump's new tariffs on China.)
Context: The U.S. seems happy to fight multiple economic wars at once, if the full embargo this week on Venezuela is any indication. That action also seems calibrated to maximally annoy the Chinese, who are simultaneously facing possible recession in a febrile and angry Hong Kong.
Why you’ll hear about this again: Boris Johnson's Britain is headed for no-confidence votes, constitutional crises and — very possibly — a catastrophic no-deal Brexit. Even before Brexit, it saw negative growth in the second quarter. The full implications of Brexit for global trade are unknowable, but they're almost certainly going to be dreadful.
- The rest of the world has no shortage of other flashpoints with potentially enormous economic consequences: Pakistan, for instance, has ended its bilateral trade with India, and Russia's exports are declining sharply.
The bottom line: The world as we know it — of complex global supply chains and countries playing to their best Ricardian advantage — is rapidly transforming into an atavistic place of trade barriers and bellicose rhetoric. If countries increasingly retreat into their nationalistic shells, no amount of fiscal or monetary stimulus will be able to head off the inevitable economic and financial consequences.