ALL THINGS BIG AND SMALL 2.0

  Many Economists see a period of both Inflation as well as Recession for the US economy in the months ahead- two scenarios at opposite ends of the spectrum of possibilities for an economy. This is a situation which they call Stagflation- a stagnant but also inflationary economy.  In this post we explain why, how Stagflation happens and the sequence of events. The flow chart above together with the notes below explains how the US Administration’s trade war tariffs can lead to stagflation:  • The process starts at the top with the implementation of high tariffs (Tariff Policy). • This leads to higher import costs, which in turn causes higher prices for goods—resulting in inflation. • As prices rise, consumers cut back on spending, which reduces corporate earnings. • Lower earnings force companies to lay off workers, increasing unemployment. • The combination of reduced spending and higher unemployment leads to a recession or stagnation. • At the bottom, ...

 TRUMP’S TARIFFS ON CHINA MAY EVEN INCREASE US-CN TRADE DEFICIT The US has always had a big trade deficit with China. The 10-year chart below shows the wide gap between US Exports to China (Blue line)  and US Imports from China (Orange line). The reasons 1. The strong seasonal/cyclical character of US Imports from China which were obtained  by decomposing data into trend, seasonal/cyclical and residual components  (Orange line in chart below) indicates that these are intermediate goods that are the input for US manufacturing and demand and correlates with their inventory cycles. The US cannot do without such inputs for their manufacturing because Chinese goods are much cheap and of high quality. Chart below shows the strong seasonal/cyclical nature of US imports from China (Orange line). US Imports from China show a seasonality strength of 0.37 versus 0.26 for Exports to China.  2. Frankly, Chinese consumers and manufacturers  don’t want US goods...