2010-08-23

Countdown to collapse

The fun begins in November, following the U.S. election. Which party will seize the trade issue, or will both parties fall apart as members break their separate ways? The "far" left and right have their own complaints about global trade and international organizations and an "unholy" alliance against the center is not impossible to imagine.

Here's Michael Pettis on The last chance to avoid a global trade war
But global trade must balance. The rest of the world will have to absorb, with rising trade deficits, the combination of rising surpluses among surplus champions and declining deficits in trade-deficit Europe. Given its openness and financial flexibility, the US will, in practice, absorb most of the adjustment, its trade deficit rising inexorably – until Congress implements vigorous anti-trade policies. The US lacks the industrial, currency intervention and interest-rate management policies available to the main trade-surplus countries, and so will be forced to use other forms of trade protection – tariffs and import quotas.

This should not be allowed to happen. Instead of supporting policies that shift the adjustment elsewhere, the other main economies must agree to absorb a large share of the European shock. If they do not, they will force the US to retaliate. It is up to the surplus countries to ensure their urgent dependence on foreign demand does not result in a collapse in the willingness of deficit countries to continue providing that demand.

Perhaps it is already too late. Trade-deficit Europe has no choice but to adjust quickly. Opposition from uncomprehending domestic constituencies in the trade-surplus champions will prevent them from taking steps to adjust. Meanwhile, US anger over trade is rising quickly and has made bashing foreigners an easy and obvious vote-getter.
The world is approaching the event horizon. The decision tree of possible choices is collapsing into the present and financial markets are moving into extreme pricing conditions. Conflict will erupt at the "worst moment" because social mood is driving the system; investors, voter and politicians will become increasingly emotional as the social mood overwhelms them.

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