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Scooped by
Graham Watson
onto International Economics: IB Economics May 10, 2019 12:45 PM
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The battle between the world’s two largest economies is hotting up – here’s the lowdown
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With the federal deficit near 6% of GDP and the national debt over $40tn, America’s fiscal position looks increasingly precarious
Graham Watson's insight:
You can sense the pleasure that Kenneth Rogoff has got from writing this piece about the level of US debt and the US Treasury's reaction to this. The debt has reached nearly $40 trillion, the budget deficit is around 6% of GDP, and debt interest repayments are around 13% of government spending, none of which is sustainable.
However, the claim that AI-induced growth is going to ensure that the fiscal position becomes sustainable is, frankly, laughable. Whenever a government puts forward something that conveniently solves their problems without them seemingly doing anything, that's cause for concern, and Rogoff rightly suggests that long-term borrowing costs are likely to remain high and any meddling in bond markets is only likely to reduce the government's credibility.
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Alarm as Republicans warn that ‘flooding’ stores with 300,000 metric tons of beef imports will hit US farmers
Graham Watson's insight:
The Lord giveth, and the Lord taketh away. It's frankly staggering how little grasp of basic economics or consistency informs current US policymaking, but the President has relaxed tariffs on imported beef to help tackle the cost of living crisis. without seemingly thinking about the implications for US beef farmers.
This comes at a time when American beef cattle herds are at their lowest for 75 years, and against the advice of a number of Republican senators.
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Donald Trump has announced that tariffs on cars, trucks, automotive parts and steel will rise to 50% next year, threatening the integrated US-Canada supply chain. In response, Canada's Mark Carney moved to lower tariffs on Chinese electric vehicles. Sky's economics and data editor Ed Conway looks at the numbers.
Graham Watson's insight:
This excellent Sky News clip looks at the ongoing US-Canada trade war, looking its significance for the global economy as well as a very localised series of exchanges looking at how many times a single car part is likely to cross the US-Canadian border between Detroit and Windsor, Ontario. It highlights the extent to which there are inflationary consequences of a US tariff on Canadian cars and Canadian car parts,
It then goes on to look at the wider implications of this for both economies, not least in terms of the trade in metals.
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What leverage does Canada, which sells about 70% of its goods to the US, actually have in this spiraling trade dispute?
Graham Watson's insight:
Here we go - tit-for-tat, tariff begets tariff etc...
Canada exports around 70% of its goods to the US, so how can it retaliate against the latest round of Trump tariffs?
Well, as the article notes: "Canada is the top customer for 26 US states, including Maine, Michigan, and Wisconsin. And it is in the top three for 45 of the 50 American states" and there are certain key sectors that it can hit hard. "Canada supplies the vast majority of US natural gas and electricity imports and about 60% of crude oil imports." Many Canadians have also boycotted going to the US.
Additionally, Canada is a major supplier of critical minerals, and a Canadian boycott of US wine and spirits has also cost US manufacturers.
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Treasury secretary Scott Bessent’s attempt to calm bond markets is a sign of weakness not strength
Graham Watson's insight:
I missed this yesterday but is President Trump on the point of driving the US into a debt crisis? I don't think it's imminent by any means but it can't be ruled out. US intervention to prop up the Japanese yen was undertaken in Euros, with the US Treasury reluctant to be seen selling dollars and its permission to use "the Foreign and International Monetary Authorities Repo Facility" suggests that the US is concerned about the reputation of the dollar as the world's reserve currency.
This and the explosion of debt in the US don't bode well for the longer-term, argues Heather Stewart. And she might be right. I suspect that the end of the current President's term of office might help but at some point the US is going to have to address its systemic problems, which is always easier said than done.
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Business owners in both countries are navigating uncertainty and worry as the tit-for-tat import taxes ratchet up.
Graham Watson's insight:
A little bit of local colour highlighting the implications of new tariffs for US-Canadian business, with small Canadian firms look like they are going to lose out as a result.
It shows how tariffs really don't do anything to help anyone, except perhaps the President whose ego seems to benefit. For everyone else, it's higher prices, lower sales, less choice and lower economic welfare.
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Investors will hope Kevin Warsh offers ‘comfort blanket’ at annual meeting of central banks amid bond market anxiety
Graham Watson's insight:
One of those articles where there's not much theory but it's worth the effort nonetheless. It highlights the annual central bankers' conference at Jackson Hole, Wyoming, and the need for Kevin Warsh to get the optics right.
So far he's somewhat dispelled the notion that he's simply Trump's man, and maintained a degree of independence from the President, something that the Guardian hopes that he continues to do in his keynote speech. central banks
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Economists said there were ongoing concerns over the level of borrowing as national debt passed $40tn.
Graham Watson's insight:
US borrowing costs are rising again after the Treasury Department intervened earlier in the week to increase liquidity in the market, driving down bond yields from 5.34% to 5.18%. However, since then, they've climbed back to 5.27%.
This reflects concerns about US government debt reaching $40 trillion, as well as high levels of borrowing elsewhere and uncertainty about the ongoing Iran conflict. Of course, the Trump administration are looking to shift the blame on the Biden administration, but the reality is that both have consistently run budget deficits.
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Further restrictions on shipping lane possible as Central America gripped by severe drought
Graham Watson's insight:
An ongoing drought in Central America has affected the Panama Canal's freight capacity, reducing the number of vessels crossing the waterway each day. The canal handles 5% of global maritime trade and 40% of US container traffic.
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Iran has so far proved adept at finding ways around years of already punishing sanctions on its economy.
Graham Watson's insight:
Perhaps this is more of a geopolitical 'scoop' than an economic one, but the US is threatening to increase sanctions on Iran or economies that trade with Iran, or enable it to evade US sanctions. So, from an economic perspective it highlights the economic 'weapons' that country's can use during a conflict.
However, the scepticism about the effectiveness of these interventions is interesting: most commentators seem to think that any increase in sanctions will have little effect on China and Turkey , for example.
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A weak yuan guarantees Beijing massive trade surplus even as the White House tries tamp down on Chinese imports
Graham Watson's insight:
This Eduardo Porter article raises a number of theme - the ongoing US-China trade war, and the continued US trade deficit, even in spite of trade barriers.
The fact of the matter is that there are a number reasons for this: the undervaluation of the yuan, the fact that China needs strong export performance to prop up economic growth and the US budget deficit, which is effectively funded by Chinese saving. He argues that there's little sign of either country tackling its underlying structural issues, and that, in the immediate term, it would be better to hope for a revaluation of the yuan to correct the trade imbalance.
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An agreement preventing a new wave of US tariffs is close and could include an end to Canada's boycott of US whiskey.
Graham Watson's insight:
It seems as US-Canada trade seems likely although how long it lasts is open to question. It appears to offer both economies greater certainty, and any increase in trade will enhance economic welfare.
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US President Donald Trump said he will delay imposing new tariffs on a wide array of Canadian goods for three days as the countries firm up a trade deal.
Graham Watson's insight:
Uncertainty, over uncertainty. Fans of "The Lego Movie" will be unsurprised to learn that President Trump made this announcement yesterday - TACO (Trump Always Chickens Out) Tuesday! He's agreed to pause the introduction of new tariffs against Canadian imports.
But it does little to benefit anyone, and continues the pattern of uncertainty lowering global economic welfare.
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Editorial: Tariffs on Canada, threats against Iran’s partners and bond market intervention show a president weaponising US power while making Americans poorer at home
Graham Watson's insight:
Today's Guardian editorial makes a straightforward point, and if you follow it to its logical conclusion it also applies a sorry end. Which would be a shame. Little in the way of theory, but some interesting reflections on policymaking - not least in that the President is making ordinary Americans poorer and diminishing the country's global standing.
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Ottawa’s ‘focused response’ to levies imposed by Donald Trump on Canadian products comes after trade talks collapsed last week
Graham Watson's insight:
Canada retaliates. Who gains?
In a word, no-one. How have we come to this?
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Move is latest deterioration in trade relations between neighbors with historically strong economic ties
Graham Watson's insight:
Seconds out! a 50% US tariff has been imposed on Canadian cars, trucks and steel.
In the present climate, you have to ask "for how long?"
So much for certainty.
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The US is scooping up treasury bonds in an effort to raise their price and push yields down – but it’s not working
Graham Watson's insight:
More on the conduct of fiscal policy in the US and its implications for bond markets, and the position of the dollar as the global reserve currency. For me the staggering little detail is the observation that "This year interest payments will absorb 13.5% of all federal spending, more than defense and up from 5.2% in 2021."
Is this a sustainable position? Long-term? No.
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Scott Bessent says the US will sever all economic ties with the country and that any nation partnering with Iran financially will also be isolated.
Graham Watson's insight:
Yawn! "The greatest" etc. etc.
You could be forgiven for thinking that no-one in the White House has ever read any history. You'd probably be right.
The US is promising to escalate sanctions against Iran and those that trade with the Iranian economy. But to call it the "greatest financial offensive ever" is indicative of the sort of ignorant rhetoric employed by the Trump administration.
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PM Mark Carney says ‘we got attacked’ as tariffs come into force on items from hockey sticks to tongue depressors
Graham Watson's insight:
The US-Canada trade war has appeared to descend into chaos - with both sides blaming the other for the collapse of trade talks, and the introduction of new tariffs.
To cite the article: "Dan Kelly, president of the Canadian Federation of Independent Business, estimated that 40% of small Canadian exporters will be directly hit by the US tariffs, and that nearly one-third expect their revenues will drop by 50% or more as a result." Equally, US consumers will face higher prices and less choice and states that border Canada will suffer the most.
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Fierce competition from China and high energy costs are just two of the reasons Germany’s famous industrial machine is sputtering. How did this crisis come to pass, and can Germany adapt in time?
Graham Watson's insight:
This is an important clip, well worth your time, looking at the changing fortunes of the German economy. Germany is Europe's largest economy is in crisis, not least in energy intensive sectors. This excellent Bloomberg piece looks at how this situation has come about, the problems that this has created and the potential solutions to the ongoing systemic crisis in Germany.
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New 50% levy on $20bn of Canadian imports comes into force after last minute breakdown in trade talks.
Graham Watson's insight:
Hold onto your hats - US-Canada trade talks have broken down, meaning that the US is going to introduce tariffs on Canadian exports at midnight tonight.
The goods covered - "including wine, dairy, cement, clothing and hockey equipment" - will be subject to a 50% tariff and Canadian President Mark Carney has promised to match them.
There are no gainers from this sort of nonsense.
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The US hit a debt milestone this week, but just how worried should we be about the world's largest economy?
Graham Watson's insight:
This BBC piece looks at the state of the US economy, starting with the escalating size of the US national debt and the implications of this for policymaking, both in the US and elsewhere.
The conclusion is that there's no need to panic yet; however, one truly global implication could be higher interest rates for everyone. If US interest rates are high, then it's likely to push everyone else's rates up too.
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High gas prices and weaker pharmacy sales pushed Walmart's growth to its slowest pace in six years
Graham Watson's insight:
An interesting proxy for the health of the US economy, the sales of Walmart are growing at their slowest rate in 5 years, with higher fuel prices seen as the major cause of this.
Such is the ubiquity of the store that it is a nice informal indicator of how the US economy is faring.
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It comes after the interest rate on 30-year bonds reached the highest level in almost 20 years.
Graham Watson's insight:
Unsurprisingly, the US national debt has nearly passed $40 trillion, being forecast to reach $39.6 trillion by the Congressional Budget Office, doubling in the last decade.
One wonders why that's the case? Could it be anything to do with the incumbent President?
The issue is that current legislation specifies that there's a debt ceiling of $41.1 trillion, although debt is forecast to reach $64 trillion by 2026. For a man who started his term of office touting the need for a Department of Government Efficiency (DOGE) it all strikes me as somewhat hypocritical.
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Editorial: New York mayor Zohran Mamdani shows Britain’s Andy Burnham that confronting billionaires need not mean the end of cooperation with Donald Trump
Graham Watson's insight:
Have we reached a point where there's too much global inequality? That's broadly speaking what this article is about, and the prospect of some wealth taxes being introduced in some US states, notably California.
However, for me, the most interesting bit of this is the implications of excessive wealth for democracy. It seems absurd that Sergey Brin should be spending $100m to lobby against a wealth tax.
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The Guardian with a piece on the current state of play regarding the US-China trade war.