Trump understands bankruptcy, strategic defaults and massive debt write-offs. But does he grasp the nature of debt in a large economy? Does he understand China’s private debt bubble is a powder keg?
Following the 2008 crisis, China stepped in to rebalance the West when America no longer could. China’s leaders created a bubble to give Europe and the US a chance to recover, but when the perfect storm hit in 2015 China had to crank up credit creation once more.
Trump’s plan seems to rely on threats of tariffs and quotas. But if he pushes the Chinese to revalue their currency he may well end up unleashing a deluge of nasty consequences that would overwhelm any domestic stimulus he manages to introduce. Thus, Trump’s infrastructure spending would morph into more corporate welfare that would set the stage for future austerity. If Trump’s strategy is to have any chance he must grasp that it is Chinese private debt, that needs to be restructured. Otherwise, US Treasury yields could go through the roof, severely weakening US debt sustainability.
If Trump truly wants to rebalance the US economy he should emulate Franklin D. Roosevelt and pursue a Keynesian makeover of Bretton Woods.