Blame of Clones - Season Two

Fire and Ice

In Blame of Clones - Season One (link here) we discussed how monetary policy at our Federal Reserve has begun to diverge from that of the European Central Bank and the central banks of England and Japan.  Here in season two we will discuss the growing tension between domestic monetary and trade policies versus those abroad.

As mentioned in last week's season one, the Fed began raising interest rates back in 2015, and have continued doing so in earnest since 2017, a process they call "normalization."  For various reasons, the other three central banks have not yet followed suit. 

Simultaneously, the U.S. has embarked on a series of threats to the established global system of commerce via the imposition of tariffs.  As arguably the world's biggest consumer of stuff, those backing these actions hope to encourage Americans to buy domestically produced items by making imports more costly.  Essentially, tariffs are meant to disadvantage foreign producers by adding an import tax to their goods, a tax to be paid by the end consumer.  The thought is, while Americans may feel the pinch, other nations will be hurt much more.  When their pain becomes unbearable, they will belly up to the bargaining table and agree to terms more favorable (i.e. fair) to us.

Foreign nations are attempting, in part, to counteract these tariffs by imposing their own on our exports.  While this will have a detrimental impact here at home, the company line again turns on the notion that we can hurt you more than you can hurt us.  Since we are the big consumers, there is no way any other trading partner can match us tit for tat. This is a trade war, and in a war, both sides will face casualties, but ours will prove to be substantially less than theirs, leading ultimately to a detente we find much more beneficial than any existing now.

Can other nations fight back somehow?  Can they pour cold water on our fiery rhetoric?  Can we single-handedly impose our will upon them using trade as a cudgel?   One major effect of our Fed's policy of normalization has been the strengthening of our dollar against a basket of other currencies.  This has, to some degree, made it easier for our opponents to initiate a separate policy: currency devaluation.  If they can make their money cheaper relative to dollars, it will act as a counterbalance to our tariffs since we will be importing the same goods at lower prices when adjusted for monetary exchange valuations. 

Atlas already is seeing the effects of these actions and the White House does too, but presently there seems to be no way to counteract such devaluation other than matching it in a detrimental race to the bottom, or by jawboning.  The latter will likely have little effect since it can be met with the reply from each of the foreign players that they are just trying to stimulate their own domestic consumption, turning our own argument against us.  Who really has the dragon by the tail?