Trade embargo inflation and bond-driven deflation

[Bernardo de La Paz]

The 145% / 125% US/China tariffs are effectively a trade embargo. China can still sell to Europe and Canada and the rest of the world.

If the over $400 billion going to China to purchase goods is blocked, then those dollars are going to be looking for places to buy. They won't go to other countries so much because tRump has set the US against the world. So they will awash in the US, looking for things to buy.

Surplus money chasing fewer goods is the definition of inflation. This is on top of tariff taxes.

On the other hand, if China, Japan, and Canada are selling US Treasuries, that represents dollars flowing out of the country. Money is flowing out of US stocks into European stocks. I saw a statistic that foreigners own $33 Trillion of US stocks and bonds. Like a third of US bonds. That's a lot of overhang. Would dollar outflow counteract or overwhelm tarifflation?

I've not heard this discussed. I never studied economics formally, but even if I had, these are unusual times. Where's the flaw in my thinking? Or perhaps better: How can this quantified?

[Tarzanrock]

1. "[D]ollar outflow" increases inflation.

The rampant sale of US Treasury bonds increases inflation and leads to stagflation. Global institutional investors and Hedge Funds are dumping US bonds. The increased price action in US Treasuries are reflecting investor fears that a sharp growth slowdown, or recession, makes an already unsustainable U.S. fiscal outlook even worse. When Treasury bond yields rise, it generally signals increased inflation expectations, impacting the US economy through higher borrowing costs for the government and businesses. This can lead to higher mortgage rates and a potential slowdown in economic activity. Note the US Treasury 30 year bond -- it rose to 4.90% "on a course for their biggest weekly jump since 1982." Where are we going to "borrow" those monies now that everyone in the world is now divesting themselves of US government bonds? How high will the "interest rates" on those US bonds now have to be raised to find purchasers of those bonds -- especially in volatile and unstable markets where investors are scared? What will those "increased interest rates" do to the US Housing markets and financial markets for business credit loans and personal loans? What will increased interest rates do to the huge credit card debt which Americans owe? This will soon be one, ugly and exhorbitantly expensive, vicious cycle of upwards "inflation" and "stagflation" which we Americans are going to receive (and have to pay "dearly" for) all because of one Madman's insane and utterly fucked-up and failed economic policies. Only a lunatic or a traitor would do what the Turd has now done!

[Bernardo de La Paz]

2. Thank you for thoughtful reply. It will take me a little bit to digest because you packed good info into as well

That's a good point about mortgage rates and borrowing costs.

[unblock]

3. i don't think the bond selling is deflationary unless they effectively take the dollars out of circulation

if they sell treasuries and then sit on the dollars, then yes, that would be deflationary.

but they wouldn't. they'd do something with the dollars, and those dollars would keep circulating outside the u.s. until, sooner or later (possibly immediately), either:
(a) those dollars get used to buy goods and services from america, or
(b) they get sold to convert to another currency.

neither of those are deflationary, and either way the dollars come back to america. it's not likely that a ton of dollars would stay outside the u.s. for very long. to the extent dollars come back by f/x conversion, this weakens the dollar, which is inflationary.

this is different from when the u.s. treasury sells treasuries, because the treasury is actually taking dollars out of circulation when they do this.

[roamer65]

4. Smoot-Hawley Tariff Act helped turn a recession into a depression.

Trade collapsed by 70 pct and the resulting demand destruction helped bring about the GD.

I expect a similar outcome.