Market Update 5/13/2019: The Dow Jones Futures indicated a 500 point drop pre-market and sure enough, we’ve opened today down 500 points. Will the Plunge Protection Team be able to work its magic today, or will the law of diminishing returns soon come into play? Only time will tell.
China Promises Tariffs of Their Own
China has built itself up over the past 40 years by accepting US dollars in exchange for very cheap goods, flooding world markets with products and providing a low overhead for manufacturing costs. This has caused a lot of Western and US manufacturing to simply move to China to increase profit margins, and after some time, China now has leverage over the rest of the world.
China is now using this leverage to threaten back with retaliatory tariffs of their own in response to the Trump administration’s initiation of tariffs on several hundred billion dollars worth of goods. At this point the dollar amount is relatively low, but a spat of tariffs can quickly turn into a trade war, and trade wars often turn into shooting wars.
China May Start Unloading US Treasuries
Perhaps the open secret of the world economic and monetary system is that the US has been spending from a deficit for the last 50 years, and issuing US Treasuries as the world reserve currency to get others to join in on the debt-based spending spree. China has bought up these US Treasuries which have consistently been a form of safe haven monetary instrument for individuals and nations to diversify their currency holdings and also a way of “buying stock” in the world’s greatest economy and political system.
With the US as the largest world military and biggest economy post-WW2 it made little sense for any country to try to go against dollar hegemony. In fact, we see what happens to countries who are not on the the global Western banking system or trading in US dollars- Iraq, Libya, North Korea, Venezuela- sure, none of those places are prime vacation spots, but it’s no shock to learn they either tried to get off the US dollar system or still are not on it to this day.
But times are a little different nowadays, the US has already attempted to play empire in the middle east and it has not succeeded in doing much more than spending trillions and costing human lives. If China starts selling US Treasuries and refusing to buy more, it could quickly impact Uncle Sam’s credit limit, and that could be the beginning of the end for the US dollar as we now know it.