Ready for the Trump slump?

I ended my last post here, just a week ago, with this quasi-prediction: If Trump wants the Fed to keep cutting rates, he just has to continue making stupid policy decisions.  Looks like a safe bet. 

Well, we haven't had to wait long for next stupid policy decisions.  At the G-20 summit in Osaka in the far-off days of late June, Donald Trump and his Chinese counterpart President Xi seemed to agree to put their trade wars on hold for three months to allow negotiations to continue, much to the relief of global markets.  However, there's no such thing as an agreement when Trump is one of the parties, and late last week he announced further tariffs on Chinese goods to take effect at the start of September.

China responded by briefly allowing the Yuan to trade through the psychologically important Y7/USD level for the first time in a decade -- and Trump immediately responded to that by having his Treasury Department officially designate China as a currency manipulator.  That inevitably plunged  US equity markets into their worst daily decline so far this year.

Paul Krugman argues in the Washington Post that the decision to label China as a currency manipulator is Trump's and Trump's alone.  Indeed,  the wording of the Treasury Department's announcement almost seems to hint at that fact, stating that Secretary Mnuchin acted "under the auspices of President Trump". Trump himself had already tweeted on the subject, leaving Mnuchin and his department very little choice in the matter.

If Krugman is correct in his belief that Trump is winging it, more unhinged decisions are on the way, because there is no sign that Trump is wavering in his entirely incorrect core belief that his tariffs are paid by China, and not by US consumers. The impact on US and global growth is already apparent and can only get worse.  With interest rates already so low (contrary to what Trump professes to believe), there are limits to what the Fed can do to offset the damage.

And what if China retaliates?  It has already imposed tariffs of its own and shelved plans to ramp up imports of agricultural products from the US, and the brief depreciation of the Yuan was clearly intended as a signal that the country will not put up with Trump's shenanigans indefinitely.  Only one side in this dispute has a weapon of mass destruction in its arsenal, and it's not the United States.  If China were even to hint at the possibility of starting to dump its huge holdings of US Treasury bonds, the impact on global markets and the global economy would be instantaneous and profoundly damaging. How many more of Trump's provocations will it take for that weapon to be unsheathed? .