Believe it or not, this is positive news, as it will probably keep interest rates from rising in Japan too soon. Many in Japan are criticizing the monetary authorities for raising interest rates twice in recent months.
This probably delays any more interest rate rises in Japan for quite a while. Japan has been trying to reignite a small amount of inflation in their nation for several years. They were finally successful, but now have slipped into deflation again. Monetary authorities rarely tolerate price deflation, believing that a small inflation keeps the national psychology stronger, as people see wages and prices rise slowly.
This is positive for global stock market and bond market demand. With Japanese interest rates remaining low, the yen carry trade will continue to provide global investment liquidity.
U.S. IMPOSES DUTIES ON CHINESE PAPER INDUSTRY
It is generally believed that President Bush needs to work towards compromise with Democrats, and to steal some of the Democratic political thunder in the upcoming election campaign. The Republicans are trying to pre-empt Democratic members’ calls for tough treatment for countries with large trade surpluses with the U.S.
This is a politically expedient thing to do, because U.S. voters are notoriously ignorant of economic wisdom. There is no doubt, that this is also an enormously risky course of action. If Congress and the president begin to sanction U.S. trading partners for real and imagined unfair practices, these trading partners will eventually retaliate. This could set off a “beggar thy neighbor” trade war, which would be devastating to the standard of living of everyone on earth.
Most economists believe that the Great Depression of the 1930’s was an economic recession, which became exacerbated by the the high tariffs of the Smoot-Hawley Tariff Bill passed by the U.S. in 1930. The high U.S. tariffs were equaled, and expanded by foreign trading partners. As a result trade slowed substantially, and the world slipped into a major depression. This depression created widespread suffering and poverty in much of the developed world.
Let us hope that U.S. politicians are wise enough to avoid the same disaster for the world. May I remind you that this happened during the supposedly pro-business Herbert Hoover administration, and by Republican Senator Smoot and Congressman Hawley. They thought they were helping business by decreasing competition; instead they were creating a downward spiral for business among the U.S. and its trading partners. Free trade has been proven time and again to be the greatest spur for economic growth. However, it remains difficult for the average politician, and for many citizens, to comprehend this economic truism.
BAD FOR THE DOLLAR AND PROBABLY GOOD FOR GOLD
U.S. protectionism could also set off a very unpleasant chain of events, sending the U.S. dollar much lower, and gold much higher.
I am utterly sincere when I say the world is generally unaware how much of the recent prosperity it has enjoyed is the result of the wise free trade agreements, which have gradually been implemented in many parts of the world over the last decades. I am not kidding when I state that, should we reverse these free trade policies in a big way, it would be devastating to world and U.S. economic growth, and to the world and U.S. standard of living.