Trump is foolish to use US stock market as a weapon in the trade war with China while a real crisis looms
- Trump should realise that the stock market powers the domestic economy to a much greater extent than elsewhere, and a protracted trade war could have a devastating effect amid signs that the next global financial crisis is brewing
The latest twists and turns in the US-China trade war raise the question of whether President Donald Trump is really interested in a deal with China (or Japan and Europe for that matter) or simply trying to hobble their economies to make America look great by comparison.
This is no idle “conspiracy theory”. Behind the obvious damage done to China's economy by trade wars (witness the recent drop in exports) is the accumulating damage of foreign firms shifting production from the world's second-largest economy, and the diversion of supply chains from China.
Yet, Trump risks falling on his own sword because the weapon he is relying on — a stock-market-driven US economic boom — is a double-edged sword. It is a one that can bestow an enormous sense of financial power on anyone wielding it but which can equally cut the ground from under any economy, even one the size of America's.
Before last week’s plunge, US equities were valued at around US$40 trillion (the NYSE plus Nasdaq) — roughly double the size of the world’s largest economy. In contrast, China’s ratio of market to gross domestic product (GDP) is around 70 per cent and its leverage over the Chinese economy proportionately smaller.
It should be obvious to someone who claims to be a consummate financial player that the US stock market is the beating heart of the world's largest economy — to a much greater extent than is the case elsewhere.
