Despite Fukuyama’s theses, the traditional war is not over: especially in Europe, from the former Yugoslavia to Ukraine. As for economic relations between states, these – with all due respect to the Austrian school – do not amount to “soft trade”. Indeed, as early as 1990, Edward Luttwak heralded the age of geoeconomics when Bernard Esambert published The World Economic War. German surpluses against French deficits, weak dollar against strong euro, difficult negotiations between the United States and the European Union on the subject of the transatlantic treaty, the world yesterday as today is an arena. Economic warfare is so pervasive that expression is a victim of its success. It is therefore necessary to precisely define this new theoretical and practical object, to evaluate its real scope and its mode of action.
It should be clear, looking carefully at the contemporary dynamics, to affirm that economic war is the daughter of globalization
Although economic warfare in the broadest sense of the term is not new, its contemporary form has relatively recent roots. We can consider that after the Second World War, with the revival of an international monetary system and the signing of the GATT agreements in 1947, the rules for commercial competition between largely national economies were established within the Western bloc. Thus, the economic struggles that have taken place in recent years have been confined to an arena of limited size.
Furthermore, when Bernard Esambert published Le Troisième Conflit mondial in 1968, he traced the contours of an economic war with positive virtues: not only did this “soft” war replace the real war in the West, but it was also a stimulus for industrialized countries, engaged in a profitable competition for all. Furthermore, the Cold War forced the nations of the Western bloc into a de facto solidarity that further limited the effects of their economic rivalries.
It was precisely this balance that was upset in 1991 with the fall of the USSR and the end of communism. From that moment on, nothing stood in the way of the capitalist and free trade model which, until then, represented only one of the two economic systems at work on the planet. Now the arena is global and hardly anyone challenges the rules of the game, but at the same time the end of the war does not bring down the politics of power; it moves them from the military and geopolitical terrain (clash of blocs, peripheral conflicts, etc.) to the economic and commercial terrain (rivalry between powers over resources, the struggle for market share, etc.). According to Luttwak, “in the future, fear of economic consequences could settle trade disputes, and certainly more political interventions motivated by powerful strategic reasons.” If Luttwak probably underestimated the importance that geopolitical issues would maintain, he underlined the new dimension of our globalization: that of economic competition between nations Far from thinking like the men of the Enlightenment that trade softens morals, it believes that trade is only one of the modes of war when its armed side weakens.
Winners of the Cold War, the United States was in fact the first to take stock of the change that the world was going through. Basically, the Cold War gave them the opportunity to subsidize entire segments of their economy.
But if at the beginning of the 90s, the geopolitical argument collapsed, the economic discourse remains in all its purity. In the same year, Secretary of State Warren Christopher officially declared that “economic security” was to be elevated to the top foreign policy priority of the United States of America.
In other words, the winners of the Cold War have officially declared economic war on the rest of the world. The perspective is certainly largely liberal; everyone has their chances and can win this game, but the discourse is ambiguous because it is tinged with the defense of national interests. In the end, it mixes both liberal and mercantilist rhetoric, principles hardly compatible in the eyes of economists but perfectly legitimate for politicians.
In order for a country to be fit to fight in economic warfare, it needs a state, that is – Esambert would say – a resolute warlord, who knows the profession of arms and who reduces the morale and spirit of conquest to the economy.
Yet in the 1980s and 1990s, in the era of neoliberalism and the Washington Consensus, the state had been mistreated; it was seen as an obstacle to economic development and therefore President Reagan was not afraid to say that “the problem is the state”. Financial globalization, the transnationalization of companies, the intensification of international trade have rung the death knell for this relic of the past. Not only has the state resisted the neoliberal potion, it is now making a comeback. The state continued to play its role of overseeing the private space by creating a favorable legal, fiscal and infrastructural environment for the economy. In our current context, states have also taken on the role of military leaders, to conquer markets and resources, both to secure their power and to enrich their businesses and their fellow citizens.
In fact, the state has a certain number of prerogatives or capabilities that companies are naturally lacking. The state can think long-term, finance long-term when companies prefer the short or medium term. Furthermore, it can implement expensive tools at the service of its companies to distinguish the sectors of the future, the fields in which they have an interest in investing; in short, the state has a far better view of the battlefield than any of its troops. The Japanese example of the MITI has a paradigmatic value, as demonstrated by the pioneering studies of the Paris school of economic warfare directed by Christian Harbulot.
It is also the state that guides the dynamics of tomorrow by setting goals: thus, the Lisbon strategy that the EU member countries adopted in 2000 intends to make the Union “the first knowledge economy” by 2010 by explicitly linking this goal to that of full employment. Only a state can tackle these kinds of tasks, the scope of which far exceeds the financing capabilities and motivations of a business.
States don’t wage wars without troops. These are businesses, large and small.
But what does all this mean specifically?
First of all, it concerns a simple but at the same time extremely delicate question in an era of globalization: the nationality of companies. Isn’t it an illusion to say that more and more multinational companies, owned by foreign capital, are American?
Indeed, economists have shown that, despite the logic of transnationalization, the idea of “corporate nationality” is not obsolete. First, because a number of strategic companies are protected by states: directly when they are shareholders indirectly when they are guarantors their independence from foreign companies. We recall, for example, that in 2006 the Bush administration forced the Dubai Port World company to sell to AIG International the management of the six large American ports carried out by the P&O company that DPW had purchased. Likewise, advertising firm China National Offshore Corporation was prevented in 2005 from acquiring the US company Unocal. What does this mean if not that states easily recognize national companies, even if their capitalization is now international?
In short, even in the era of the “Global Players”, we can speak of nationality of companies.
Secondly, we can assimilate the present large companies, even more so the multinationals, to the legions of the late Roman Empire; mixed, variegated, composed of Roman cadres and barbarian troops, they are nevertheless the army of the Empire. Today’s companies, despite their global character, still maintain a national foothold. Furthermore, the recent Peugeot bailout around an alliance between the family, the French state and the Chinese manufacturer Dongfeng illustrates well that the idea of a national company did not die with globalization, it is only more complex than in the past. .
Returning to contemporary economic warfare this can be read as a traditional conflict, with its war objectives. The first is to defensive carette: saving industrial jobs. This challenge has become an obsession as relocations or subcontracting to low-wage countries are draining our industrialized countries.
Why this obsession with industrial jobs in our outsourced world? It is because our post-industrial societies, in the sense that most of the GDP no longer comes from the secondary sector, are no less industrialized than they have ever been. Not only do industrial jobs generate tertiary employment, but there are also many that require a qualification. Bernard Esambert speaks of an “industry-service symbiosis” to designate this pair formed by the high-tech industry and the service sector that accompanies it. Losing the former to the advantage of the new industrial powers means losing the latter and risking regress, not to mention the risk of unemployment or underemployment, which no democracy can bear in the long run. Advocates of economic warfare therefore believe that industrial employment must be defended and even maintained . Beyond the economic debates about their cost-benefits, the destruction of jobs is difficult to accept in the eyes of voters and, therefore, decision makers.
The other objective of the war, decisive for the states, is no longer defense but the conquest of markets and scarce resources. Economic warfare scholars have clearly demonstrated the intensification of the war for the control of natural resources, mainly for the control of hydrocarbons.
Perhaps nothing better than this example illustrates in the eyes of its proponents the obviousness of economic warfare: oil is a scarce and limited resource. Every drop gained by one is lost by the other. Therefore, as it is the basis of development, it is necessary for each state to ensure a secure and continuous supply. The inexorable struggle that the United States and China are waging for African oil but also for the other resources of the subsoil of this continent is an example of this. Absent in Africa 25 years ago, China is now the third largest trading partner after the United States and France; for two thirds it imports oil, but also metals, cotton and precious stones.
This war for natural resources is the scene of a reversal of the balance of power between Western countries on the one hand and emerging and / or developing countries on the other. The rise of China, of the BRICS, the rise of sovereign wealth funds in the Arab oil exporting countries would demonstrate this. In economic warfare, resources are powerful ammunition. And everything suggests that this conflict will escalate.
The International Energy Agency estimates that energy needs will increase by 50% by 2030, in part due to Indian and Chinese growth. The search for raw materials will in fact become a crucial issue for the States. As early as 2007, the Committee on Critical Mineral Impacts on the US Economy published a report in which it lists eleven minerals that are particularly crucial to the American economy due to their scarcity, their need in high-tech industries … the more coveted, is rhodium, used in particular in catalytic converters, and found in Russia but also in South Africa, a much better ally than Moscow. Rare metal, today it is the subject of struggles in which states and multinationals fight side by side. As guarantor of the national economy, each State is called upon to draw up, in its own way, a list of the resources that are or will be essential for it.
The “scarce resources” also include companies that today more than ever are falling prey not only to their private counterparts but also to governments. As such, the crisis has facilitated the entry into the capital of very large companies in the countries of the South through powerful sovereign wealth funds. The large investment funds of the United Arab Emirates, in particular Dubai and Abu Dhabi, have invested extensively in favor of the economic crisis in prestigious companies in difficulty: EADS, AMD, Sony, Citigroup … The Chinese sovereign fund holds almost 10% by Morgan Stanley. As for the Singapore fund, it entered the equity of Merril Lynch at the same level. Here we find the idea of revolution in the North / South hierarchy: winning in the economic war is not a legacy. The newcomers are shaking up the old hierarchy. Saudi Arabia is estimated to be responsible for 5% of US GDP thanks to wealth creation made possible by the use of Arab oil. Suffice it to say that Riyadh has a strategic advantage over its powerful economic partner.
Finally, there is a scarce and strategic commodity that constitutes a relatively new objective of the war: information. It is now important that companies and states know their opponents, their exact technological level, their strategy, in order to be able to anticipate them. Sometimes we speak of cognitive warfare to refer to the advanced weapon of economic warfare. In fact, the acquisition of information with high added value is also essential for the development of the tango economic activity as much as the accumulation of financial capital and the coordination of human skills. If states now want to help their companies gain market share, they must equip themselves with economic intelligence programs, otherwise they will lag considerably behind in a form of struggle that appears increasingly crucial as all the immense theoretical and operational work done by Ecole du guerre economique founded by Chrustian Harbulot.
In short, our time is woven of contradictions; on the one hand, the states hold an official speech supporting, sometimes with nuances, a multilateralism supported by the main international institutions such as the UN, the WTO, the IMF. On the other hand, everyone can see that the states are developing quite different reasoning. The imperative of solidarity in the financial field advocated by the G20 t new response to the need not to lose market share in a context of tension. In the midst of the crisis, the logic of competitiveness requires the conquest of foreign markets.
It is up to Christian Harbulot to have clearly shown this shift from Cold War Manichaeism to the multilateral economic war that states are waging today. According to him, the ally / opponent pair replaced the partner / competitor one. This transformation of possible alliances is accompanied, according to Harbulot, by a reorganization of the field of partners and competitors in geographical terms. The two blocks of the Cold War would have succeeded three blocks: the first is the degraded space of the Western world from which we can possibly extract the United States, the second is the expanded room for maneuver of the new powers, the third, finally, is space of survival of other countries. Each of these spaces follows very different power strategies. Furthermore, the members of each block are not necessarily allies as we have just seen.
Therefore, any peremptory statement becomes impossible. The United States and China are waging a relentless war over Africa’s resources. But China, through the purchase of US Treasuries, is the country that allows the United States to live on credit. Another example, China and Taiwan are political enemies but economic partners.
If economic warfare is a struggle, it is based on weapons and countermeasures. In covert warfare, a large number of tools count as weapons. The first of all is undoubtedly training: in our constantly changing societies, initial training helps create a workforce or managers prepared for change.
Likewise, the importance given to research is fundamental. Since 2010, China has more researchers than the United States, although the latter enjoy, thanks to the practice of brain drain, the sharpest minds on the planet. In this context, public-private collaboration is fundamental: in the United States, the Bayh-Dole Act of 1980 provides that patents financed with public funds – by universities or public research centers – are assigned mainly in the form of exclusive rights to private companies American.
In other words, in the eyes of states in economic warfare, the search for patents is truly a national affair, a guarantee of productivity, a decisive weapon in the perspective of a trade struggle between nations. These tools are at the service of competitiveness, this ability to face competition on external and internal markets. As for the attractiveness – which could be understood as the competitiveness of a territory – it is the object of particular attention by many states that the disputes between the European Commission and Ireland regarding Apple have brought to light.
The ultimate hidden weapon of warfare is economic intelligence. It is similar both to a weapon, which anticipates the enemy’s movement to surprise him and steal his victory, but also to a defense tactic because it anticipates enemy moves, practicing disinformation for example. The United States is the main player in this information war. We now know that the NSA, initially created in a counterintelligence logic during the Cold War, would have used the Echelon network to know the position of the European Union in 1994 during the final negotiations of the Uruguay Round. In 2014, the New York Times revealed that the agency had spied on an American law firm defending a foreign country in a trade dispute with the U.S. Information has become one of the key issues of the economic war.
As states move from covert warfare to open warfare, weapons change. These attacks can take the form of geoeconomic retaliation in response to a geopolitical crisis; this is for example the case in the fruit and vegetable embargo between the European Union and Russia.
Voluntary import restrictions also amount to retaliatory measures. The well-known example of the restrictions imposed by the United States on Japanese cars in the 1980s testifies to the violence of the conflict. Faced with rising Japanese car sales, Washington sought to protect the “Big Three”. Rather than proceed unilaterally, the US government has asked the Japanese to limit their exports. Tokyo preferred to negotiate this perfectly anti-liberal measure rather than run the risk of even more unfavorable restrictions being imposed: this is the voluntary restriction agreement of 1980.
A series of disputes between states led to the adoption of tariff peaks in retaliation; for example, the United States decided in January 2009 to triple tariffs on Roquefort in response to a ban on exports of hormone-containing beef in Europe. In each of these cases, the best offense was the defense.
When worried about avoiding frontal conflicts, states prefer an alternative approach which is to facilitate the assault of their companies on foreign markets. For this reason the political power is an ardent promoter of its companies. This ancient practice has been systematized in the United States in the form of “commercial diplomacy”. This is based on three principles: preparing the ground by liberalizing trade with the destination country; use economic intelligence, industrial and commercial intelligence to provide American companies with all the data on the ground to be conquered; finally, to set up ad hoc structures such as the War room. This offensive public strategy is entirely in the service of the private corporations that are the strength of the United States. It is in the same perspective that Washington has increased the number of bilateral free trade treaties: with most of the countries of Central America in the 2000s, with Morocco in 2006, South Korea in 2010.
Finally, there is one last weapon that, individually, is now almost the prerogative of a few emerging countries: sovereign wealth funds. Although they deny themselves, these funds take hold in sometimes strategic groups and help guide their strategy.
To cope with these dangers, those involved in economic warfare have developed policies that resemble shields or even counterattacks. In a context where customs barriers are historically low, there are other means to preserve its market: export subsidies, standards, favoritism given to national companies in one form or another (think of the Small Business Act which reserves some public procurement for SMEs) In short, all means are good.
So it is with money, which has long been – and continues to be – a defensive weapon in the hands of states, especially in the form of devaluation. The UK gave us a recent example of the geo-economic use that could be made of a currency: at the height of the crisis, London let the pound slip while the euro remained strong. In this way, British exports were stimulated. We could reproduce the analysis for the yuan or even the yen at a time when Shinzo Abe has launched a policy of monetary expansion.
For large Western states, it is primarily about protecting their markets at a time when old-fashioned protectionism is almost outlawed. For emerging countries, the stakes are different: by increasing the number of regulatory sources (state, international, private, public, etc.), they weaken the universal legal system designed by the dominant states. Paradoxically, the desire to unify world trade has led to a legal fragmentation of the latter.
The rules of trade have become a battleground in a few decades. Witness the emergence in France of the notion of “economic patriotism”. Spread out in 2005 by Dominique de Villepin, then Prime Minister, the doctrine of economic patriotism is based on the idea that it would be up to the state to defend companies considered to belong to strategic sectors. In practice, success is mixed: while Suez was married to GDF in 2008 to deal with a potential takeover by Italy’s Enel, Arcelor was absorbed by Mittal.
Looking at the world today, it is tempting to provocatively conclude that war has a bright future; economic warfare of course, but also traditional warfare. But there is also a more dramatic scenario, namely that tomorrow’s economic wars can degenerate into armed conflicts.
In short, yesterday as today, historical reality is an ocean of forces that are opposed to each other, in a dynamic that determines a perpetual flow that now leads to ascent now to decline.
Indian Farmers Protest Against the Parliament’s Encroaching Bills
The new agricultural reforms in India aim to permit farmers to offer their produce to private purchasers beyond a state-run discount or wholesale markets, where farmers are guaranteed a minimum cost for their yields.
However, the farmers state that the laws would undermine their livelihoods and will solely be profitable to large companies, leaving producers helpless under the heel of a free market. Such patters can be gauged from the Modi government’s corporation-oriented policies. For instance, the current corporate tax rate – 30 percent – has been considerably reduced: 22 percent for existing companies and 15 percent for those established after 1st October, 2019.
Farmers regard these bills with suspicion, for they feel threatened by the corporatization of their agricultural domain and the dismissal of the MSP regime. Introduced in 1966-67, the MSP regime promises the sale of specific crops at a fixed price thus assuring the farmers of a regular income in spite of escalating input costs and unstable prices.
Primary leaders of farmers’ associations have called for protests, even willing to observe fasts during the protest in order to challenge the new farmer laws. With almost 250 million protesters, to protest is being called the largest protest in human history.
This is the second time in the previous two weeks that the farmers have called for country-wide protests, requesting all the people to organize sit-ins outside the district organizations across the state. The protests are being led by a large number of farmers sitting outside the capital, New Delhi, obstructing main highways heading towards the city.
Chief Minister of Delhi, Arvind Kejriwal, and his party ‘Aam Aadmi Party’ have supported the sit-ins by fasting with them. Kejriwal encouraged his party workers and members to join the campaign and asked Modi’s Bharatiya Janta Party to set aside arrogance and fulfill the demands of the farmers.
The agriculture sector contributes almost fifteen percent to India’s $2.9 trillion economy and enrolls the greater part of the nation’s 1.4 billion individuals. In recent years, this sector has been facing setbacks and driving a huge number of indebted farmers to take their lives.
Modi said the enactment was required to support the agricultural sector, and that the new laws would profit the farmers and “free” them from the oppression of middlemen. Farmers, generally from Haryana and Punjab and considered the “grain bowl” of India, have denounced the laws as “hostile to farmers”.
The farmers have demanded revocation of the new laws and assurance of the Minimum Support Price for their yields.“It’s been months now since the farmers began protesting. We have sent a few written messages to the Prime Minister, Agricultural Minister is demonstrating our hatred to the hostile laws but the BJP government is careless on this issue,” said the farmers’ leader.
One elderly woman, aged 75, said that “unless and until Narendra Modi withdraws these laws, we will not go back. This government should know about the strength and determination of the Punjabi people.”
The Indian Supreme Court has received many petitions regarding a ban on the protest, but the top court has declined such calls and ordered the government and unions to form a committee in which the experts would mediate between the concerned parties.
On the birth anniversary of Sikh leader, Guru Nanak, Canadian Prime Minister Justin Trudeau said in a Zoom meeting that Canada would always defend the right of peaceful protest.
Federal Minister Fawad Chaudhry termed Indian behavior with farmers as “shameful”. He stated that the Indian government’s policies were the biggest threat to regional peace. United Nations Secretary-General António Guterres called on the Indian government to allow protests, asserting the right to raise a voice and show opposition to the government.
The vociferous calls have certainly proven to be a feather in the farmers’ cap, as India’s Supreme Court has recently ordered for the suspension of these farming bills.
U.S. Trade Deficits Increase from Covid
America’s trade deficit (excess of imports minus exports) reached its minimum in February 2020, and since then has increased 84% from February’s -3708, up to November’s -6812. America has one of the world’s highest rates of coronavirus-19, or Covid-19, infection, and therefore is less productive and more needy than most countries are, during the coronavirus crisis, and is consequently importing more and producing less. The reverse has generally been the case for the countries that have had good policy-responses to the virus — those countries’ economies have either been virtually unharmed by, or else have actually boomed from, this pandemic.
China’s mere month-long trade deficit from coronavirus was an enormous -62.05 in February, but by March China popped back up to+19.93 and has remained above +36 since that time, and it reached its high of +75.43 in November. China has one of the world’s lowest rates of coronavirus-19 infection, and is therefore exporting more as it fulfills the needs of countries (such as America) that are producing less because of the coronavirus crisis.
A major study by Jungle Scout, “Global Imports Report 2020”, says that:
Those countries that were able to recover from the impact of early 2020 economic events are the countries faring better later in 2020. For example, China had the most drastic year-over-year reduction in U.S. imports among the top 20 countries in February and March, second only to Hong Kong. But in April, China bounced back significantly, achieving approximately 40% year-over-year growth in U.S. imports. The countries that were able to recover early are the countries faring better later in 2020.
On December 17th, Matthew C. Klein at Barrons headlined “China’s Pandemic Recovery Accelerates While the U.S. Economy Rolls Over” and he reported that, “Soaring consumer spending, rapid manufacturing growth, and robust exports are pushing up the speed of China’s recovery from the pandemic even as the third wave of the viral outbreak and the withdrawal of federal government income support are causing the U.S. economy to turn over.”
One of the very few countries that were hit about as little as China by this pandemic is Vietnam, whose northern border is China. Vietnam has perhaps the world’s most vigorous and well-planned policies to restrain this virus. The country’s only two months of trade deficit were during April, at -12.20, and popped back up to +12.33 in May, then peaked at +49.86 in August, and declined sharply down to +6.00 in November, and then down to -10.00 in December. Although Vietnam’s worst month of the infection was August, after which the numbers of new daily cases returned quickly to the extraordinarily low numbers of the preceding months, Vietnam was hit hard by retaliation (such as complaints and investigations) from the U.S. regime in October, which caused an especially hard drop from 29.39 in October down to November’s +6.00, and then December’s -10.00. China wasn’t hit so hard by the U.S., mainly because Trump had already turned the screws against them earlier, and China had thus already reoriented its exports toward other countries. Yet, still, China has, steadily, each year, during the past five years, produced almost exactly 40% of all imports by the U.S. The impact of America’s policies against China has been much bigger in boosting America’s imports from China’s competitors than it has been in reducing America’s imports from China. America has been increasing its imports mainly from Vietnam, Germany, and Taiwan. So, those have been the chief beneficiaries of Trump’s anti-Chinese policies.
Another of the very few countries that have been hit by this coronavirus even less hard than China has been is Taiwan, which is almost unique in its enjoying a positive balance of trade throughout the year, and so Taiwan has produced record-breaking trade surpluses ever since May. This is largely because Taiwan is selling more to all of the desperate countries, such as the United States (which regime is especially happy to increase its purchases from Taiwan so as to decrease its purchases from China and from Vietnam). Taiwan is perhaps the world’s top gainer as a consequence of this pandemic.
Unlike China, Vietnam, and Taiwan, Germany has been somewhat poor in its coronavirus policies, and has 24,493 cases per million inhabitants, versus 16 in Vietnam, 36 in Taiwan, and 61 in China. America, by comparison, has 73,795. So, whereas America is over 3 times worse than Germany, it’s 4,612 times worse than Vietnam, 2,950 times worse than Taiwan, and 1,210 times worse than China. Germany is benefitting not because its coronavirus policies have been good but because the American regime wants to crush China and for some products this means buying from Germany instead.
The people who were saying that the aggressive types of measures that countries such as China, Vietnam, and Taiwan, were imposing against this virus would hurt instead of help those nations’ economies were not only wrong but they had their understanding exactly upside-down. They were exactly and precisely and extremely wrong. And if the United States (and perhaps some of its allies) had not been retaliating against the countries (other than Taiwan) that are the most successful against this virus, then the countries that have been doing an outstanding job of protecting their populations from this virus would be economically benefitting even more than they have been economically benefitting from their success against this virus. The result for the well-performing countries is not only lower rates of disease and lower rates of deaths, but higher rates of economic production and GDP.
Coronavirus has thus been redirecting global leadership away from the United States. One might anticipate that America will respond by relying increasingly upon its military in order to impose its will — no longer as any sort of role-model to inspire its ‘allies’. For example, on Christmas Day, December 25th of 2020, at the very same time that the nation’s austerity hawks were blocking passage of a covid-19 relief bill in the U.S. Congress, and millions of Americans were terrified at the resulting prospects of soon becoming made homeless, CNN headlined “US Army prototype cannon blasts target from 43 miles away”, and presented video of a successful test of a tank’s cannon firing a small guided missile against a military vehicle that was located 43 miles away, which video CNN accompanied with martial music in celebration of the huge explosion and fireball-annihilation of that targeted vehicle. America would then be selling its threats more, and its benefits less, and CNN was already a liberal cheerleader for this change to a more ‘assertive’ style of propaganda. But if this is liberal propaganda, then what is conservative propaganda; or: How will CNN now distinguish itself from, say, Fox?
Trump’s replacement, Biden, has appointed, to his Administration’s international affairs posts, individuals who are just as intensely neoconservative (or “hawkish” or “war-loving”) as Trump did; and, therefore, the incentive for America’s trading-partners to become less economically dependent upon America is likely to decrease little, if at all, and America’s balance-of-trade numbers will probably improve little, if at all, during his Presidency. America seems set on being an aggressive declining power, economically, no matter how much it will be spending militarily in order to prop-up its power. America’s billionaires have been thriving while America has been spending around half of the entire world’s military expenditures, and, so, this type of U.S. Government is unlikely to change in the near future.
‘Make That Trade!’ Biden Plans Unprecedented Stimulus for US Economy
The revolving doors to the White House, the Senate, and the House are set to welcome president Joe Biden and his administration. Now that the Democrats control the executive and the legislative branches of government, they have carte blanche to push through unprecedented economic stimuli to benefit all Americans. Taking center stage is a massive $1.9 trillion stimulus on top of the $900 billion stimulus recently passed by Congress under President Trump. Combined with the $2.9 trillion stimulus in 2020, the US economy is now flush with cash.
All that money has plenty of different directions to go, including Wall Street and Main Street. Americans across the board are anticipating $1400 stimulus checks to go with the $600 released in December 2020. Dubbed the ‘American Rescue Plan,’ the stimulus money is intended to get the economy moving again, by empowering consumers who have faced sweeping job losses, cutbacks, and personal difficulties.
The stock markets have reacted to these stimuli as expected – bullishly. A snapshot of the US financial markets confirms the impact of the stimulus, and what’s to come. The 1-year change for the major US indices reflects strong gains for the NASDAQ composite index (38.44%), the S&P 500 Index (13.17%), and the Dow Jones Industrial Average (5%).
Markets across Europe, the Middle East, and Asia have performed poorly over the past 1 year, owing to the government enforced lockdowns vis-a-vis the pandemic. The best performing European market over the past 1 year was the DAX (+2.38%). This begs the question: How will all the stimulus money impact the stock markets, and demand for gold?
What Happens When Central Banks Start Flooding the Market with Trillions of Dollars?
Monetary stimulus is designed to assist struggling American households who through no fault of their own were furloughed, or now face tremendous economic uncertainty. SMEs across the board are cutting costs, and letting people go. In December 2020, hiring rates in the US dropped for the first time in 7 months. Industries affected most by the pandemic include service-related businesses, travel and tourism, restaurants and bars.
It’s not only low income families struggling against adversity; it’s middle income earners too. Several measures have been proposed, including raising unemployment benefits to $400 weekly, and increasing the minimum wage to at least $15 per hour. All of these bold initiatives have yet to be passed by Congress, and signed into law by the President.
The effects of these massive stimuli will reverberate across the economy. There are definite winners and losers from massive spending. The Deficit/GDP ratio is already 15%, and monetary supply growth has increased by 25%. Inflationary concerns are growing, but for now the stock markets are shrugging off the prospect of higher prices and welcoming the stimulus. Low-income earners will benefit most from the stimulus, but every action has a reaction in the financial markets.
Currently, the Federal Reserve Bank has indicated no change to interest rates. This is surprising, given that bond yields are increasing. Multiple economists are concerned that the infusion of trillions of dollars into the economy will ultimately lead to rising prices, and nullify the intent of the stimulus packages. Equity markets and housing markets have shown tremendous resilience, and growth in recent months. State governments will be getting their fair share of stimulus money, as ‘financial healing’ kicks off in earnest.
TheFed’s bond-buying program continues in earnest as quantitative easing goes into overdrive. Millions of Americans remain out of work, and the unemployment rate is at pre-pandemic numbers. If the proposed economic boom kicks in, inflation will likely result before the end of the year. Markets across the US rallied in 2020, and bullish sentiment continues into 2021.
Analysts point to high valuations in the stock markets that are not supported by the fundamentals. The CARES Act was like a steroid shot for the market. The Paycheck Protection Program (PPP) ensured that at least some of the $1200 + $600 checks found a way to stock markets. Brokerages across the board reported increased registrations and trading activity. Americans are certainly taking to stay-at-home work/life by actively engaging in the financial markets. This will likely continue with an additional $1400 stimulus check.
Which Stocks Will Benefit?
Source: StockCharts.com SPX 500 Large Cap Index
Major US banks are set to benefit over the short-term, thanks to their ability to borrow money at short-term interest rates, and lending that money out over the long-term at higher rates. The biggest US banks should all see an uptick in stock price performance. Bank of America (NYSE: BAC) has a market capitalization of $285.563 billion, and the performance outlook for the stock is bullish over the short-term, mid-term, and long-term.
Wells Fargo & Company (NYSE: WFC) has a market capitalization of $132.469 billion, with a medium-term and long-term bullish performance outlook. Much the same is true for Citigroup (NYSE: C) with a market cap of $133.77 billion, and a medium-term bullish outlook. Energy efficient stocks will also benefit from the Biden administration. Companies like Tesla stand in good stead with a green energy-focused Presidency, House, and Senate
Analysis of bank stocks provides interesting insights. For example, BAC has climbed from November lows of under $24 per share to $33 per share. The stock price is higher than its short term moving average (50-day MA), and the long-term moving average (200-day MA) of $29.04 and $25.26 respectively. Technical analysis of BAC, using the Ichimoku Cloud confirms bullish momentum moving forward.
Indeed, experts at Bank of America attested to the benefit of passing the stimulus, without which a recession would have occurred. In a similar way, WFC stock, and C stock are also up sharply since the November 2020 lows. Bollinger Bands indicate that the run on bank stocks is likely to continue as momentum is clearly on rising prices for bank stocks.
Source: StockCharts AAPL
Besides bank stocks, there are plenty of other stocks to watch, including (NASDAQ: BKNG), Renesola Ltd (NYSE: SOL), Snap Inc (NYSE: SNAP), and Apple Inc (NASDAQ: AAPL).Pictured above, AAPL is currently trading around $127.14 per share [January 18, 2021]. It is bullish, compared to the 50-day moving average of $124.24 and 200-day moving average of $103.77 per share.
Bollinger Bands for Apple indicate a slight tightening,and stabilisation of prices at a much higher level than the lows recorded in July and August 2020. As the world’s most valuable company, AAPL is on the rise once again. Momentum indicators such as Ichimoku Cloud tend to suggest that AAPL is set for additional gains.
Which Sectors of The Stock Market Will Flop?
The shift away from crude oil and natural gas to green energy will cripple the oil industry and all the stocks that populate it. If these companies don’t start switching to alternative energy investments they will stagnate. WTI crude oil is currently trading around $52.09 per barrel, while Brent crude oil is trading around $54.76 per barrel [January 18, 2021].
The long-term charts of companies like Exxon Mobil Corp, Chevron Corporation, Royal Dutch Shell all point in the same direction – decline. In fact, these major multinational companies are at their worst levels in 10 years. US oil consumption is flattening out, while that of global oil consumption is increasing. Overall, nonrenewable energy sources such as oil and natural gas are long-term bearish, and best avoided. The global focus is on clean energy, not oil and natural gas.
Other long duration assets such as biotech stocks will likely slump over the short-term. Given that these stocks are discounted to the present, makes them unattractive to investors right now. However, any attempts to expand the Affordable Care Act will work to the advantage of biotech stocks, and pharmaceutical stocks, because people have greater access to healthcare.
The lukewarm reaction of stocks to the stimulus plan is predicated on the notion that additional stimulus will invariably result in additional taxes. If lawmakers in Congress require that taxes be raised in order to pay for the income redistribution, stocks will slump. The cruise ship industry, hotel industry, and entertainment industries still have a ways to go before a recovery is on the cards.
The strongest-performing sectors include many household names. The likes of shopify, Nvidia, cryoport, Pinduoduo, and Albemarle were considered winners in 2020. The biggest losers were airlines such as Boeing, and United, real estate and retail operations such as Simon, and oil and gas industries like British Petroleum.
Overall, the stocks which outperformed market expectations included freight and logistics, basic materials, Internet retail, software applications, and semiconductors. Heading into 2021, the S&P 500 index was up 16.3%, and growth continues. There are ‘moral hazard’ concerns with any big stimulus. Prior to the pandemic, approximately 20% of public companies were operational, but unable to repay their debts. After the pandemic hit, that number swelled to 32%.
How will the Stimulus Affect Demand for Gold?
Source: MarketWatch SPDR GLD
Traders and investors tend to buy gold when stock markets are performing poorly. The pandemic hit the brakes on the economy, and gold benefited. During uncertain times, gold becomes the go-to commodity, as it functions as a store of value. With trillions of dollars in stimulus money finding its way into the markets and households, there is no threat of a recession anytime soon. Gold prices such as GLD are off their highs, and trading at weaker levels.
When the Fed decides to raise interest rates once again, possibly to curb inflation, gold will again get hit. Since gold is not an interest-bearing commodity, it doesn’t benefit investors the same way that interest earning bonds do. As the 10-year yields on bonds continues to increase, capital will exit gold stocks, ETFs, and holdings and move to the bond markets, and interest-bearing accounts. That the gold price forecast is bearish is par for the course under current conditions.
It is against this backdrop of change and uncertainty that trillions of dollars in stimulus will weave its way into the fabric of the American economy through households and businesses. How that plays out in the stock markets remains to be seen, but for now all signs are positive.
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