Can Money Be Used as a Weapon?

On Monday, August 5th, we learned about China’s retaliation to tweets and threats made the prior August 1st by President Trump.  Trump tweeted:

“…on September 1st, putting a small additional Tariff of 10% on the remaining 300 Billion Dollars of goods and products coming from China into our Country. This does not include the 250 Billion Dollars already Tariffed at 25%..” . 

China’s Central Bank (think of it as their version of a Federal Reserve) responded by not buying their own currency as it fell.  Clearly, this was intentional, and later confirmed by the Chinese Central Bank as an intended action to help support their economic/trade fight with the United States.  Trump has since called China a currency manipulator.  He is right, they are.

Both the International Monetary Fund (IMF) and the World Trade Organization (WTO) prohibit currency manipulation.  However, China remains as a charter member of each organization and as a reserve currency for many of the world’s central banks.  This needs to stop, and I hope each of these organizations are motivated to penalize China.

In the meantime, yes, we have weaponized money.  In fact, I believe most countries use their currency and monetary policy as a weapon, the United States included.  For example, On July 31st, the Federal Reserve decided to cut the overnight lending rate by .25%.  The stock market immediately responded with a rally. In anticipation Chairman Jerome Powell would signal additional cuts throughout the year.  However, Powell’s comments were stern, and without any signals an additional rate cut would be made anytime soon.  Those comments immediately reversed the direction of the stock market and losses were made.

The following day, the US Senate approved a bipartisan budget for the next two years, which increases spending by $320 billion in 2020 and more in 2021.  With spending well over $5 trillion, American’s will foot-the-bill of nearly $1.4 trillion of new debt for each of the next two years.  Functionally, this authorizes the Treasury department to dilute the US dollar, thus lowering the value against other currencies by issuing bonds to finance the spending.  We should all be asking questions about why we are doing this and what this means for the long term viability of the United States.

My take on this is not very rosy.  I believe Chairman Powell knew the budget was going to be passed the day after he made the rate decision, so he tossed Congress a bone to support the debt expansion. In exchange for this expansion, there would not be an impasse which could stall payments on the $22 trillion already owned. Chairman Powell gave Congress a stern message; he will not offer further rate cuts during an economic expansion while the unemployment rate is low and consumer prices are stable.  In essence, he accommodated for Congress’ and Trump’s request to dilute our currency in exchange for Congress to make a bipartisan agreement on a budget.

While China is clearly, and openly manipulating their currency, our Congress  and President are manipulating our currency in a stealthier way.  So why does this matter?  It matters because we, as American’s, keep allowing it to happen.  By my simple calculations, we would need to raise taxes on the middle class and up by 100% to be able to cover these new obligations.  In essence, most of us will eventually be taking a substantial pay cut unless we want to support the dismantling of our great nation.

The solution to this mess is seemingly simple; we need to stop doing business with China.  Weaponizing our money, as China has clearly done, is a myopic response to a giant problem.  The United States benefits from being the world’s primary reserve currency to stabilize all other world currencies.  If we keep acting like fools, we will become the world’s fool.  Forget the tariff’s, we should simply penalize companies who do business in China.  We will not make China change. Their economic and social system is built on a foundation of collectivism.  The United States is built on individualism.  Fundamentally, there is no common ground here, so we need to stop.  We need to get away from China, and we need to not do business with them.  The rest of the world should do the same.

by Brian Wiley

Tree City Advisors LLC / Host of the The Real Money Pros

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