Trade End Game Scenarios: Boycott Treasuries vs Yuan Devaluation

Since there is no longer any reasonable debate about a trade war having started, let's investigate how it ends.

End Game Analysis

Treasury Boycott Thesis

I am surprised that Rosenberg brings this up because in my mind, this hash has been settled long ago.

What exactly would China, Japan, and Germany do with their reserves and ongoing trade surplus? Mathematically they have to do something.

Historically, that something has been to buy treasuries. But I suppose China could buy could be gold or US equities. The latter would be smack in the middle of an obvious bubble.

And if China were to dump US treasuries, the alleged nuclear option, it would serve to strengthen the Yuan. Recall that China sold US treasuries to support the Yuan and stop capital flight. In a trade war, China would not want an appreciating currency!

I think Rosenberg proposes nonsense, but given the nonsensical actions of Trump, I cannot rule out nonsensical or illogical responses.

This leads us to the most logical real threat.

Yuan Devaluation Thesis

China cannot retaliate with enough tariffs on its own to combat tariffs imposed by the US. However, the yuan does not float. China could devalue the yuan enough to counteract the value of US tariffs.

Of course, Trump could ban Chinese imports in response, but prices at Walmart, Costco, Target, everywhere, would skyrocket.

This scenario is nearly the opposite of what Rosenberg suggests. It is also far more credible.

But hold on. It is not without risk. Recall that China sold US treasuries to stop capital flight. If China devalues, there is a strong likelihood that capital flight would intensify.

Sester Chimes In

Excuse me Brad, but it's now $450 billion proposed.

Lance Roberts Chimes In

Back to Rosenberg

This Tweet makes far more sense.

Relax, Nothing Worse Will Happen

This whole thing could blow over. Trump and China may come to an agreement that brings us back from the brink.


  • Door 1: Treasury boycott with untested results likely to be hugely negative for everyone
  • Door 2: Devaluation with known immediate consequences that are certain to be bad for everybody. The long-term prognosis depends on further retaliations.
  • Door 3. Cooler heads back off the crisis a bit.
  • Door 4. Every country abolishes all tariff

Realistically, door 4 is closed. Curiously, it's the best option no matter what any other country does.

Winning by Losing

  1. Trump Ups the Ante: Trump Now Threatens Tariffs on All Goods from China: $450 Billion
  2. A Fed study shows "Tariffs Kill High-Paying American Manufacturing Jobs and Businesses".
  3. Auto job losses alone are likely to hit 45,000 as noted in Pandora's Box: Another Look at Steel Tariffs.
  4. On June 8, I noted Three US Tire-Chord Makers Threaten to Close Doors Due to Trump Tariffs.

Trump believes China will lose more. This we call "winning".

Mike "Mish" Shedlock

No. 1-25

Mish. Swapping treasuries for gold wouldn't necessarily strengthen the yuan. It could just strengthen gold.


FelixMish, Stuki -- you both make good points. It is a complicated world, and many factors come into play. Despite economists with their equations, it is pretty clear that we don't understand much of what drives the real (as opposed to financial) economy. Think about the situation at the end of WWII, when all the US war production facilities were being shut down and millions of soldiers were being demobilized (aka laid off). Every economist knew there would be a recession (historically typical of the end of wars); instead, there was a boom. Talk about getting it wrong!

Trying to understand how reasonable people can come to different conclusions -- my guess is that a lot of the difference depends on whether people take a short-term or long-term perspective. Another element is that some people start from the bastardized Keynesian view that Consumption is all-important (which I think does a disservice to Keynes); others start from the Say's Law view that there has to be Production before anyone can consume anything, or trade with others for part of their production.


Comparative advantage is neither all the "theory" there is, nor ever presented as the one true explanation for everything. It isn't 42. Hence, merely observing that A has reported faster economic growth than B over a period, despite B imposing somewhat fewer restrictions on trade than A, doesn't somehow invalidate Ricardo, any more than birds invalidate gravity.

When you start with nothing, and have a blueprint readily available to you for how plenty of other countries went from nothing to quite a lot more, undertaking that development yourself doesn't take the world of resources. But once you are already at the cutting edge of anything, growth from there is harder.

And, this is important: Not because some hack with rudimentary skills at feeding numbers into a statistics program and a desire to get his name on a published article, managed to fit some data to a curve and "prove" so. But simply because when a rational being wanting to improve his condition is presented with a world of varying opportunities for how to spend his limited time and resources, he will first pick the opportunity that yields the greatest payback (read growth) for his efforts. Then, once this is done, he is stuck picking the second best. Then the third best, and so forth... Which, inevitably, not subject too any empirical pretense of verification nor refutation, leads to initial growth being faster,. Then getting slower as the easy pickings have already been done.

When some starving Chinese guy starts out low enough, simply crawling over and picking up food scraps the Average Silicon Valley engineer throws away as trash, results in faster measured growth for the Chinese than for even the most productive Silicon Valley startup in history. "Comparative advantages" at trash pickup vs software writing be damned.

Hence, if you want to do an apples to apples comparison of which countries' trading regimes look to have the fastest growth, you have to start with countries that start at the same place development wise. A five year old kid of two dwarfs growing faster than the fully grown son of two basket ball players, doesn't really tell you much about how parental height affect chilenerens' growth, after all.....

And, it so happens, WRT China, an apples to apples comparison is available: Taiwan. And, albeit slightly less direct, Hong Kong. All started at the same spot. All grew at different rates since that time. Two have had comparatively free trading regimes, while the third has been more closed. In which ones have citizens enjoyed the greatest growth of living standards since back when they were separated? North and South Korea is another example. As is Singapore vs Malaysia post split. And East and West Germany. As were, earlier, the cities of Italy that traded, vs those who did not. As well as Holland and England vs European peers with less of a trading fleet.


K, I like your quick summary of Ricardo.

Couple nits:

That the real world is more complex than the theory makes the theory work better. More opportunity for efficiencies.

You're bringing up something often brought up: The idea someone is going to capture a market and then crank up the prices. Same argument as in the '30's against the new grocery store chains. It's hard to find examples of that really happening but easy to find examples of the prices staying low and going lower. Market dominance seems to lead not to high, captive prices, but to the "monopoly disease". That's when the monopoly starts doing things more for themselves and less for their customers. Very hard to find a long term monopoly that escapes the disease. "We don't care. We're the phone company" used to be a joke inside the Bell system, for instance. Or pick pretty much any US Gov operation's behavior despite valiant efforts made by good individual people inside the operation.

I agree about changes since 1970. Lots of candidates for culprit. But one not often mentioned is we're counting the wrong things. Again, quality of stuff has changed remarkably but that change isn't measured well or publicly.


That China has done better than the US in the last 20 years is to be expected and desired. They started from the bottom like many before them. 20 years from now, the same thing will be able to be said of Viet Nam, several countries in Africa and, well, pick any country now at the bottom of the barrel.

In practice, any country currently on the low end of the industrial revolution curve has no excuse but ineptitude not to change-for-the-better more than the US (using the usual 19th century metrics). As it turns out, the trend is exactly what the learning curve says it would be: Each country changes for the better quicker than those before it. Ho, hum.

Overall this is very good for those on the top end of the curve. Sure, it's not universally good for every person in the top end. Especially if they rate themselves by comparing how much they changed against those who changed a lot. Or if the industrial revolution process eliminated their job. But, what else is new?

Consider this, if you are an American: Do you want Mexico to stay poor, or do you want them to be at Canada's level?