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Is a trade war in our future?

"He'll sit here, and he'll say, ‘Do this! Do That!' and nothing will happen..."
-Harry Truman on Dwight Eisenhower

A lot has happened since I penned the last Cerebral Override. No surprises, but big things. The Fed announced that they would begin Quantitative Easing, Round 2 (QE2). The Republicans gained control of the U.S. House of Representatives. Do I think anything will change? In a word, no.

People, institutions or nations don't change in an economic sense; they act in their own self-interest. The Federal Reserve lowering interest rates with their QE2 plan will not increase borrowing if people and businesses feel uncertainty and want to de-lever. The uncertainty felt by individuals and businesses is a headwind to taking on risk and assuming more debt.

The elections set up the gridlock scenario - Republicans control the House with a Democratic Senate and President. In my opinion, gridlock is a counter balance to QE2. The President will say "do this, do that", and John Boehner will say "do this, do that"... And nothing will happen.

So what can be done... exports. If domestic demand is stagnant, let's just sell to the foreigners. Europe is stagnant and doesn't know if the Mediterranean countries will pay their bills. There aren't enough Canadians or Aussies. Looks like we'll sell to the Asians. There are plenty of them and they have good credit to boot. Sounds like a great idea except for one very big point. All the "big boy" countries have the same idea, "Let's export our way to prosperity".

Until recently, the U.S. was the world's repository of manufactured stuff. The world would lend us money which we used to buy their stuff.

Then... Our domestic economy faltered and our unemployment went up... The light bulb went on in Washington... Let's increase our exports... and let's get our competitors to sell less of what they make and buy more of what we make. Give me a break! We can tell the Chinese, Germans, Japanese and Koreans to "do this, do that"... And nothing will happen.

These countries are not our friends, they are our competitors. If we want the Chinese to raise the value of their currency, the result should be they will sell less to us and us more to them. Wishing doesn't make it so. Being nice doesn't make it so. We will have to either intimidate the Chinese or in some way force them to raise their currency. If they refuse, this could result in a trade war. Not good.

I for one don't believe a trade war will occur, but the likelihood is greater now than last month. The bottom line is, just as individuals and businesses will do what is best for each individually, so will countries. Just asking won't make it happen. My advice to Mr. Bernanke and President Obama is, to quote President T.R., "Walk softly and carry a big stick".
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Arthur Polner

Arthur T. Polner, Certified Investment Manager Analyst (CIMA�), is a Senior Vice President, Senior Portfolio Manager and Financial Advisor with Morgan Stanley Smith Barney. He and his team believe in an ongoing relationship with families and individuals in order to help manage their wealth for their benefit. Arthur provides guidance that his clients need in discerning the trustworthiness of financial information and its relevance to them. Arthur can be reached at (303) 545-1817 or arthur.t.polner@morganstanleysmithbarney.com. For more information, visit http://fa.smithbarney.com/polner.



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