The series of economic and financial developments on August 22 was a strange, bewildering, exhausting microcosm of why the global economy is at risk of a meltdown. It showed the odd interplay at work between the Chinese government’s actions in the escalating trade war with the US, the sober-minded global central bankers who have limited power to deploy, and a US president whose public pronouncements often appear driven by grievance more than strategy.
President Trump arrived in France on August 23 for a meeting of the Group of 7 industrialised nations, having set the stage for fireworks and confusion. In one dizzying day, he had seemed to be searching for whom or what to blame for economic troubles, first using Twitter to call his own Federal Reserve chief an enemy of the US and then to urge American companies to stop doing business with China.
And that was just while the markets were open. Late on August 22, he said he would apply tariffs to all Chinese imports and increase those already in place.
Even chaos is inter-linked
The global economy may yet turn out fine; most economic data in the US has been solid. But if a recession and breakdown in international commerce happens in the coming year, histories of the episode may well spend a chapter on the August 22 collision of official actions in the government offices of Beijing, in the Grand Tetons in Wyoming, and in the Oval Office.
It became clear in real-time how the risks of an escalating trade war and the fraying of long-standing financial and political ties could quickly outpace the ability of central banks — the normal first responders to economic distress — to do anything about it. Trump’s shoot-first approach adds to the risks at a delicate moment, with major economies in Asia and Europe already teetering and policymakers’ capacity to contain the damage in question.
“The escalation, the unpredictability, the erratic nature of policy developments is central to what is going on, and these aren’t things you can plug into an economic model,” said Julia Coronado, president of MacroPolicy Perspectives, an economic consultancy. “Something is breaking. It’s very dangerous.”
Compressed into one news cycle
A single news cycle makes vivid how these different areas of policy can influence one another in unpredictable ways. As August 22 dawned in the US, China announced it would impose tariffs on $75 billion in American goods, going into effect starting September 1. New US tariffs on Chinese goods go into effect the same day.
While not great news for those who hope that a trade peace can be found between the world’s two largest economies, it was proportional — more tit-for-tat response than escalation. Financial markets shrugged.
At 10am Eastern, the Federal Reserve chair, Jerome Powell, delivered a speech in Jackson, Wyoming, where the world’s leading central bankers gather every August for an economic symposium. The financial world had been on edge — eager for any sign of what the Fed would do next.
Financial markets are increasingly pointing to a slumping US economy. But by most measures, growth continues, and the job market is quite healthy. Will the Fed act preemptively in response to those market swings and some evidence that business confidence is slipping?
Powell delivered a nuanced speech signalling the Fed was committed to a “risk management” approach, of adjusting policy to try to prevent bad things from happening. His words kept the Fed’s options open. But he made clear that a breakdown of global trade relations was not the kind of thing that the Fed’s interest rate policies were well suited to addressing.
“While monetary policy is a powerful tool,” Powell said, “it cannot provide a settled rule book for international trade.” The central bank can only adjust policy to try to respond to the ways trade policy changes affect the overall outlook.
The implicit message: If erratic trade policy undermines the economy, the Fed’s tools are likely to have only limited ability to overcome the damage. Interest rate cuts in that situation would be like giving pain relievers to someone with a broken bone — better to have than not, but unable to solve the underlying problem. The speech evidently did not sit well with the White House.
Trump, who has called on the Fed to cut interest rates by a full percentage point, issued a series of tweets at 10:57am that excoriated the “weak Fed” and asked “My only question is, who is our bigger enemy, Jay Powell or Chairman Xi?”
He followed that with the ones urging American companies to disinvest from China. The stock market, which had been stable after the Powell speech, plunged.
At 5pm, after financial markets closed, the president tweeted that he was escalating the trade war further, applying a 15 per cent tariff to $300 billion worth of Chinese imports starting October 1 and raising the rate on $250 billion of imports to 30 per cent from 25.
The disconnect between sober, cautious central bankers and erratic policy that puts the economy at risk isn’t unique to the US. Also speaking at the Jackson Hole symposium was the Bank of England governor, Mark Carney, who described a limited ability to use monetary policy to offset the damage from Britain’s potentially messy exit from the European Union this fall.
“In the end, monetary policy can only help smooth the adjustment to the major real shock that an abrupt “no-deal” Brexit would entail,” Carney said, and that ability would be constrained by the need to keep inflation under control.
Beyond the trade wars and Brexit, Powell’s speech cited a potential Chinese crackdown on Hong Kong protesters and government instability in Italy as factors in a turbulent summer for financial markets. This is the global economy in 2019.
A volatile political environment in many of the world’s major economies keeps layering new risks, both for financial markets and for the businesses and consumers who are making economic decisions every day.
But this isn’t like the 2007 and 2008 crisis, when central banks came together to address a potential collapse of the global financial system. That episode, scary and catastrophic as it was, was well suited to the tools that central banks have.
This situation is not. It can be comforting to think that there are a bunch of wise men and women operating behind the scenes keeping the world economy from going into a ditch.
The lesson of the last several months is that forces are unfolding that they can’t do much to contain. And if August is a guide, their caution and sobriety may even make things worse.