Will a Trade War Spur Deflation?

As you probably know, the prospects of a trade war between the U.S. and China, as well as with other nations, has been in the news since President Trump took office.

Here's a Bloomberg headline from April 22:

Central Banks Fret Trade War More Deflationary Than Inflationary

The article goes on to say:

Global central bankers sounded the alert that a trade war would leave them worrying more about the economic fallout than any boost tariffs would give to inflation.

As President Donald Trump threatens to impose levies on imported steel and aluminum and duties on as much as $150 billion of Chinese goods, uncertainty over global commerce is casting a pall over an otherwise strong outlook.

The tensions were a key theme at the IMF meetings in Washington, with policy makers on [April 21] warning of challenges in a communique. Colombia's central bank president said a trade war would be "catastrophic," his Paraguayan peer said it would be "bad for everyone," while Japan's chief described protectionism as "very undesirable." —

"You have the direct effect on prices, of imposing tariffs, but you have the recessionary forces that will always generate significant downward bias in prices," Alejandro Werner, head of the IMF's Western Hemisphere department, said in an interview. —

A spiral of protectionism "would have a very big impact on growth," Colombia's central bank president Juan Jose Echavarria said in an interview in Washington. "It would be catastrophic for global growth. What we learned from the 1930s is that when all the countries start raising tariffs, economies stagnate."

But, trade wars do not "cause" deflation. Indeed, both trade wars and deflation are effects of the same primary cause.

Here's what the April Elliott Wave Financial Forecast says:

The recent "stiff trade measures" are not the cause of the trend but a forecastable manifestation of society's changing mood. This causality is demonstrated by what did not happen last summer, when the U.S. imposed duties on imported Chinese aluminum. Few paid heed to the tariffs, as the aggregate mental state of investors remained ebullient. — The trade conflict is now being discussed and even feared because negative mood has become dominant. It fits the Elliott wave model perfectly. In fact, conditions are a little ahead of the 1929-1932 experience, when tough trade talk hardened into the passage of the Smoot-Hawley Tariff Act in June 1930.

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