Trump’s Plan to Make America Great Again Will Fail Because of Dollar

In the early 16th century the Spaniards captured large parts of what is now known as South America. The area had large deposits of silver and gold. As I write in my book Easy Money: Evolution of Money from Robinson Crusoe to the First World War: “The precious metals were melted and made into ingots so that they could be easily transported to Spain. Between 1500 and 1540, nearly 1,500 kg of gold came to Spain every year on an average from the New World.” i

Gold wasn’t the only precious metal coming in. A lot of silver came in as well. As I write in Easy Money: “One of the biggest silver mines was found in Potosi, which is now in Bolivia, in 1545. Potosi is one of the highest cities in the world and is situated at a height of 4,090 m. Given the height it sits on, it took Spaniards sometime to get there. Here a mountain of silver of six miles around its base was discovered.ii The mountain or the rich hill, as it came to be called, generated nearly 45,000 tonnes of silver between 1556 and 1783. iii

Most of this new found silver was shipped to Seville in Spain where the mint was. In the best years some 300 tonnes of silver came in from silver mines in various parts of South America.iv

Once the gold and silver started to land on their shores, the Spaniards became proficient at spending it rather than engaging themselves in productive activities. Easy money had spoiled them and they produced very little of their own. Once this happened everything had to be imported. Weapons came from the Dutch, woolens from the British, glassware from the Italians, and so on.v It also led to Spaniards buying goods like bangles, cheap glassware, and playing cards from foreigners for the sheer pleasure of buying them.

As Thomas Sowell writes in Wealth, Poverty and Politics: “The vast wealth pouring into Spain [in the form of gold and silver from South America]… allowed the Spanish elite to live in luxury and leisure, enjoying the products of other countries, purchased with the windfall gain of gold and silver. At one point, Spain’s imports were nearly twice as large as its exports, with the difference being covered by payments in gold and silver… It was a source of pride, however, that “all the world” served Spain, while Spain “serves nobody”.”

Dear Reader, you must be wondering, why have I chosen to point out all this history so many centuries later. The point I am trying to make is that there is an equivalent to what happened in Spain in the 16th century in this day and age. It is the United States of America.

Like Spain, the total amount of good and services that the United States imports is much more than what it exports. The ratio of the imports of the United States to its exports was around 1.23 in 2016. The difference between the imports and the exports stood at $503 billion. In fact, if we look at the imports and the exports of goods, the ratio comes to around 1.51.

The point being that like Spain, the United States imports much more than it exports. Spain had an unlimited access to money in the form of gold and silver mines of South America. This gold and silver over a period of time was mined and shipped to Spain and in turn used by Spaniards to buy stuff from other parts of the world.

What is the equivalent in case of the United States of America? The dollar. The US dollar is the international reserve currency. It is also the international trading currency. As George Gilder writes in The Scandal of Money-Why Wall Street Recovers But the Economy Never Does: “Today it [i.e. the dollar] handles more than 60 percent of world trade, denominates more than half the market capitalization of world stocks, and partakes in 87 percent of global currency trades.”

Spain had almost unlimited access to the gold and silver from South America. Along similar lines, the United States has unlimited access to the dollar. Other countries need to earn these dollars by exporting goods and services. The United States needs to simply print the dollars (or digitally create them these days) and hand it over for whatever it needs to pay for.

While the unlimited access to gold and silver was Spain’s easy money, the dollar is United States’ easy money. And given this, it isn’t surprising that like Spain, the United States imports much more than it exports. This basically means that the country consumes much more than it produces. Also, while the Spaniards had to face the risk of gold and silver ultimately running out, the United States does not face a similar risk because dollar is a fiat currency unlike gold, and can be created in unlimited amounts. As long as dollar remains the global reserve currency and trading currency, the United States can keep creating it out of thin air. Of course, the role of the United States in global politics will be to ensure that the dollar continues to remain the reserve and trading currency. Having the biggest defence budget and military in the world, will help.

The supply of silver in Spain peaked around 1600 and started to fall after that. But the spending habits of people did not change immediately, leading to Spain getting into debt to the foreigners. The government defaulted on its loans in 1557, 1575, 1607, 1627, and 1647.vi

One impact of access to the easy money in the form of gold and silver, was a huge drop in human capital in Spain. As Sowell writes: “What this meant economically was that other countries developed the human capital that produced what Spain consumed, without Spain’s having to develop its human capital… Even the maritime trade that brought products from other parts of Europe to Spain was largely in the hands of foreigners and European businessmen flocked to Spain to carry out economic functions there. The historical social consequence was that the Spanish culture’s disdain for commerce, industry and skilled labour would be a lasting economic handicap bequeathed to its descendants, not only in Spain itself but also in Latin America.”

So, what is human capital? Economist Gary Becker writes: “Economists regard expenditures on education, training, medical care, and so on as investments in human capital. They are called human capital because people cannot be separated from their knowledge, skills, health, or values in the way they can be separated from their financial and physical assets.”

What is happening on this front, in case of the United States? As Michael S Christian writes in a research paper titled Net Investment and Stocks of Human Capital in the United States, 1975-2013, published in January 2016: “The stock of human capital rose at an annual rate of 1.0 percent between 1977 and 2013, with population growth as the primary driver of human capital growth. Per capita human capital remained much the same over this period.”

So, over a period of more than 35 years, the per capita American human capital has remained the same. And this is clearly not a good sign.

Further, unlike Spain which ultimately ran out of gold and silver, given that there was only so much of it going around in South America, the United States does not face any such risks given that dollar is a fiat currency and can be printed or simply created digitally.

But like Spain, the access to this easy money will ensure that in the years to come, the United States will continue to import more than it exports. This will go against the new President Donald Trump’s plan to make America great again. His basic plan envisages increasing American exports and bringing down its imports. But as long as America has access to easy money in the form of the dollar, the chances of that happening are pretty low because it will always be easier to import stuff by paying in dollars that can be created from thin air, than manufacture it locally.

The column was originally published on Equitymaster on March 14, 2017

America First?

donald_trump_by_gage_skidmore_2

Moments after taking over as the 45th President of the United States on January 20th, Donald Trump said: “From this day forward, a new vision will govern our land. From this day forward, it’s going to be only America first, America first.”

The irony is that this insular approach comes from the President of a country which was built primarily by outsiders. Countries and civilizations which do well, never do so in isolation is a basic point that Trump seems to have forgotten.

Take the case of the British and how they managed to cross the Atlantic Ocean in order to reach North America. As Thomas Sowell writes in Wealth, Poverty and Politics: “When the British first confronted the Iroquois [a group of tribes] on the east coast of North America, the mental and material resources at the disposal of these two races were by no means confined to what they had developed themselves.”

So, what did British have access to, which they hadn’t produced themselves? As Sowell writes: “The British had been able to navigate across the Atlantic, in the first place, by using the compass invented in China, doing mathematical calculations with a numbering system from India, steering with rudders invented in China, writing on paper invented in China, using letters created by the Romans, and ultimately prevailing in combat using gunpowder, also invented in China. The Iroquois had no comparably wide cultural universe.”

The point being that Britain would not have managed to capture large parts of the world, including North America from the native tribes, without having access to all the foreign technology and the ideas that it had. And this was possible because Great Britain had always been a very open economy.

This ensured that many things that originated in Asia over the centuries became a part of the British and the European cultures. As Sowell points out, among the many things that originated in Asia and became a part of the European culture included, papers, bells, printing, gunpowder, the compass, rudders, spaghetti, chess, playing cards and so called Arabic numerals, which actually originated in India.

Without many of these things, the British wouldn’t have been able to crossover to North America. And if they hadn’t been able to do that, there would have been no United States of America. Hence, technologies and ideas from outside contributed a lot in Great Britain ruling large parts of the world, including North America. The founding fathers of the United States and the leaders that followed did not forget this, and their openness to ideas and individuals from outside, continued.

Donald Trump now wants to undo much of this. The question is can the United States afford this? As far as it comes to making things, the United States can’t compete with much of the world. This is clearly visible in the fact that it imports significantly more than what it exports. And this has led to a severely disgruntled workforce.

Nevertheless, one area where the United States clearly rules, is in the world of ideas and technology. As Ruchir Sharma writes in Breakout Nations—In Pursuit of the Next Economic Miracles: “US strength in technology looks overwhelming in comparison with even the fastest-rising emerging markets, and in comparison with Japan and Taiwan, nations that also spend heavily on tech research and development but generate a lot less growth out of it.”

Also, unlike Japan’s insular technology culture, the United States has a very open culture. As Sharma writes: “Silicon Valley is so rich in immigrant Indian and Chinese talent that it’s little surprise Google has travelled so well. The broader ecosystem that nurtures tech-start-ups, including the venture capital industry, the top-notch university system and the strong legal protection for intellectual property , is also arguably stronger in the United States than anywhere else in the world.”

America’s lead in technology is its best chance to pull the country out of the rut that it currently is. And the tech industry cannot continue to thrive, if only America and Americans come first. The sooner Donald Trump understands this, the better it is going for US long term growth.

The column originally appeared in the Bangalore Mirror on March 1, 2017

If Trump Unravels the Global Ponzi Scheme, What Will China Do?

donald_trump_by_gage_skidmore_2

On January 31, 2017, I wrote a column on Donald Trump and the Global Ponzi Scheme. Today’s piece is a continuation of that piece. Hence, Dear Reader, it’s best if you read the earlier piece, if you haven’t already, before you start reading this one.

One of the things that the new American President Donald Trump is trying to do is to cut down on the total amount of trade deficit that the United States runs with China. The trade balance is essentially the difference between the imports and the exports of any country. If the trade balance of a country is in negative territory, it is said to run a trade deficit, which the United States does.

Specifically, the United States runs a trade deficit with China i.e., it’s imports from China are significantly greater than its exports to China. Also, over the last three decades the trade deficit that United States has run with China has exploded. This can be clearly seen from Figure 1.

Figure 1: 

As can be seen from Figure 1, the US trade deficit with China has jumped from almost zero in 1985 to around $367.2 billion in 2015. The curve takes a dip in 2016 primarily because only the data between January and November 2016 is currently available. Once the December 2016 trade deficit data comes in, the trade deficit curve will no longer take a dip by as much as it currently does.

President Trump wants to bring down this trade deficit with China and he has been quite vocal about it. The trouble is that this is easier said than done. This was the topic of discussion in my column published on January 31, 2017. For the sake of continuity, I will repeat some stuff from that column.

On a recent visit to Baltimore I had the pleasure of listening to the famous economist Richard Duncan. Duncan’s book The Dollar Crisis has had a tremendous impact on the way I looked at the international financial crisis, in my Easy Money books. As Duncan put it: “President-elect Trump [Duncan was talking before Trump took over as President] believes the US trade deficit has been responsible for the loss of manufacturing jobs in the United States and the downward pressure on US wages that has occurred over the last several decades.”

Now take a look at Figure 2.

Figure 2: 

What does Figure 2 tell us? It tells us that the American import curve and the export curve are very closely matched. It tells us that the dollars earned by the countries which export goods and services to the United States (essentially imports for the United States), are used to buy goods and services being exported by the United States.

As Duncan puts it: “Over the past 35 years, that deficit has become THE driver of global economic growth. In fact, the entire global economy has been constructed around unbalanced trade.”

So, what will happen if Trump makes it difficult for the United States to import stuff from China and other parts of the world, as he has promised to do? If the American imports come down, so will its exports primarily because other countries won’t have the dollars required to import stuff from the United States. Also, with both imports as well as exports shrinking, the American trade deficit may not shrink.

There is a flip side to this as well and it is the Chinese exports and imports. Take a look at Figure 3.

Figure 3: 

Figure 3 like Figure 2 before it makes for an interesting reading. The Chinese export as well as import curves are closely matched (though not as much as the American curves). When China exports less it imports less as well. One reason for that lies in the fact that it has fewer dollars to pay for the imports. One impact of this is that the import of commodities from all over the world, falls. This will have a huge impact on commodity exporting countries like Australia and Brazil, to name a few.

Over and above this, it will have an impact on way things are inside China as well. As Duncan puts it: “If China’s trade surplus were eliminated, the negative impact on China’s economy would be devastating. In all likelihood, China would experience a severe depression, that could threaten the rule of the Communist Party. China might respond militarily – just as Japan did at Pearl Harbor after the US imposed an oil embargo on Japan in 1941. No one should underestimate the damage that could result from an economic crisis in China.”

Hence, the impact of contracting the US trade deficit is going to be far reaching. In fact, things are not going to work out well for the US either. In fact, the dollars that China earned over the years have found their way back to the United States and have been invested in the US government bonds (US treasuries) and other financial securities.

This flood of money coming from outside (and not just from China) has helped keep interest rates in US low. As of November 2016, China owns $1.05 trillion in US government bonds. Just this number should tell us very clearly that Trump shouldn’t fiddle around too much with the US-China trade relationship.

If the US goes back eliminating its trade deficit, by bringing down its imports, other countries may not have access to as many dollars as they had in the past. This would mean that the total dollars that come into the United States and get invested in American government bonds and other financial securities, will come own. This will mean that interest rates in the US will rise.

As Duncan puts it: “Higher interest rates would cause credit to contract and the US economy to go into recession. Higher interest rates would also cause a sharp fall in US asset prices. That, too, would also cause the economy to go into recession. Higher interest rates could cause a wave of credit defaults in the US and around the world, potentially leading to a new systemic financial sector crisis.”

The global trade structure has morphed itself into a Ponzi scheme and that won’t be so easy to unravel. As I write in my the third volume of the Easy Money trilogy: “The United States is the biggest economy in the world. It accounts for nearly one-fourth of the world’s GDP. By virtue of this, it is also the world’s biggest market, where China, Japan, and countries from South-East Asia could sell their goods and earn dollars in the process. It is also the world’s biggest consumer of oil and consumes nearly a fourth of the global oil production. This meant that oil-rich states like Saudi Arabia could sell oil to it and thus earn dollars in the process.

So, the United States imported, and countries like China, Japan, Saudi Arabia, and other countries in Asia earned dollars in the process. These dollars were then invested in treasury bonds… as well as the private sector. With so much money chasing these American financial securities, the issuers of these securities could in turn offer low rates of interest on them.”

If the United States chooses to disturb this relationship, then it will get hurt in the process as well. His hatred for China notwithstanding, Trump should think about all the points highlighted here, before proceeding on this front.

(The column originally appeared on Equitymaster on February 7, 2017)

Will Donald Trump Unravel the Global Ponzi Scheme?

donald_trump_by_gage_skidmore_2
In the third volume of the Easy Money trilogy which was published in 2015, I discuss how global trade has degenerated into a Ponzi scheme.

As I write in the book: “The United States is the biggest economy in the world. It accounts for nearly one-fourth of the world’s GDP. By virtue of this, it is also the world’s biggest market, where China, Japan, and countries from South-East Asia could sell their goods and earn dollars in the process. It is also the world’s biggest consumer of oil and consumes nearly a fourth of the global oil production. This meant that oil-rich states like Saudi Arabia could sell oil to it and thus earn dollars in the process.

So, the United States imported, and countries like China, Japan, Saudi Arabia, and other countries in Asia earned dollars in the process. These dollars were then invested in treasury bonds… as well as the private sector. With so much money chasing these American financial securities, the issuers of these securities could in turn offer low rates of interest on them.

This meant that the prevailing interest rate scenario in the United States remained low despite a high budget deficit. This allowed citizens to borrow money at low interest rates and buy homes. It also allowed them to encash the equity in their homes and spend it on consuming other goods. So, the Americans could buy cars from Japan, apparel and electronics from China and so on.

And so the cycle worked. The United States shopped, China earned, China invested back in the United States, the United States borrowed, the United States spent, China earned again and China lent money again. The same was true with Japan, though to a lesser extent.

The way this entire arrangement evolved had the structure of a Ponzi scheme. A Ponzi scheme is essentially a financial fraud wherein the money that is due to older investors is repaid by raising fresh money from newer investors. The scheme keeps running while the money brought in by the new investors is greater than the money that needs to be repaid to the older investors. The moment this reverses, the scheme collapses.

The entire US-China-Japan arrangement was like that. The Chinese invested money in various kinds of American financial securities, which helped keep interest rates low in the United States. This helped Americans to consume more. The money found its way back into China (like a return on a Ponzi scheme) and was invested again in various kinds of American financial securities, again helping keep interest rates low and the consumption going. Like in a Ponzi scheme, the dollars earned by China and other countries kept coming back to the United States. This arrangement… kept interest rates low.”

What the American President Donald Trump proposes to do threatens this global Ponzi scheme. Before we come to the specifics of this, let’s take a look at Figure 1. It shows the trade deficit that the United States has run with China, over the last three decades.

The trade balance is essentially the difference between the imports and the exports of any country. If the trade balance of a country is in negative territory, it is said to run a trade deficit, which the United States does. Specifically, the United States runs a trade deficit with China i.e., it’s imports from China are significantly greater than its exports to China. Also, over the last three decades the trade deficit that United States has run with China has exploded.

Figure 1: 

Take a look at Figure 2. It shows the trade deficit that the United States has run with the world at large, over the last three decades.

Figure 2:The Figure 2 shows that the trade deficit that the United States runs with the world at large has fallen in the aftermath of the financial crisis. This essentially means that the difference between what the United States is importing from the world and what it is exporting to the world, has come down.

Now take a look at Figure 3. It basically combines Figure 1 And Figure 2. What does it tell us?

Figure 3:It tells us that the trade deficit that the United States runs with China, makes up for a greater proportion of the overall trade deficit, than it did before. In 2015, the trade deficit with China made up for 73.4 per cent of the overall trade deficit. In comparison, in 2000, the figure was just at 22.5 per cent.

Given that the United States runs a trade deficit with China as well as the world, countries earn dollars from it. These dollars then find their way back into the United States and get invested in financial securities and in the process help keep interest rates low in the United States.

The new American President Donald Trump, who took over earlier this month, wants to bring down this trade deficit that the United States runs with China in particular and the world in general. As I had discussed in the column dated January 23, 2017, this is one of the plans that Trump has, to make the United States of America great again.

As Peter Navarro, an economist known to be close to Trump, and who served as a policy advisor to the Trump campaign, puts it: “Trump proposes eliminating America’s $500 billion trade deficit through a combination of increased exports and reduced imports.” The trade deficit of the United States in 2015 stood at $500.4 billion.

So how does Trump plan to bring down imports? As his website puts it: “[He plans to direct] the Secretary of Commerce to identify every violation of trade agreements a foreign country is currently using to harm our workers, and also direct all appropriate agencies to use every tool under American and international law to end these abuses.”

Trump also plans to: a) Instruct the Treasury Secretary to label China a currency manipulator. b) Instruct the U.S. Trade Representative to bring trade cases against China, both in this country and at the WTO. China’s unfair subsidy behaviour is prohibited by the terms of its entrance to the WTO. c) Use every lawful presidential power to remedy trade disputes if China does not stop its illegal activities, including its theft of American trade secrets – including the application of tariffs consistent with Section 201 and 301 of the Trade Act of 1974 and Section 232 of the Trade Expansion Act of 1962. (Source: https://www.donaldjtrump.com/policies/trade)

Trump plans to impose import duties (i.e., tariffs) in order to ensure that the cheap Chinese imports into the United States, no longer remain cheap. CNN reported in late December 2016: “President-elect Donald Trump’s transition team is discussing a proposal to impose tariffs as high as 10% on imports, according to multiple sources.”

The question is why does Trump want to do this? I will just come to that.

On a recent visit to Baltimore I had the pleasure of listening to the famous economist Richard Duncan. Duncan’s book The Dollar Crisis has had a tremendous impact on the way I looked at the international financial crisis, in my Easy Money books. As Duncan put it: “President-elect Trump [Duncan was talking before Trump took over as President] believes the US trade deficit has been responsible for the loss of manufacturing jobs in the United States and the downward pressure on US wages that has occurred over the last several decades.”

The question is what will be the repercussions if Trump and his associates do go about doing what they have proposed. My sense is it will lead to the unravelling of the global Ponzi scheme, which I talk about at the beginning of this piece. And in the process, nobody will be better off.

In fact, take a look at Figure 4, which maps America’s imports and exports since 1990.

Figure 4:One look at Figure 4 tells us that the import curve and the export curve closely map each other. What does that tell us? It tells us that the dollars earned by the countries which export goods and services to the United States (essentially imports for the United States), are used to buy goods and services being exported by the United States. As Duncan puts it: “Over the past 35 years, that deficit has become THE driver of global economic growth. In fact, the entire global economy has been constructed around unbalanced trade.” So, what will happen if Trump makes it difficult for the United States to import stuff from China and other parts of the world, as he has promised to do? If the American imports come down, so will its exports primarily because other countries won’t have the dollars required to import stuff from the United States. Also, with both imports as well as exports shrinking, the American trade deficit may not shrink.

Nevertheless, a fall in American imports would mean a fall in global demand and in the process the global economy will shrink. As Duncan puts it: “At this point, the attempt to eliminate the US trade deficit could very easily cause the global economy to collapse into a new Great Depression.” Things could go particularly bad for China. In 2015, the United States ran a trade deficit of $367.2 billion with China. This meant a trade deficit of around a billion dollars per day.

As Duncan puts it: “If the US eliminates its $1 billion a day trade deficit with China, China’s economy could collapse into a depression that would severely impact all of China’s trading partners, and potentially lead to social instability within China and to military conflict between China, its neighbors and the US.”

Further, eliminating imports from low-wage countries would mean that the consumer price inflation will rise in the United States. This will lead to higher interest rates.

We live in a world, where easy money available at low interest rates from the United States, has been invested in financial markets all over the world. And if interest rates start rising in the United States, it won’t be good news for financial markets all over the world.

The column originally appeared on www.equitymaster.com on January 31, 2017.

Why Trump’s Plan to Make America Great Again Will Not Take-off

donald trump

Donald Trump was sworn in as the 45th President of the United States on January 20, 2017. One Trump plan to make America great again is to reduce the American trade deficit.

The trade balance is essentially the difference between the imports and the exports of any country. If the trade balance of a country is in negative territory, it is said to run a trade deficit, which the United States does.

Take a look Figure 1. It plots the American exports and imports from 1960 onwards.

Figure 1:US import and Export Chart 

Up until the early 1980s, the American imports were more or less equal to American exports. But things changed after that and America started running a trade deficit. Take a look at Figure 2. This plots the American imports and exports from 1980 onwards.

Figure 2:US import and Export Chart 

In fact, take a look at Figure 3, which maps America’s imports and exports since 1990.

Figure 3:US import and Export Chart 

One look at Figure 3 tells us that the import curve and the export curve closely map each other. What does that tell us? It tells us that the dollars earned by the countries which export goods and services to the United States (essentially imports for the United States), are used to buy goods and services being exported by the United States.

Hence, there is a clear link between the total imports and the total exports of the United States. So where does that leave Trump’s plan? As Peter Navarro, an economist known to be close to Trump, and who served as a policy advisor to the Trump campaign, puts it: “Trump proposes eliminating America’s $500 billion trade deficit through a combination of increased exports and reduced imports.” The trade deficit of the United States in 2015 stood at $500.4 billion.

So how does Trump plan to bring down imports? As his website puts it: “[He plans to direct] the Secretary of Commerce to identify every violation of trade agreements a foreign country is currently using to harm our workers, and also direct all appropriate agencies to use every tool under American and international law to end these abuses.”

Trump also plans to: a) Instruct the Treasury Secretary to label China a currency manipulator. b) Instruct the U.S. Trade Representative to bring trade cases against China, both in this country and at the WTO. China’s unfair subsidy behaviour is prohibited by the terms of its entrance to the WTO. c) Use every lawful presidential power to remedy trade disputes if China does not stop its illegal activities, including its theft of American trade secrets – including the application of tariffs consistent with Section 201 and 301 of the Trade Act of 1974 and Section 232 of the Trade Expansion Act of 1962. (Source: https://www.donaldjtrump.com/policies/trade)

Trump plans to impose import duties (i.e., tariffs) in order to ensure that the cheap Chinese imports into the United States, no longer remain cheap. CNN reported in late December 2016: “President-elect Donald Trump’s transition team is discussing a proposal to impose tariffs as high as 10% on imports, according to multiple sources.”

This is not going to be so straightforward. If Chinese imports into the United States become expensive, the consumer price inflation in the United States is likely to go up, given that American citizens will have to buy more expensive American products. Also, a clamp down on imports in general and Chinese imports in particular, will lead to countries earning fewer dollars. This means that they will have fewer dollars to imports goods and services from the United States. Hence, a fall in US imports will also lead to a fall in US exports. Hence, the trade deficit may not differ much from its current levels.

Over and above this, if the United States imposes import duties other countries can do the same. This will impact US exports as well. Hence, it is important to understand there is a positive correlation between US imports and US exports. While the US maybe the global bully, China isn’t exactly a pushover.

There is another point that needs to be made here. A huge portion of the dollars earned by countries by exporting goods to the United States and other parts of the world, has made its way back into financial securities issued in the United States. This includes US government bonds. This money has been one of the reasons which has kept interest rates low in the United States.

As of end of November 2016, foreign investors held $5.94 trillion worth of US government bonds (or treasuries as they are better known as). Of this China held close to $1.05 trillion worth of bonds. The point being that if US pushes its luck too far with China, China always has the option of dumping these bonds and pushing up bonds yields and in the process interest rates in the United States. While, it may never come around to doing so, it still has the option. And the United States understands this. Hence, bullying China won’t be easy.

Where does all this leave us? It brings us to that term post-truth. The term post-truth politics has been used quite a lot in the recent past, with the rise of Donald Trump in the United States. It was first used by the blogger David Roberts in 2010.

As Emma Kilheeney writes in Politics e-Review edition for October 2016: “Roberts coined the term to describe a situation in the US Congress where the Republican Party made no attempt to win support for its policy decisions by providing evidence-based arguments. Instead, it opposed all policies put forward by the Democratic Party in order to exploit the emotional responses and loyalties of its followers.”

The Economist defines post-truth as “a reliance on assertions that “feel true” but have no basis in fact.” Hence, the assertion that Trump will decrease US imports and increase US exports may feel to be true, it has no basis in logic and facts.

(The column was originally published on Equitymaster on January 23, 2017)