Brace For Global Economic Depression Should Trade War Escalate - John Doody
(Kitco News)- An escalating trade war could spiral out of control andbring the world to the brink of an economic collapse on the scale of the GreatDepression of the 1930s, said John Doody, founder of Gold Stock Analyst.
“We’re going to get a replay, to some extent, of the 1930sepisode where the U.S. put the Smoot-Hawley Tariff Act, imposed taxes on 20,000imports, and basically made what was going to be a recession into adepression,” Doody told Kitco News.
The Smoot-Hawley Tariff Act was enacted in June 1930 andraised existing import tariffs to as high as 50%. Historians and economistshave mostly criticized the protectionist bill as having exacerbated problems inan already strained U.S. economy at the time, ultimately leading to the worsteconomic depression in American history.
Doody’s comments come as the Trump administration preparesto put into place tariffs on $34 billion on Chinese goods at midnight EasternStandard Time on Friday.
China has vowed immediate retaliation should these tariffstake effect. “China will not bow down in the face of threats and blackmail andwill not falter from its determination to defend free trade and themultilateral system,” the Chinese Ministry of Commerce spokesman, Gao Feng,said at a weekly news conference.
Doody called these tariffs “unjustified attacks by the Trumpadministration,” and should foreign allies retaliate, it would become “more andmore apparent that we’re going into a recession, and the Fed will react withlower rates.”
He noted that while this worst-case scenario is a potential,it is unlikely we will see a second Great Depression play out anytime soon as amore active Federal Reserve today would cut rates to even the economic scales.
The analyst said that the Fed will likely ease up on hikingrates this year as jobs losses occur as a result of a trade war.
“Ultimately the Fed will react to the jobs loss, and we’reseeing jobs losses already. These things have a ripple effect. It ripplesthrough the economy the same way that increases in government spending ripplesthrough the economy,” he said.
Total nonfarm payroll employment added 223,000 jobs in May,pushing the unemployment down to 3.8%, the lowest level since the GreatFinancial Crisis of 2008.
Doody added that we are only in the beginning phases of atrade war, and its ramifications will take effect further down the line. Oneimmediate consequence is a weakening dollar from the Fed lowering rates, whichwould be a boon for gold.
“One of the things that determines the gold price is U.S.interest rates and the attractiveness of the U.S. dollar. The dollar has beenvery strong this year, based on U.S. industry growth, but the dollar will loseits attraction if the tariffs really dig in, which is what I expect,” Doodysaid.
The Fed has been steadily tightening the money supply sinceDecember 2015. The latest round of rate hikes, implemented in the June Fedmeeting, sent the U.S. dollar index (DXY) up 1.7% from mid-June to its high onJune 28th. It has since slid 1% from its highs.
Gold has fallen nearly 5% since the June Fed meeting. TheYellow metal rose Thursday on weakness in the U.S. dollar, with June Augustgold futures up 0.4%, last trading at $1,258.60 an ounce.
By David LinFor Kitco News
Follow @davidlinMTL
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