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How Trump could turn global asset bubble into weapon of mass destruction

11 0 24

US President Donald Trump’s assertion that trade wars are “easy to win” seems too fatuous to merit a response: there are no winners, only losers, in such conflicts. But more worrying are the common and simplistic assumptions that there can be “limited” trade wars; battles carried on only at the periphery of the global economy.

This would be true only if a couple of relatively small economies that are not of “systemic” importance were to slap tariffs on imports from each other. When the world’s biggest economies engage in such actions, that is something else – for reasons that are not immediately obvious when viewed only in terms of trade statistics.

Trade obviously is a critical factor in creating and sustaining global economic activity. But it is money that makes the world go around and money critically impacts trade, not only by virtue of its role as a medium of exchange but also because of the “wealth effect” that financial markets exert on supply and demand.

A few figures illustrate this point. World trade in goods is worth around US$16 trillion a year, plus another US$4 trillion in services trade – making some US$20 trillion in all. This is sizeable when stacked up against world gross domestic product of US$80 trillion. But the total value of global financial assets towers massively over both figures at near US$300 trillion.

“Paper” wealth of the kind represented by stocks, bonds and other financial........

© South China Morning Post