Brace For Global Economic Depression Should Trade War Escalate - John Doody
(Kitco News) - An escalating trade war could spiral out of control and bring the world to the brink of an economic collapse on the scale of the Great Depression of the 1930s, said John Doody, founder of Gold Stock Analyst.
“We’re going to get a replay, to some extent, of the 1930s episode where the U.S. put the Smoot-Hawley Tariff Act, imposed taxes on 20,000 imports, and basically made what was going to be a recession into a depression,” Doody told Kitco News.
The Smoot-Hawley Tariff Act was enacted in June 1930 and raised existing import tariffs to as high as 50%. Historians and economists have mostly criticized the protectionist bill as having exacerbated problems in an already strained U.S. economy at the time, ultimately leading to the worst economic depression in American history.
Doody’s comments come as the Trump administration prepares to put into place tariffs on $34 billion on Chinese goods at midnight Eastern Standard Time on Friday.
China has vowed immediate retaliation should these tariffs take effect. “China will not bow down in the face of threats and blackmail and will not falter from its determination to defend free trade and the multilateral system,” the Chinese Ministry of Commerce spokesman, Gao Feng, said at a weekly news conference.
Doody called these tariffs “unjustified attacks by the Trump administration,” and should foreign allies retaliate, it would become “more and more apparent that we’re going into a recession, and the Fed will react with lower 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 a more active Federal Reserve today would cut rates to even the economic scales.
The analyst said that the Fed will likely ease up on hiking rates this year as jobs losses occur as a result of a trade war.
“Ultimately the Fed will react to the jobs loss, and we’re seeing jobs losses already. These things have a ripple effect. It ripples through the economy the same way that increases in government spending ripples through 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 Great Financial Crisis of 2008.
Doody added that we are only in the beginning phases of a trade war, and its ramifications will take effect further down the line. One immediate consequence is a weakening dollar from the Fed lowering rates, which would 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 been very strong this year, based on U.S. industry growth, but the dollar will lose its attraction if the tariffs really dig in, which is what I expect,” Doody said.
The Fed has been steadily tightening the money supply since December 2015. The latest round of rate hikes, implemented in the June Fed meeting, sent the U.S. dollar index (DXY) up 1.7% from mid-June to its high on June 28th. It has since slid 1% from its highs.
Gold has fallen nearly 5% since the June Fed meeting. The Yellow metal rose Thursday on weakness in the U.S. dollar, with June August gold futures up 0.4%, last trading at $1,258.60 an ounce.