"We are just getting started"

In the 18th century the Scottish economist Adam Smith coined the phrase 'beggar-thy-neighbor' to describe economic policies that benefit one country at the cost of others - a trade war in other words. President Trump's America has fired the opening salvos of a new trade war, imposing 25% tariffs on imports from Canada and Mexico and a 20% tariff on those from China. President Trump told Congress that these tariffs "are about making America rich again", but skeptics question that.

No one can be certain what the precise impact of these tariffs will be, although Mexican vegetables, Canadian lumber, and Chinese T-shirts are all likely to rise in price - along with a plethora of other imports from these countries. President Trump believes the tariffs are justified and will force more companies and nations to invest in manufacturing in the US. Tariffs tend to strengthen the currency of the country that imposes them - so the Dollar could appreciate against other currencies, making US products less internationally competitive.

China immediately retaliated by slamming a 15% tariff on American agricultural products. This will reintroduce inflationary pressures in China - which imports more than 60% of the world's soybeans, 30% of those from the US. The US is the world's biggest importer of goods and China is the biggest supplier of those goods.

The Chinese embassy in Washington D.C. put out a menacing social media post as a riposte: "If war is what the US wants, be it a tariff war, a trade war or any other type of war, we're ready to fight to the end."

Stagflation headed your way

The standard economist view of a trade war is that no one wins. Higher prices, trade flows interrupted, lower consumption, all result in reduced economic growth. Trade wars in the past have metamorphosed into actual shooting wars. As the rhetoric pumps up and countries lose sight of mutual interests, trust becomes fragile and can disappear. Trade wars were a contributory factor behind the Great Depression of the 1930s and World War II. The 19th century French economist Frédéric Bastiat is supposed to have warned that "if goods don't cross borders, soldiers will".

But rather than a shooting war the US may well be headed for a rather different conflict which will nevertheless have casualties - stagflation. The American economy seems to be stuttering. In January US consumer spending fell by the most in nearly four years; new orders from factories fell by the most in nearly five years in February; and economic growth may well have fallen into negative territory in the first quarter. Consumer confidence in February fell the sharpest since August 2021.

Stagflation - a combination of high inflation and economic stagnation - presents a central bank with a nightmare choice - raise interest rates to try to stifle inflation, or cut interest rates to encourage economic activity. The chart below shows how gold performs in stagflation.

The Presidential blitz

President Trump is aware of having only one term - he's in a hurry to get things done. Like the sparks thrown by a catherine wheel, his new policies are almost too numerous to count. Some seem absurd - he says the US will "get" Greenland, "one way or another".

More dubious is the idea of creating a "crypto strategic reserve", in which the US would hold five cryptocurrencies. America has various 'strategic reserves' including one for critical medical supplies, another for grain, one for petroleum, and of course the bullion depository. It even had a national raisin reserve until as recently as 2015, to control raisin prices.

It's not yet clear what the cryptocurrency reserve would be used for; the US holds about 200,000 Bitcoin tokens, seized from criminal activities. Nor is it clear which federal agency would control this reserve. Leaving aside the possible conflict of interest - the President has a portfolio of cryptocurrencies and can appoint regulators for those assets - such assets are extremely volatile. The administration has endorsed the idea of acquiring a million Bitcoins for this reserve - no doubt from taxpayers' money.

We should not let this catherine wheel distract from other developments of equal importance to our assets. Europe is planning to spend heavily on defense, but the funds are lacking. In the UK the Labour government, facing a financial squeeze, is planning to announce cuts to state welfare schemes, which will be highly unpopular. In Germany the new government is planning to scrap its so-called 'brake', the rule introduce in 2009 that constitutionally limited annual borrowing to 0.35% of gross domestic product. That Germany of all countries is losing its aversion to bigger debts is alarming. Stagflation may not simply be a US problem.

For UK and Rest of the world (ROW) clients: We make every effort to demonstrate a balanced conversation between gold, silver, crypto and fiat currencies when it comes to purchasing power and, while we strongly believe that gold is the fairest and most reliable currency on the planet, we need to point out that it isn’t 100% risk free. While we have seen a steady increase over time, the value of gold can fall, which means that its purchasing power can also decline.

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