North Korea with its constant nuclear weapon testing also is trying to light a fuse on a trade war between the United States and China, and if that happens, Americans could face some tough economic times ahead.
Firing that warning for US economic threats this week was Nick Giambruno, senior editor of Casey Research’s International Man, when he was featured as a guest on Jason Hartman’s and the Platinum Properties Investors Network’s “Creating Wealth” podcast show.
Giambruno works closely with Doug Casey, best-selling author of such books as “The International Man” and “Crisis Investing,” and was speaking while on assignment in South America. Casey also has been a guest on the “Creating Wealth” show in recent weeks.
Besides forecasting a trade war sometime soon between the United States and China, Giambruno discusses with Hartman how the bubble is about to burst on public pension plans in the years ahead and that your taxes as a property owner most likely will soar as a result.
‘Rocket Man’ Could Be Firing an Economic Missile Toward the U.S.
Giambruno notes in the “Creating Wealth” podcast that President Trump’s treasury secretary, Steven Mnuchin, had “just yesterday threatened to kick China, the largest trading partner of the United States, out of the dollar if they don’t sufficiently comply with sanctions on North Korea.”
“That’s the big issue of the day is North Korea,” Giambruno adds. “Think of it as North Korea lighting a fuse on a trade war between the United States and China. I think it’s coming.”
In an interview with Fox News recently, Mnuchin said that the United States would stop trading with any country that refuses to stop all trade with North Korea in accordance with sanctions adopted by the United Nations. China is North Korea’s largest trading partner. This could be one of the larger US economic threats in the near future.
The situation accelerated this week when Trump on Thursday announced that the administration wants even tougher sanctions against North Korea. The new penalties would force nations, foreign companies and individuals to choose whether to do business with the United States or the much smaller economy of North Korea. The tougher sanctions came a couple of days after Trump called North Korea’s leader, Kim Jong Un, “Rocket Man” in a speech before the United Nations.
Then, on Friday, a day after the tougher new sanctions were announced, Kim responded angrily by calling Trump a “dotard,” or an old man who has become senile. “I will make the man holding the prerogative of the supreme command in the U.S. pay dearly for his speech,” Kim vowed in a statement released by the official Korean Central News Agency.
When announcing the tougher sanctions, Trump said Chinese President Xi Jinping had ordered Chinese banks to cease doing business with North Korean entities—a good sign that China might comply with the new sanctions. However, China along with Russia also has veto power in the U.N. and must approve the sanctions yet. Both have been leery in the past of imposing the toughest of proposed restrictions against North Korea.
As for the trade war he foresees between the United States and China, Giambruno says, “Trump did something last month in what is widely regarded as the first shot in the trade war.”
“He used a very little known law that unilaterally allows the president to investigate and punish foreign countries for what they perceive to be unfair trade practices,” Giambruno says.
“When there’s usually a trade dispute among members of the World Trade Organization, of which China and the U.S. are, usually those disputes are taken to the WTO, and it’s mediated in a unilateral forum.”
“With Trump doing this outside of that … unilaterally it’s looked at as a very aggressive move against the Chinese. That’s no surprise—we all know what Trump’s rhetoric towards China has been.”
“So, (a trade war), I think, is coming. I think North Korea is acting as an accelerant to that, because it’s so immediate, and Trump is looking for ways to tighten the screws on North Korea. And, he’s looking to China, and he’s going to pressure China on trade, which is something he wanted to do anyway. That’s going to be a very big deal.”
What does this US economic threat mean to you, though, as a real estate income property investor who follows Hartman and his “Creating Wealth” show? Hartman asks Giambruno that very question during the podcast.
“It means if this trade war with China proceeds, as it seems to be, it’s going to mean a lot of turmoil in the stock market and the bond market,” Giambruno replies.
“China holds a lot of U.S. treasuries, and Chinese officials are not shy about saying they wouldn’t dump those treasuries if there was some sort of trade war with the United States. I think if this does proceed, just the average person is going to be looking at higher prices in the store, higher consumer prices … inflationary (pressures) … so it’s not good no matter how you look at it.”
“It’s good if you’re investing for inflation, though,” says Hartman, who often espouses investments in real estate as the best hedges against inflationary pressures rather than stocks and bonds.
“If you’re investing the right way, then inflation makes the people in the know a lot richer obviously, and most people, it hurts them, unfortunately,” Hartman adds.
More on Trump … and How Saudi Arabia Is Tied to the North Korea-China Situation
“I just get the feeling that no matter which president,” Hartman says, “whatever they say or whatever their own position is, once they get into the Oval Office, they just for whatever reason, whatever pressures they endure, whatever secret society runs the world … they all just have to support the military industrial complex don’t they?”
“Yeah, it is bizarre, and I’ll give you what I think is the starkest example of this,” Giambruno replies. “When Trump was campaigning, he would put on his Twitter some very colorful language, to say the least, about Saudi Arabia and how, ‘ahh, they can’t bribe me with their money’ and how terrible they are.”
But then, after Trump became president some months later, “he goes and does a sword dance and bows before the Saudi king,” Giambruno says.
“I mean, what is going on here? It goes back to the dollar. I think in large part the oil markets help backstop the dollar, and who’s one of the larger oil exporters? It’s Saudi Arabia.”
The seemingly Saudi about-turn from the Trump administration “relates to the geopolitical situation with China,” he adds, noting that China long has tried, albeit unsuccessfully, to get Saudi Arabia to accept Chinese “renminbi” (its currency) in exchange for the oil that China imports from the Saudis. China now needs dollars to buy oil from Saudi Arabia.
Should Saudi Arabia accept China’s currency, “that would be a game changer because that would totally affect the U.S. dollar and treasury market,” Giambruno warns. China already has entered renminbi arrangements with a number of other oil-exporting countries, including Russia, Iran “and, I think, Angola,” but Saudi Arabia’s “the big one” missing from such arrangements.
“If (China) can twist the Saudis’ arm enough that they do it, that will be not only a geopolitical earthquake but a financial earthquake.”
Both Hartman and Giambruno offer reasons why they actually like Trump, despite their Saudi reservations.
“We’ve obviously had a regime change in the United States, and a pretty significant one, I would say,” Hartman says of Trump. “I’m not sure he can get much done. The media hates his guts, obviously, and I think he’s reckless. There are some things I like about him and some things I hate about him—like any president, I guess.”
Giambruno says he likes Trump’s plans for tax reform, and if he can get Congress to go along, “I would love it.” Trump wants to lower corporate taxes, which he says would push up workers wages and bring back trillions of dollars in cash which now goes overseas.
“That would be awesome,” Hartman says of any tax-reform passage. “Like, if corporate taxes dropped that much, you know how much money is going to flow back onshore if that happens, and how the economy is just going to boom?”
Not Booming Are Public Pension Plans, and Giambruno Warns of Another US Economic Threat There
During his recent coverage of global financial issues for Casey Research, Giambruno says he has been “looking a lot at this pension crisis that’s long been a crisis but it seems that it’s finally reaching a tipping point.”
Affected mostly by the crisis are public-sector employees, or those who work for local, state and the federal governments, and receive the pension-plan perk.
“Pensions as I’m talking about here,” Giambruno says, “have basically disappeared from the private sector. I think less than four percent of private-sector companies even offer pensions. Most get these 401Ks, which, for many people, is nowhere near as good as getting a promised monthly check that’s basically equivalent to your monthly salary.”
Part of the US economic threat and the problem with the public pension funds, he says, is that they’re allowed to overstate their liabilities, which will put a strain on the funds as more and more people retire and try to collect their benefits.
“Each fund has an assumed rate of return, and this is what this pension fund thinks it’s going to make on its investments,” Giambruno explains. “It’s an assumed rate of return, so these public sector pensions choose ridiculously high, assumed rates of return, and what this does is it has the effect of shrinking the liabilities, because those future liabilities are discounted at this assumed rate of return.”
“The larger the assumed rate of return, the smaller your current rate of liabilities, so these public pensions have used inflated assumptions to artificially shrink their liabilities for many years.”
Such accounting would be considered “fraud” in the private sector, Giambruno says, “but since it’s in public sector, it magically becomes legal and OK.”
Hartman says he’ aware that pension problems are brewing in such states as California and Illinois—“you know, every liberal state is always the most messed up of all of them.”
But, he adds, “When the economies are so big and there’s so much momentum, it just takes a long time for the results of this irresponsible behavior to show up in any real way. And then, of course, they can manipulate, manipulate, manipulate, kick the can down the road. Ultimately, yes, there’s a problem, and someone’s going to have to come to the table, but will it just be the federal government doing a bailout and printing more fake fiat money to do so?”
“I think that’s exactly the case,” Giambruno replies.
“I can’t imagine a situation where it’s politically acceptable for the government to not honor their promises to their own employees when they can simply print money, so I think that is what the most likely situation is going to be—that the federal government, through the Federal Reserve, will just simply paper this over.”
However, when the government does that, “what they’ll be doing is trading a local debt crisis for a fed currency crisis,” Giambruno adds.
“It’s going to be terrible for the dollar. We’re talking trillions of dollars. I think the latest estimate is a $5 trillion shortfall just in these pensions across the country.”
In the immediate future, before any federal bailouts occur, some local and state governments that start running out of dollars to pay for their retirees’ pension obligations most likely will raise property taxes to cover the shortfalls, Giambruno says.
“Property taxes are always most likely going to be the first thing that go up in any jurisdiction that has a pension problem, because it’s so simple.”
“Why is property tax always the ‘so simple’ one,” Hartman asks Giambruno. “Why is it not the sales tax or a tax at the state level on income? Why property tax?”
“Because you can ratchet it up by a couple of basis points or percentages, a small amount, and it’s not as noticeable at first” as a sales or income tax increase,” Giambruno replies. Generally, he says, property owners also “are wealthier and have more to squeeze.”
“Those big, evil property owners,” Hartman says. He adds, however, that if you own a rental property as an investment, you can always raise the rent to make up for the increased property taxes. “The rent-to-value ratios are fantastic, so there’s always this compensating factor, and it always hurts the little guy.”
“They think they’re hurting the big guy, but all the big guy does is pass (tax increases) through to the little guy. So, you know, raise the corporate tax, and then the corporations raise the price of all their goods and services, and who buys those? The little guy. Duh … Economics 101, right?”
He adds, with a laugh or two, “You can’t get a liberal to understand this stuff. It’s just mind-boggling how they’re so myopic. Try telling this to Bernie Sanders. It just won’t work.”