Financial headlines are dominated by stories about “currency wars,” “trade wars” and possible recession. It’s true that these stories are important and are driving the recent volatility in stock and bond markets.

China sharply devalued its currency a few weeks ago below the critical red line level of 7.00 yuan to $1.00 as retaliation for Trump’s tariffs. Some new tariffs go into effect on Sept. 1 even though Trump delayed other tariffs because of the coming Christmas shopping season.

Trade wars are also affecting U.S. relations with Europe, Mexico and Canada among others. In this article, global elite Mohamed A. El-Erian agrees that trade wars and currency wars are important. Yet, he takes a step back from the headlines to ask whether these problems are not symptoms of a deeper malaise.

Historically, trade wars and currency wars arise in conditions of too much debt and not enough growth. When debt is low, trade surpluses or deficits are manageable. When growth is high, currency exchange rates are not considered problematic. But when debt is high and growth is low, countries are desperate to steal growth from trading partners. They do so with cheaper currencies and tariffs on imports, which give rise to the trade and currency wars.

What if growth could be increased without resort to devalued currencies? What if debt could be made manageable without resort to tariffs? El-Erian says the root causes of debt and weak growth can be mitigated with international cooperation, selective fiscal policy and spending on desirable goals such as improved infrastructure and stronger safety nets. He says the issue of intellectual property theft can also be addressed inside a multilateral framework similar to the World Trade Organization.

El-Erian’s ideas have some merit and are worth considering. The problem is that his ideas have little chance of being pursued because of a lack of trust of elites generally and a specific lack of trust between the U.S. and China.

A favorable resolution of ongoing disputes cannot be ruled out, but investors should brace for the unfavorable outcome of even worse tensions on the trade and currency fronts.

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