Capital wars

After the shock of Liberation Day, markets have recovered their losses as Mr Trump has paused these high tariffs and struck holding deals with China and the UK. But this market relief is overdone. The structural rewiring of the global economy is only just getting started and ongoing economic and market turbulence is likely (as we saw on Friday), due to Trump Administration policy, the actions and responses of others, as well as structural economic and geopolitical dynamics.

As one example, efforts to rebalance global trade flows will contribute to structural change in global capital flows: current account deficits are the mirror image of capital/financial account surpluses, and vice versa. New patterns of global trade will lead to changed cross-border capital flows, as well as to growing competition for capital, increased capital nationalism, and over time perhaps to financial repression. Trade wars are a precursor to capital wars. Indeed, a fragmented global economy in terms of capital flows is likely to emerge more sharply than in terms of trade flows.

Changing global capital flows will have implications for the location of productive investment and economic growth, the financing of government borrowing, as well as exchange rates and asset prices. This note selects seven charts that provide insights on global capital flows and related developments.

The full note is available at: https://davidskilling.substack.com/p/capital-wars