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Andy Xie

Donald Trump’s policies as US president, set against China’s manufacturing competitiveness, could trigger a liquidity crisis for many countries squeezed in between.
This is the risk of rising US interest rates due to the president-elect’s threatened tariffs, his promise to deport undocumented immigrants and a rising US fiscal deficit as a result of his proposed tax cuts.
The euro is at greatest risk but the Japanese yen and Indian rupee are also in the firing line. A US debt crisis is further down the road when there are no significant economies left to bleed.
The bond market is already adjusting to the Trump effect. Inflation never really went away, despite the US Federal Reserve’s positive outlook just before the presidential election, which in any case failed to help the Democrats. If anything, US inflation is becoming entrenched.
Two years after the Covid-19 pandemic, US companies and government agencies are still having a hard time getting staff to return to work in the office. There is very little chance of productivity bringing down inflation.
Two of Trump’s three major policy thrusts – more import tariffs and mass deportations – are clearly inflationary. Even if the tariffs end up boosting domestic production, it would take a long time. Further, there is no evidence from Trump’s first trade war to support the possibility of a supply response within the United States.
More tariffs on Chinese goods led to more imports from other countries, which cut the inflationary impact. But the Trump 2.0 trade war promises to be global.


Moreover, a mass deportation of undocumented immigrants would trigger wage inflation when the US labour market is already tight.
Since the pandemic, work preferences have changed in many countries. The median age of the US population is 39; it’s 44 for its white population. As baby boomers retire, US labour supply is becoming highly dependent on immigration, legal or otherwise. Without a boost in productivity, mass deportations are likely to spark a wage surge.
The resulting inflation uptick would make it harder for the Federal Reserve to cut interest rates and force it to shrink its balance sheet. Its support for the US debt market would weaken. America’s fiscal deficit would thus need more money from the market to finance it, especially from other countries. And with Trump set to extend tax cuts, the fiscal deficit is unlikely to reduce.
The US debt market sucked up an estimated US$1 trillion of foreign money last year and will need more in the coming years. To encourage foreign buyers, the US would need rising bond yields and a strong dollar.
Such a gigantic liquidity-sucking exercise is likely to deflate a few economies. Europe appears the most vulnerable. Its energy crisis is pushing its industries out of the continent. Meanwhile, looming American tariffs could draw them into the US: structurally, Europe is losing its competitiveness against China and its industries might need to hide behind US tariffs for survival. This is a powerful long-term incentive. European capital is likely to flee to the US.


An important pillar of Europe’s economy is its automotive industry, which boasted dominance in exports and in research and development. But in its reliance on branding for profitability in the China and US markets, it missed the electrification revolution. Its profit margin has collapsed in China, which is gearing up for its biggest price wars yet this year.
This could be an extinction event for European cars in China, as well as unprotected markets. It may trigger a debt crisis in Europe’s car part supply chain. In 2025, the euro could collapse. The bursting of the dotcom bubble in 2000 took the euro down to around 80 US cents. The story could be repeated this year. This time, however, Europe is much weaker and its capital base is not deep. The euro is fragile.
The yen is likely to struggle too, though not as badly. The Japanese currency has declined by one third against the dollar over the past three years. This is an advantage heading into a storm. But Japan’s car industry, arguably its most important, is in decline.
Tourism is stepping up but this is fundamentally a low value-added industry. The long-term fundamentals for the yen are weak. Furthermore, Japan’s long-term debt problem can only be solved through inflation. There is talk of holding down inflation but the authorities can’t really mean it.


When there is a liquidity storm, the hottest emerging market gets into trouble. India has been the one for the past five years. Its economy is behaving like Indonesia’s in the 1990s before the Asian financial crisis. Indonesia’s gross domestic product was growing but there was a great deal of hot money in the economy. When the Thai baht collapsed, the hot money fled. The liquidity crisis collapsed Indonesia’s financial system.
India’s current account situation is arguably worse. And India’s foreign reserves are very much a product of hot money, which is beginning to leave already. When the storm hits, India will need to raise interest rates quickly to stabilise the situation. But the economy would take a big hit. There is likely to be hesitation and this would lead to a depletion of forex reserves and uncontrollable instability down the road.
The global financial system survived the pandemic pretty well due to the massive liquidity support from major central banks. As the liquidity turns into inflation, financial crises follow. There are consequences to printing money. They have just been delayed by four years.


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Inflationary pressure and a growing deficit would turn the US into a liquidity-sucking force


Inflationary pressure and a growing deficit would turn the US into a liquidity-sucking force.


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Trump’s plans could trigger liquidity crises across Europe and Asia

.css-1c6uqr6{color:inherit;font-weight:inherit;font-size:inherit;font-family:inherit;line-height:inherit;overflow-wrap:break-word;}Inflationary pressure and a growing deficit would turn the US into a liquidity-sucking force

Inflationary pressure and a growing deficit would turn the US into a liquidity-sucking force