by Jim Rickards, Daily Reckoning:

What if China isn’t half so desperate for a deal as the president believes?

Are we in for an extended siege of economic trench warfare?

Today we explore possibilities… and their implications.

We first direct our gaze to Wall Street.

Investors came crouching from their shelters this morning… as if expecting an aftershock to the quake that drove them underground yesterday.

With Monday’s 617-point battering — piling atop last week’s losses — three months of stock market gains have vanished into the ether.

The S&P 500 endured its 15th-largest decline in history yesterday. It has shed $1.1 trillion since May 5 alone.

Markets Bounce Back

But the Earth held today. And investors cleared away some of yesterday’s wreckage.

The Dow Jones rebounded 207 points.

The S&P reclaimed 23 of the 70 points it lost yesterday. The Nasdaq gained 87.

Markets were encouraged by President Trump’s comments that he will strike a deal with China “when the time is right.”

He will have an opportunity at the G20 summit in late June. There he will meet China’s Xi Jinping, for whom his “respect and friendship is unlimited.”

But is China sweating dreadfully for a trade deal as Trump assumes?

China Braces for Escalation

China does — after all — ship some $500 billion of products to these shores each year.

It cannot afford to sit on them like a broody hen.

But you might have another guess, says the director of monetary policy at the People’s Bank of China:

As for the change in the domestic and external economic environment, China has sufficient leeway and a deep monetary policy toolkit, and so has full ability to deal with [economic] uncertainties.

But here we cite a government mouthpiece, a marionette in human form. You no more trust his word than you would trust a dog with your dinner.

Just so.

But affirms Brad Setser, senior fellow for international economics at the Council on Foreign Relations:

Trump’s escalation comes at an awkward time, but if push comes to shove, they’re quite capable of supporting growth through more investment and credit.

There may be justice here.

Twice as Much Stimulus as During the Financial Crisis

If you believe the Federal Reserve is a gargantuan spigot of credit, the People’s Bank of China brings it to shame.

ING estimates China has pledged 8 trillion yuan in economic support — twice as much “stimulus” as it offered during the global financial crisis.

And the Organization for Economic Cooperation and Development (OECD) estimates China’s fiscal stimulus this year equals 4.25% of GDP… up from 2.94% last year.

Meantime, Chinese domestic consumption has been on the increase.

Growth through increased consumption — say the economics wiseacres in practice among us — reduces dependence on exports.

Is most of this stimulus woefully wasteful? Does it finance vastly unproductive economic activity?

Yes and yes.

Is the way to wealth through consumption — rather than production?

No, it is not.

But if Chinese authorities believe they can offset lost exports by bellowing credit and vomiting money… they may choose to dig in for the long haul.

“A nation is never as happy as when it’s at war”

A trade war may even rally the people to the colors…

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