A Few Notes on China’s “Trump Problem”

imageBefore we get into the daily dose of data (DDoD) we should point to the story making the rounds this morning about how the Chinese are watching the evolving groundswell in the direction of Donald Trump’s presidential bid with some concern.

Specifically, according to the story over here, following the Nevada win by Trump, the Chinese have told the U.S. not to engage in currency shifts because that would be a bad thing in their view.

Yes, a change in currency valuations (like weakening the dollar) would cause the price of imported goods – not just from China, but from everywhere – to rise.

But here is how the current situation works – and this is really a “deal with the Devil” so pay attention as I run this down on the whiteboard:

As things are now, when we go to the store and buy something made in China, two things are going on:  First, we are buying goods that actually should cost a little more.  So the American consumer is getting a good deal at the checkout stand.  Chinese workers don’t charge as much for their labor.

BUT where the screw job comes in is that because the US has pursued a “strong dollar” policy, it means that actual goods producing jobs have fled American en masse.  So while the consumer gets a little “pay-off” in terms of cheaper goods, the penalty box is that industry flees from the USA, the Chinese benefit from this hollowing-out of America, and THEY get the factories and the increasing standards of living that go with production of real goods, not just the circularity of increased government spending on more and more…er…. government…  (Takes a lot of people to run the catch and release program and all.)

The problem the Chinese see with Trump is real:  I think he’s likely to actually DO something about the process which has been backed by the legions of lobbyists who ply Capitol Hill with threats and favors in order to set up favorable tax policies that allow big companies (like Apple) to make and park oodles of money in offshore accounts, safe from U.S. taxes.

And the accounting aspect of the “current way” can not be over-emphasized.  What ends up happening is that major corporations can set up shop in China and elsewhere, where they can pay workers a dollar-an-hour instead of a U.S. rate of perhaps $20 per hour for semi-skilled labor.

At some point, the American people need to make a choice:  Do we continue to export jobs and watch the “hidden hand” make the Chinese society upwardly mobile, I mean to the point they can dredge up whole islands to project power OR do we bite the bullet, pay a bit more for domestic manufactured goods, which in turn will drive up prevailing wages in the U.S.?

The very fact that Donald Trump is a graduate of the Wharton Business School at U Penn means that he’s a bright enough guy not only who can see the balance, but realized that there would be some HUGE BENEFITS to a graduation decline in the US dollar’s value.

For one, we would be paying back our creditors (like China) with cheaper dollars.  For another, there would be a major incentive to build factories (and that means jobs and that means increasing tax revenues) in the United States.  And don’t forget, the sample principles apply to Mexico, Singapore, Malaysia, Vietnam, Thailand, and we don’t have all day for the list.

But the key thing is that non-human corporations are playing the labor-wage spread between countries – that’s how they make their money, anymore. 

You know, once upon a time the way a shoe company in the U.S. would make a buck would be to turn out a high quality, or at least very good value basic product.  Whatever the margin was on that was what the company margin was.

In today’s world, however, that’s now how things really work:  Take something like a cell phone – which might be engineered in Cupertino – and this is not to pick on Apple, which is a well-run company –   but they make a lot more money and profits when the products are made by people in the $3/hour range than they would if they opened a manufacturing operation in Novato or Walnut Creek.  Can you imagine what the cost of the phones would be if made here?

Last summer, few paid attention as Bloomberg reported on “Tim Cook’s $181 Billion Headache: Apple’s Cash Held Overseas.”  Again, one of those “rock and hard place” problems that CEO’s have to face:  If the money is held offshore, the books look great and the investor class has more money to draw from Apple in the future in terms of potential dividends and such.  But if the money were repatriated, such that money would be counted as income in the country of sale of goods, then things could change.  But, by using who knows what for exchange rates, costs can be allocated to any country of your choosing.

If I was managing a multi-national corporation, though not Apple (Tim Cook is doing fine…) I would probably headquarter my sales operation in the Turks and Caicos and would then inflate sales expenses through the roof so that if anyone asked, I could say (with an almost straight face)  “Look:  Even though the sale took place in the U.S., we really didn’t make any money on it.  We have these horrible sales costs over there from our sales operation in Grand Turk and look at the labor costs and bill of materials for the goods coming out of China.  We only made 3-cents a unit in the U.S. in the great scheme of things… 

The bulk of my revenue would come to the Turks and Caicos where, oh my, no income taxes…gee, what a coinky-dink, huh?

Not that this is Apple’s case, but it’s illustrative of how the game works.  You don’t learn all this stuff rom textbooks.  You learn it from sitting in the first class section of 727’s shuttling back and forth to the Cayman Islands which still has more banks per capita than anywhere on Earth.

After enough trips, sitting next to the Zero Halliburton customers with attaches full of cash, and “I’ll have the lobster and a glass of Blue Nun, please” you get the sense that this is all really a rational world…just not played at the levels that regular folks are cognizant of.  But this is how it works.

Things have, of course, evolved since my passing acquaintanceship with the high-rollers at high altitudes in the mid 1980’s.  To stay current, you need to read the Wiki entry on how the “double-Irish” accounting scheme works:

The double Irish arrangement is a tax avoidance strategy that some multinational corporations use to lower their corporate tax liability. The strategy uses payments between related entities in a corporate structure to shift income from a higher-tax country to a lower-tax country. It relies on the fact that Irish tax law does not include US transfer pricing rules.[1] Specifically, Ireland has territorial taxation, and hence does not levy taxes on income booked in subsidiaries of Irish companies that are outside the state.

The double Irish tax structure was pioneered in the late 1980s by companies such as Apple Inc..[2] In 2010 Ireland passed a law intended to counter such arrangements, though existing arrangements were exempt and lawyers have said that this change will cause no significant problems for multinational firms.[3]

In 2013, the Irish government announced that companies which incorporate in Ireland must also be tax resident there. This counter-measure took effect in January 2015, for newly incorporated companies, and will take effect in 2020 for companies with existing operations in Ireland.[4] Irish Finance Minister Michael Noonan, during the presentation of his 2015 budget, said that he believed this would align Ireland’s corporate tax regime with international best practice.[5]

If this isn’t working for you, we’ll just get a boatload of “local nominees” and untraceable accounts set up in the ABC Islands, the Caymans, Turks, or the Channel Islands.  Accounting have seldom been so much about “truth, justice, and the American Way” so much as it’s being able to move money at the lowest effective tax rates among international conglomerate business units.  And if that involves a lot of “tax engineering” then hey…so it goes.  At least so long as the exchange rates are clearly articulated and stable.

Ask yourself what happens to the New World Order’s Bank Accounting should someone come along (with Carl Icahn) who knows this stuff like it’s kindergarten?  You think that might pose some risk?  I mean compared with a neighborhood organizer from Chiraq?

This circles back to the reason that the Chinese are worried about a change in the US “strong dollar policy.”  Because if that changed and the dollar was cut in half on the international markets, here’s what would basically happen (vastly simplified):

  • If the dollar value was cut in half, the price of gold and silver would double.
  • The price of oil would nearly double.
  • The cost of imported goods from Mexico, China, and wherever, would double.
  • The labor and cost components (plant and equipment amort. and such) in foreign countries would double.
  • That would cause a massive job creation boom in the USA.
  • USA goods would drop in price on the world market (dollars being worth less) and the balance of trade would soar.
  • Oh, and since we’d have to be inflating to do this, we would also see housing prices and interest rates very quickly head back toward historical levels.

Yes…there would be a price.  The price of non-US goods would go way up and the income to the farmers from foreign sales would go way down.  But let’s not forget that America’s farm prices, especially to export destination could be raised, too.

It’s a terribly complicated question, but it’s one that Trump is willing to raise and it likely scares the shit out of China.

And it should. A Daily Caller story has it that a “Political Science Professor: Odds Of President Trump Range BETWEEN 97% AND 99%.”

Things like this story would change:  China has more billionaires than US: Report.  People in the know do what?  They follow the money, of course!  WTF do you think guys like Jim Rogers are doing in Asia?

Repeat the morning mantra with me brothers and sisters:

Everything’s a Business Model

Being Human sucks

The Corporations own it all

And we is truly fu….

I wish Burma-Shave signs were still in vogue.

Historical Reader Note:

If the operant Burma-Shave Ad from 1932 could be re-written in terms of the American political scene today, it would go something like this:

Listen voters

Knock on Wood

When offered something

“Just as Good”

Feel free in the comments section to post political poetry like this…I rather enjoy it.  Curse of the small mind, I suppose.  Pretty soon I will be printing up my first batch of “One Clinton Was Too Many” bumper-snickers.

Tell me there isn’t yet another debate to put up with?  Wrong: In the Republican Debate, Here’s What to Look For sayeth the NY Times.  No, I will be watching the inside of my eyelids…even though the Drudge Report is headlining about this being a Cruz, Rubio Death Match…  Way too early for that kinda hype.  Decaf only thanks.

But the most interesting article in the Times this morning is about the other elections – the ones in Iran:  Six Things to Know About Iran’s Elections.

Durable Goods

Press release time:

New Orders  
   New orders for manufactured durable goods in January increased $11.1 billion or 4.9 percent to $237.5 billion, the U.S. Census Bureau announced today.  This increase, up following two consecutive monthly decreases, followed a 4.6 percent December decrease.  Excluding transportation, new orders increased 1.8 percent.  Excluding defense, new orders increased 4.5 percent.       Transportation equipment, also up following two consecutive monthly decreases, led the increase, $8.2 billion or 11.5 percent to $79.7 billion.   

   Shipments of manufactured durable goods in January, up two of the last three months, increased $4.6 billion, or 1.9 percent, to $241.9 billion. This followed a 1.6 percent December decrease.  
   Transportation equipment, also up two of the last three months, led the increase, $4.3 billion or 5.7 percent to $80.0 billion.      

Unfilled Orders  
   Unfilled orders for manufactured durable goods in January, up three of the last four months, increased $0.6 billion or 0.1 percent to $1,187.7 billion.  This followed a 0.5 percent December decrease.  
  Computers and electronic products, up twenty-five consecutive months, drove the increase, $0.7 billion or 0.5 percent to $137.2 billion

Market futures are about flat…tomorrow the GDP and Personal Income data…I see the coffee finally kicked-in.

Scalia: A Secret Society Member

.Yes, that’s the word in the Washington Post.   And it seems like the “order” was having a meeting at that hunting ranch here in Texas where Scalia died “in his sleep” although no autopsy and the conspiracy boards are kicking up on this.

The website of the Order of St. Hubertus (who knew?) is over here. 

There Goes BLM Again

Not, the Bureau of Land Management didn’t crash a private Hillary fund-raiser.  But Black Lives Matter did.  How much of this will the public stand for?  And if a white supremacy group pulled stuff like this would the response in the media be different?

I’m sure you saw where “Black Lives Matter Crash Apple Support Rally, Set Flag on Fire.”

So where, exactly is the line between dissent, marketing and domestic terrorism?


A Few Notes on China’s “Trump Problem” — 24 Comments

  1. Dear George: Perhaps, not withstanding any of your immediate and well measured observations of the Economics that Mr. Trump might favour, if you were in Charge in China, would Mr. Trump be MORE or LESS likely to stop the Naval expansion efforts of China to secure practical and total control of the waters of the South China Sea?

    I think this is the key issue for the future, and there are many in the City that would take whatever means necessary to stop him, if he leaned in that direction. Regards!

    • Oh, no, we all kind the real seat of power is the district of corruption law firms, though thanks for reminding us

  2. I wonder if the 3D printer will put China out of business someday. It appeared to me that it was a plot against China, and the US would move beyond heavy industry and leave them with unneeded industrial infrastructure. It’s a reach, but I’ve been always trying to find logic in the US gov’t 1980’s strategies of rewarding businesses who move overseas, and punishing those who stay.

  3. I bet quite a few in Latin America are watching the “Trump groundswell” also. Do the Chinese realize that Trump is just running for office and not in office yet?

  4. Are BLM actions/activities no different than what KKK has done in the past? Is there a truly an equivalence because I have never heard KKK being referred to as domestic terrorist during the height of their terror.

  5. I have always appreciated reading your comments. I saw another post by someone about Trump. He had a picture of some Trump branded Ties. Guess where the Trump branded product was made? Yep China. So I am not so sure Trump really cares what he slaps his name on.

  6. There’s just one little hitch in your dollar devaluation plan. All the central banks (and privates banks too) who are holding dollars/US treasuries as reserves would instantly be insolvent.

    And $20 labor becoming $10 labor is still more expensive than $3 labor.

    Not to worry, prison labor, 80 cents per hour, is the labor that will make America competitive again.

    This dollar devaluation is coming, but only when the Chinese want it, on their terms, and after there is no more cheap gold to acquire, and also after they have acquired another $1 trillion (or more)in companies and hard assets after cherry picking through western economies. It comes automatically when the Chinese say that they will no longer take dollars for their products, only Yuan or something backed, at least partially, by gold, of which incidentally, the USA has zero.

    And BTW, last figure I saw was that only 18% of Chinese exports go to the USA. A smaller number than exports to the EU.

    And apple generates more than 60% of their revenue from sales outside the USA. As they took a beating on exchange rates last quarter.

  7. The story you posted about the crackdown in Caracas? I did some searches and all I’m finding are broken links. Are they scrubbing this story from the msm?

  8. As I have said from the start, I do not think Trump makes it to the White House. This developing move on him re; taxes and Mob connections may be the beginning of his demise.

    And I mean that literally.

    The “issue” itself won’t be a problem. Nobody is going to buy in to any great degree…as I have said, Trump would have to use a baby to club a puppy to death – on national live tv – in order to derail his run.

    BUT…Trump is Trump…and he WILL have something to say about these “attacks”, and PTB will spin aspects of what he says into “insults” or derision of Mob types. This will be spun up for our benefit.

    When Trump meets a violent end, the narrative will already have been set up for a slam dunk sale to the public, that shady underworld types did him in, and the establishment skates yet again.

    If PTB wanted to compound their efforts, they would pre-place an asset next to Trump (literally and figuratively), so that on the day of the theater that is public assassination, the asset was there – maybe even splattered with the Don’s blood – and clutching his lifeless body, tear in his eye and his voice cracking, the heir vows to carry on the good fight – in Don’s name – and for the good of us all.

    THAT man would be swept into office.

  9. Isn’t trump calling for tarrifs, a tax on goods coming in. How is that a devaluation of the dollar.

  10. Yes, inflation would do all of those things. The problem is inflation is good for debtors and bad for creditors. It doesn’t matter if the creditor is Chinese or the American Bank of Everything. They don’t want inflation.

  11. Gosh – My take is that he’d take an axe to Gov employment – all the tsars would be gone and their staffs and I think he may even eliminate a couple of cabinet positions – I could see a possible draft or mandatory service time for high school grads………

  12. So could you directly compare the lowering of American labor wages with the rise in Chinese wages since 1980?

    The trend must be toward a slow matching of labor costs.

  13. Just saw the movie Network again. It could have been written yesterday. Everything they said in the 1970’s is almost identical with todays problems, just change a few names. And when Ned Beatty as head of the TV network explains (threatens) to Beale how the system works is priceless. Check it out on YouTube – well worth it.

  14. George,

    Henry Ford paid his workers over the going rate because he realised his workers were also his customers. This seems to be lost on off shored corporations and the 62 people who own as much as the poorest half of humanity combined. When they have hoarded ALL the wealth the rest will have nothing to buy their goods and services. That’s seems to be where we are heading just now.

  15. Another way it works is have Holding Companies all over the world. Delaware is popular for this if it is just a US strategy. But in turn, the DE corp can then be actually part of a holding company overseas. “Royalty” payments were made to the holding companies. These look like ‘expenses’ on the P&L so tax basis is transfered from the US(lower profits due to expense of the royalty payment) to the holding companies.

  16. Did you notice that last month’s jobs report showed a decline in government jobs? That makes a total decline in government employment over the last seven years of more than 500,000. Don’t be surprised if you see Trump increase government employment by a million or more if he gets the White House. You heard it here first.

    • Why would Trump raise gov jobs?

      Trump is an interesting anomaly. He is a new form of “hope and change”, really. Bernie is selling “give me your change and I’ll give you hope”. Not sure I could go for either one. But the good thing is our government is not only one man.

      We need to figure out a way to make a strengthening change fiscally without imploding the fragile bubble we are floating around in. George may be right in thinking that the economic turmoil follows the election late in the year. I have to wonder if we could find some strength through controlled deflation. Those who would suffer the most are those buying the $1.2 Million homes George mentions in his other blog today. But is that truly suffering?

    • MOST government employees are doing activities(I won’t call it work) that have little to no value to the American people or the nation. The political “correctness” of their progression is such that incompetents can easily beat the best man for the job, if they have the correct demographics. I think Trump is likely to demand that each letter agency justify its existence and propose a plan to cut its budget 10% within a month or so. There’s no excuse to pay “prevailing wages” if the market doesn’t require it.

      Regarding “Lack Lives Matter”; violating the rights of legitimate individuals or groups is always a crime, and has legitimate consequences.

      • The government already does this – it is called the Performance Management Agenda, and yes, the cuts are draconian. Do some research and you’ll discover the gov’t has been cutting for over thirty years now; we are well past cutting into bone yet we find a way. I’m a fed employee and I guarantee you there is no dead weight around my place of employment.