A Few Notes on China’s “Trump Problem”

Before 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 
   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?