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Trump's Fake Midterm Economic News: 10% Tax Cut And China Deal

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U.S. President Donald Trump. Photographer: Al Drago/Bloomberg

On Monday, October 22, President Trump had another one of his off the cuff thoughts that seemed to catch everyone, including his staff and Republicans, by surprise. He said that there would be a 10% tax cut for the middle class, that a resolution would be done in the next one to two weeks (which would be just before the midterm elections) and that it would be voted on after the elections.

To see that Trump’s employment gains are just a continuation of Obama’s Presidency click here and this is a review of Trump’s Economic Scorecard before the midterm elections.

Politico reported Trump being vague on timing about the middle-class tax cut, saying “we’re putting in a resolution sometime in the next week or week and a half, two weeks,” but did not offer additional details. However, it quickly became apparent that this would not in the works. Congress was not in session and was campaigning out in their districts and states.

The timing of Trump’s announcement seems to be linked to the drop in the stock market . The Dow 30 Industrials had hit an all-time high of 26,952 on Wednesday, October 3, and by Friday, October 19, it had fallen 5.6% to 25,444 and had experienced an 832 point decline on October 10. With Trump tying his Presidency to the stock market it would not be surprising to see him “announce” a tax cut to try and help the market.

Dow 30 Industrials price chartStockCharts

It took just over a week but the President and the House Ways and Means Committee issued a joint statement that included, “We are committed to delivering an additional 10 percent tax cut to middle-class workers across the country.  And we intend to take swift action on this legislation at the start of the 116th Congress.” This looks like cover for Trump’s earlier statements.

Adds another $2 billion to the deficit

Two days after Trump made his remarks Maya MacGuineas, the president of the Committee for a Responsible Federal Budget issued a statement saying, “We apparently haven’t yet reached the height of fiscal recklessness and irresponsibility. We’re on course to borrow $2 trillion to pay for the last tax cuts, and if new tax cuts aren’t paid for they could add as much as $2 trillion more to the debt. On our current course, we could see the return of trillion-dollar deficits by the end of this year and debt as large as the entire economy within a decade or so. Interest payments, meanwhile, will approach $1 trillion within a decade, eclipsing what we spend on Medicaid or defense.”

U.S. fiscal 2018 receipts and spendingU.S. Treasury Department

Deal or no deal with China?

Then on Thursday, November 1, less than a week before the midterms, President Trump tweeted that he “had a long and very good conversation with President Xi Jinping of China… with a heavy emphasis on Trade”. I don’t doubt that he did talk with President Xi, but this again seems like an election ploy to help the stock markets and lessen the anxiety with voters. The Dow 30 had fallen an additional 4%, to 24,443 on October 29 for a decline of almost 10% from its high.

President Trump’s tweet about ChinaTwitter

There are at least two indications that this was politically motivated . The first is the Wall Street Journal reporting that CCTV, China Central Television, saying that President Trump initiated the phone call. There is the possibility that the call had been scheduled a few weeks ago, but it does look like Trump reached out so that he could say that there was progress on the trade talks.

The second sign that nothing of substance had come from the call was Larry Kudlow, the White House economic advisor, on Friday said on CNBC, “ We are doing a normal, routine run through of things we have already put together and normal preparation. There is no mass movement, there is no huge thing and we are not on the cusp of a deal.” After Kudlow made his remarks the Dow went from positive territory to negative and at one time had fallen 500 points from its peak to its trough.

Trump did say later on Friday that he had spoken with President Xi and that China very much wants to make a deal. Trump added “I think we will make a deal with China, and I think it will be a very fair deal for everybody. But it will be a good deal for the United States.” This helped to bring back the Dow so that it only had a 110 point loss on Friday.

It certainly appears that Trump is talking up a potential deal with China for political reasons with the midterms a few days away and the looming threat of imposing tariffs on $500 billion of Chinese products at the beginning of 2019.

Soybean farmers already being impacted

China’s tariffs have already hit U.S. soybean farmers with lower prices (see graph below where the blue circle shows when tariffs started to come into play) and could have long-term negative implications for U.S. farmers if China decides to rely on other countries for soybeans and/or ramps up their own production.

It would not surprise me if China decides to lessen their reliance on foreign, and especially U.S. provided food stocks. The Chinese may make it a strategic imperative and given their resources could significantly cut the amount of soybeans and other food products it buys from the U.S.

The 15% lower soybean prices that farmers have seen over the past five months could become permanent. With operating margins below this level, there is the potential for a large number of U.S. soybean farmers to go bankrupt.

Soybean pricesStockCharts

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