Tax Cuts Now Much More Likely, China’s New Emperor, DNC Purge of Sanders Supporters, and Warnings About China’s Asset Bubbles

In Brief

  1. Tax cuts and tax reform are now domestic issue #1 for the Trump and Republican agendas. They will focus on corporate rate cuts to foster job creation and growth and on middle-class tax cuts and simplified filing. The passage last week of the Budget Resolution by the Senate and strong House support for accepting it makes tax reform and tax cuts much more likely this year.
  2. China is in the midst of a crucial Party Congress [every 5 years] that will re-elect Xi Jinping as party leader. Xi is, in effect, becoming China’s new emperor. This Congress will have very substantial implications for Chinese, regional and world politics. The results of the Congress will likely set the stage for major economic changes, more authoritarian rule, a pull-back from a market oriented economy, substantial slowing of GDP growth and major Chinese actions on N Korea’s Kim regime
  3. The DNC purges Sanders and Ellison supporters in favor of Clinton supporters.
  4. The leader of China’s Central Bank warns of a potential Minsky Moment…the sudden collapse of the prices of over-leveraged assets. He especially warns of high corporate debt and rapidly increasing household debt.
  5. Sexual predators in Hollywood and elsewhere are being identified and being challenged. Many are called. Many will fall… Who is next?

In-Depth

What’s Important

Almost every week I get two questions about President Trump:

  1. When is he going to resign?
  2. When is he going to be impeached?

The answer to both questions is the same…it is extremely unlikely the either will ever occur.

Here is why.

There is no evidence Trump is even thinking about resigning. Those who hate Trump hate his ego. His ego is but one thing that strongly argues against him resigning. He is the most powerful person in the US and world…by far. There are no credible hints of him resigning. Resignation would only become likely if he got seriously ill with little hope of recovery. There is no evidence of serious physical health problems. Assertions he is mentally ill or deranged are more likely to be accurate for the accuser than the President. Intense dislike for a person’s tone and style or policies does not mental illness make.

There is no doubt Trump has made mistakes, especially in the tone and style area but he is piling up major policy and substantive successes… excellent federal judges, ISIS’ defeat, massive deregulation, excellent cabinet and staff appointees and the guts to remove losers like Bannon and Flynn. And major tax reform and cuts now appear likely by Christmas. Why would he resign?

What about impeachment. I urge those of you intensely interested to read Article II, Section 4 of the Constitution as well as the 25th amendment.

There are but three constitutional ways to remove Trump:

  1. Vote him out in 2020.
  2. Impeach him by majority vote in the House and 2/3rds vote in the Senate under an Article II impeachment.
  3. Using the 25th amendment process, declare him unable to serve which as its final step requires 2/3rds of the House to so declare as well as 2/3rds of the Senate…that is a much higher bar than an Article II impeachment.

Note that in all three methods of removing him the process are political, not legal. The voters must do it or the House and the Senate must do it.

The federal courts can NOT remove a President, according to their own case law.
The political facts are simple. A Republican majority House is NOT going to impeach Trump under any anticipatable circumstance.

In the Senate a 2/3rds vote to remove is a pipedream. In the current Senate 19 Republicans would have to vote to remove along with every Democrat.

After the 2018 election it will likely be even harder as the Rs are likely to gain at least a few Senate seats because the Ds have 10-13 vulnerable seats and the Rs just two.

And please remember that in the late 1990s Bill Clinton was impeached by the House but not one Democrat voted to remove him even though Clinton had indeed committed a federal crime that cost him his law license.

This is a partisan political process, not one of law.

Long-Term

The Political and Economic Earthquakes from China’s Party Congress

Most political conventions are filled with hot air and have, at most, modest consequence.

China’s 19th Party Congress is not yet completed but is already guaranteed to have major influence in China, East Asia and the world. It will be the topic of hundreds of articles, books and PhD dissertations.

Let’s review the major changes we already know about:

  1. Xi Jinping has effectively been tapped as China’s all-powerful dictator.
  2. Xi is essentially China’s new emperor with power exceeded only by Mao’s when he was alive. Xi’s “thought” is being enshrined in the Party Constitution guaranteeing him supreme power as long as he lives.
  3. Xi announced that the party’s control of almost all aspects of life and enterprise in China would be strengthened…more authoritarian power in the hands of Xi.
  4. Deng Xiaoping’s market capitalism is the be shifted to a Chinese brand of socialism.
  5. That economic model is to include more direct control of the private corporations by the state. All corporations are to put the welfare of the country and state ahead of investors or profits as do the the currently state-owned enterprises [SEOs]. This will include partial state ownership and active participation in management. [This policy was actually announced several weeks ago.]
  6. Income inequality is to be addressed by re-distribution from the wealthy to the poor and from rich provinces to poor provinces.
  7. Xi promised to build up the military to world class standards…standards that would allow it to win a high-tech modern war with the US which it now cannot do.
  8. China is to become a world leader by 2050.
  9. He threatened Taiwan with destruction if they sought permanent independence from the mainland and promised increasing control of Hong Kong.
  10. He gave the country to 2035 to become a leader in innovation and until 2050 to become a great modern socialist country.
  11. China will extend and strengthen its control of the East and South China seas in violation of international law and rulings and over-riding the legitimate claims of Japan, Vietnam, Malaysia and others as well as freedom-of-navigation by US ships and planes.
  12. More state control means more destruction of civil society and non-government institutions.
  13. Neither N Korea or the US and Trump were mentioned.

All of my summary sounds hyperbolic, but it is not. A sea change has been orchestrated by Xi and he totally controls China’s political decision making. He has a clear vision for China. I think much of the vision is a pipedream and I’ll be writing about that regularly with facts and realistic analysis.

The world needs to take his words and plans at face value. Foreign investors and companies need to take the planned changes very seriously. Imagine how US investors would react if the US government legally took over partial ownership of Apple and actively participated in management and mandated that Apple’s priority was not profit but what was best for the country and the Democratic or Republican Party. That is what is happening to Jack Ma and Alibaba. That is not hyperbole, it is Xi’s PLAN. And, he has the power to implement it slowly or rapidly. If I am correct, foreign investment in China will slow markedly and rich Chinese will do everything they can, legal and illegal, to get their money and themselves out of China. Use those “metrics” to test my analysis.

Additional Implications and Reactions

The implications of these new policies and extensions of existing policies are mostly, but not universally bad for China, East Asia and the world.

They are bad for China because they presage:

  • More inefficient government control of the economy and corporations
  • More restrictions on civil and human rights and repression of dissent
  • More use of debt to “buy” growth
  • They are bad for East Asia because they promise:
  • Less freedom for Hong Kong and Macau and threats to Taiwan
  • More confrontations in the East and South China seas
  • More expansion of Chinese military power

One positive outcome might be more Chinese suppression of Kim Jong-un because he threatens stability on their border

For the world it offers:

  • An aggressive, mercantilist, authoritarian China
  • An active contest between China and the US for dominance in East Asia and worldwide.
  • But the reality of China’s future not likely to be as good as Xi is promising.
  • The leader of their central bank is worried about their extreme indebtedness and asset bubbles that might collapse. I have been predicting rapid slowing of Chines growth starting within the next 9 months and lasting for years for the same reasons.
  • China’s work force is declining in size and its population will begin declining in a few years. India’s population will grow through 2050 and the US population is projected to grow beyond 2100.
  • China is well past it’s period of peak growth and likely to experience an extreme slowdown as has Japan since the early 1990s.

Political promises are easy to make but often very hard to deliver.

Elections

Ohio Issue 2

I’ve had a request from a reader to analyze Ohio Issue 2 on the Nov 7 ballot. It will mandate drug price controls for some government funded purchases.
It is strongly contested with major proponents and opponents.

I’m not going to get in the business of publicly evaluating issues like this but will report that the following major Ohio papers, both liberal and conservative are all opposed:

  • The Cleveland Plain Dealer
  • The Columbus Dispatch
  • The Akron Beacon Journal

I don’t think the Cincinnati Enquirer has made an endorsement either way yet.
If you want details on the issue just google “Ohio Issue 2” and you’ll get more info than you can absorb.

In the end, your vote is yours to decide.

Major Legislation and Policies

2018 federal budget and tax reform

Thursday the Senate passed the 2018 budget resolution 51-49 along party lines. Republican House leaders and factions have indicated they will pass the same resolution.

This effectively clears the way for tax reform and cuts to be approved in the Senate with 51 votes under reconciliation rules. These steps greatly increase the likelihood a tax package will be passed by Christmas.

Many difficult issues remain to resolve but the Republicans almost all believe they MUST pass a tax bill to get back into the good-graces of their own voters.

Trump and  the White House

General Kelly to the rescue

Four-star Marine Corps General and Trump Chief-of-Staff came out swinging with intense personal fervor when Trump was accused of insensitivity to the family of Sgt La Donald Johnson. Kelly lost his own son in Afghanistan and was in the room when Trump called the families of the four soldiers who died in an ISIS ambush in Niger. The accusations were made by Representative Frederica Wilson [D-FL].

Kelly is emerging as a major force in managing the White House as well as being an increasingly public and skilled defender of Trump and his policies.

Democrats on the Democrats

This is a new approach the analyzing the situations in the two parties. For both the Democrats and, separately, the Republicans these sections will report what party official, politicians, or partisan analysts are saying about their own party…WITH WHICH I AGREE. For example, many Democrats recognize the internal battle going on now in the party between the progressive wing and the mainstream wing. Almost all Republicans recognize the internal conflicts between the Trump wing, the Never Trumpers, the Bannon alt-right, and with the Tea Party folks.

Purge of Sanders Supporters

Democratic National Committee Chairman Tom Perez has purged scores of Sanders and Ellison supporters from key positions at the DNC. Vanity Fair reports…” …progressive party members were incensed to find that Perez demoted a number of veteran delegates who supported Keith Ellison [D-MN] and Bernie Sanders in the 2016”. Ousted delegate James Zogby is quoted as saying,,,”I’m concerned about the optics. And, I’m concerned about the impact. I want to heal the wounds of 2016.” Host Cenk Uygur of the “Young Turks” show said, referring to the disastrous wedding in the Game of Thrones series…” Now all of a sudden it looked like it was a fun wedding until they took out the daggers and turned it into a red [bloody] wedding or in this case maybe a blue wedding.”

Forecasts

There are changes this week

Political Forecasts – Elections

  • The chance the Rs will lose at least a few seats in the 2018 House elections is 80 to 90 percent.
  • The chance the Rs will lose their 241-194 House majority in 2018 is 10 to 20 percent.
  • The chance the Republicans will still control the Senate after next year’s elections is 90 to 95%.
  • CHANGE–The chance the Ds lose three or more of their 48 Senate seats in ’18 is 85 to 90 percent. [Up from 2 or more Senate seat losses previously.] The change is due to increased likelihood of major tax cuts and reform.
  • The chance that Donald Trump will be the 202o R nominee is 90 to 95 percent.
  • The chance that Trump will win a 2nd term is 80 to 85 percent.

Policy and Legislative Forecasts

CHANGE–There is a 80-90% probability the Congress will pass and Trump sign major tax reform and tax cuts for most by fall 2018. [Up from 70-80%] The change is due to support for budget resolution, a key pre-cursor of passing tax package with just 51 votes.

There is a 50-50 probability that Obamacare Repeal and Replace will be passed and become law by fall 2018. [This issue will not go away as Obamacare is self-destructing with high premiums, increasing state costs and insurance company losses.]

Media

Don’t forget the Tuchfarber 30 Day test—when you get upset about something in the news ask if it is likely to be IMPORTANT IN 30 days or soOnly seldom will it be so and you can usually ignore it.

Global Politics

Behold the new emperor of China

Graham Allison of Harvard is a very famous international relations expert. His recent op-ed in the WSJ titled…” Behold the New Emperor of China’…makes five points worth discussing. I agree with three but strongly disagree with two.

The points are:

  1. Xi Jinping will be the most powerful leader of China since Mao. I agree.
  2. Xi is the most ambitious leader on the international stage today. I agree.
  3. He is the most surprising major leader on the planet today in that he was expected to be a “bland figurehead” like his immediate predecessor. I agree.
  4. President Xi is the most effective global leader today. I strongly disagree as he has taken China down a debt-ridden path that will end up in a long period of slow growth like Japan’s of the last 25 years. Japan has grown by 0.5% per year since 1992 and China’s potential going forward is not much higher than that unless someone changes the rules of economics and finance.
  5. Of all the leaders on the international scene Xi will be the most consequential with Beijing being the nominal world capital of influence by 2022. I strongly disagree. By 2022 China will be mired in slow growth and perhaps even a lingering recession. Its new commitment to socialism will be a disaster and the “Chinese Model” now being copied by dozens of countries will be seen as a failure as was the case of the Soviet model.

The proof is in the pudding… watch the hard-economic numbers over the next 5-10 years.

Important Election in Japan

On Sunday Japan held an important parliamentary election. Prime Minister Abe’s Liberal Democrats and allies are won a large victory, one important for the US. Abe is a strong US ally and is building up Japan defenses against N Korea and China in conjunction with the US and S Korea.

He retained his two-thirds super majority and the new Hope and Change party did poorly winning only about 10% of the seats. Like Abe’s LDP party the Hope and Change party is conservative and not really very different than the LDP. In fact, its leader, Yuriko Koike, is a former LDP member who may rejoin the party at some point.

China’s Politics and Economy

Economic Change

China’s politics and economy are so important to the global economy and the general situation around the globe I am adding a regular section on it to the newsletter. The section will periodically include detailed articles on specific things but will also list each week evidence that suggest an economic soft landing for China—a controlled slowdown to “normal” economic growth levels—or a hard-landing—a more rapid, extended and dangerous bursting of China’s asset bubbles.

I WILL ADD AND DELETE ITEMS TO THIS SECTION AS RELEVANCE DICTATES. “NEW” ANALYSES WILL BE SO LABELLED AND REVISED SECTIONS WILL BE LABELLED “CHANGED”.

New or Major evidence for Soft Landing

  1. The WSJ reports that Chinese regulators removed emergency measures they put on the Chinese stock exchanges in support of equities following crashes in 2015 and 2016. This is a sign of confidence and stability.
  2. The political leadership, including President Xi, and the financial regulators have promised to rein in excessive speculation and credit growth. [We’ve been promised that for many years and the debt has continued to sky.]

New or Major evidence for Hard Landing

  1. NEW—See the story above in the Long-term section on the Party Congress now underway.
  2. NEW— China’s central bank chief, Zhou Xiaochuan, warned repeatedly over the last week that China faces the risk of a “Minsky Moment”. Named after economist Hyman Minsky, such an event is a sudden market sell-off driven by an over-leveraged asset. In other words, an asset like real estate, stocks, or commodities whose prices are much too high, often because of speculation. It is remarkable that Zhou made his comment during the 19th Party Congress where the past and future successes of China are to be celebrated. Zhou cites corporate debt in China being too high corporate and household debt rising very fast.
  3. In an under-reported Chinese initiative, the government is demanding partial ownership and substantial control of China’s private companies, especially the big successful ones. That is almost surely a prelude to sharing profits with the government. China already owns and runs most of the older major companies in the country and fears the wealth being gained by Jack Ma of Alibaba and other tycoons. One simple way to understand what is happening is to imagine the US government telling Apple that it is “buying” into the company, will have multiple seats on the board, will name some managers, will share in the profits and will do what is best for the country, not the company or its shareholders.
  4. Governments have proven to be bad managers and terrible predictors of winners and losers.
  5. The WSJ headlines…” Consumer Loans Fuel China Housing”. Short-term consumer loans have grown at an astounding 100% rate in the last year but not for retail spending whose growth is little changed. Rather it is for investments in housing extending the housing bubble and adding more debt.
  6. Party Secretary/President XI continues to purge opponents and those offering him only weak support so as to have almost complete control of the levers of power when the economic/financial crisis starts to bite. On Oct 18 every 5-year Party Congress starts. Expect major news at the end of it and for months to come.
  7. S&P has joined Moody’s and Fitch in downgrading China’s debt because of excessive and growing levels of that debt.
  8. Two quotes from separate stories in a recent WSJ accurately describe where things are with China’s economy. “China’s economic mandarins are unlikely to permit an overly sharp slowdown in investment that could tank commodity markets right ahead of the twice-a decade Communist Party leadership shuffle kicking-off in mid-October.” “An all-powerful leadership can likely keep the forces of disruption at bay for some time. But they haven’t disappeared…”
  9. A WSJ story reads— “…China has been reeling in some of its biggest deal makers on mounting concerns about capital leaving the country and debt loads posing a risk to its economy.”
  10. The WSJ’s Heard on the Street [Sept 8] wrote…” This doesn’t mean China’s bad loan problem has gone away, it just has been swept under a convenient nearby rug.”
  11. WSJ article points out that the yield curve in China has flattened—the prices of 3-year bonds are essentially the same as 10-year bonds. Such flattening is often, but not always, indicative of an economic slowdown on the horizon.
  12. Several weeks ago, the IMF raised its projections for Chinese growth but sternly warned that rapidly increasing Chinese debt will hit 300% by 2022. Others like the Institute for International Finance [IIF} asserted in June that Chinese debt already totaled over 300% of GDP, a high percentage for a developing country.
  13. China is now officially and publicly instructing its companies that they must stop foreign investments in areas like insurance, hotels, other real-estate, gambling facilities, etc. Foreign investments are to be directed to two areas. The first is into strategic areas, as defined by the government, such as technologies where the intellectual property gained fits with government plans for China to become a major, worldwide competitor in various fields. [Sound like Japan in the 1970s and 80s?] The second area is into investments consistent with China’s One Belt-One Road strategy to tie it more completely with all of Asia as well as Europe and Africa.

These all indicate concern that economic, financial and political risks are rising.

Musings

This is a new section. My “musings” will not have the factual and analytic rigor required for the other sections above. But, they will not be just opinions like the Opinion and Commentary articles. They will be somewhat free-flowing and speculative. Please comment if you like or dislike them.

Weinstein and Hollywood and Media Cesspool

Dozens of women have come out in recent days to accuse Weinstein and many others of rape and abuse and harassment. Others are targeting abusers elsewhere. These abuses have been well known for decades, but the elites and mainstream media had an informal pact to just look the other way and keep quiet.

Weinstein is toast and likely, so are many others. Stay tuned…

Tidbits, Insights and Facts

Majority Leader McConnell figures out Trump

Senate majority Leader McConnell has figured out how to deal with Trump…credit Trump with the successes he has had…

McConnel is a genius on the rules and procedures of the Senate and for getting things done. Ask any fair-minded person privately, off-the-record, in either party, who has worked closely with him and almost all will agree.

It is not his fault that Obamacare didn’t get repealed and replaced.

He has only a 52-48 majority and 4 or 5 grandstanders like McCain, Paul and Collins whom no one can control. A handful of others drop in and out of the “uncontrollables”.

On CNN’s State of the Union Sunday, McConnell said of Trump…” I think he’s getting a lot more done than anyone’s giving him credit for.” He cited increased economic growth, terrific personnel appointments like Justice Gorsuch, and “changes that he is bringing about that are turning the country in a different direction”.

All of that is substantively true and McConnell has unlocked the key to effectively dealing with Trump…laud him when he deserves it and don’t gratuitously attack him because his ego will force him to respond in kind.

Until next week…
Al Tuchfarber
Professor Emeritus of Political Science, University of Cincinnati