Dude, Where’s My Tax Cut? DR. RAJEEV DHAWAN DIRECTOR Presented at the Global Interdependence Center’s Central Banking Series meeting at Fundación Rafael del Pino in Madrid, Spain • March 27, 2017
Trump’s Bull Run A balanced budget is fine. But sometimes you have to fuel the well in order to really get the economy going. Donald Trump
Index Moves Since Trump Victory
45th President
12.5%
19.8%
12.0%
9.6% 7.4%
Chg. From Jan 20th
+3.75%
+3.22%
+4.03%
S&P 500
Dow Jones
6.2%
‐3.08%
‐1.02%
‐8.87%
‐0.49%
Dow Transports
Russell 2000
Crude Oil
KBW US Banks
‐1.9% Gold
Gold
S&P 500
Dow Jones
Source: The New York Times, February 17, 2017
Dow Transports
Russell 2000
Crude Oil
KBW US Banks
Source: Yahoo Finance; Investing.com
‘Wealth Effect’ Revs Up Luxury Cars U.S. Sales of Most Expensive Vehicles Brands are surging since Election Jan.‐ Oct 2016
(%) Chg. Maserati
Nov. 2016 ‐ Jan 2017
Maserati
‐0.9
48.0
Rolls Royce
Rolls Royce 6.0
Ferrari
3.1Ferrari
Porsche
Porsche 3.2
11.0
Bentley
11.0
Bentley ‐6.8 Lamborghini Industry
42.0 28.0
0.0 Lamborghini ‐0.2
‐10.00 ‐5.00
0.00
Industry 5.00
10.00 0.00
8.6 1.9 10.00
20.00
Source: The Wall Street Journal, March 1, 2017
30.00
40.00
50.00
Post-Recession Consumer Spending Divergence And I think some of those big-ticket items are eating up not only their ability to spend, but their time. At some point in time you’ve got to believe that everybody’s going to have a brand-new car. There’s dollars that are going to be freed up for other categories of spending.
Terry Lundgren CEO, Macy’s (SAAR, mil.)
(% Change Year Ago)
20
8.0 7.0
18
6.0 5.0
16
4.0
14
3.0 2.0
12
1.0
10
0.0
2010
2011
2012
2013
2014
2015Q1 2015Q2 2015Q3 2015Q4 2016Q1 2016Q2 2016Q3 2016Q4
National Vehicle Sales (left)
National Retail Sales (right)
Source: The Wall Street Journal, February 22, 2017
Forecast in 140 Characters or Less!
Currency Manipulation and Trade Deficits They (Japan and China) play the money market, they play the devaluation market, while we sit here like a bunch of dummies.
Donald Trump 45th President United States of America
Countries
Trade Exports
Trade Imports
Trade Deficit
% of U.S. Trade Deficit
% of Total Trade
China
115.78
462.81
‐347.04
47.26%
15.90%
Mexico
230.96
294.15
‐63.19
8.61%
14.40%
Japan
63.26
132.20
‐68.94
9.39%
5.40%
Germany
49.36
114.23
‐64.87
8.83%
4.50%
Canada
266.83
278.07
‐11.24
1.53%
15.00%
A big obstacle to viewing TTIP as a bilateral deal is Germany, which continues to exploit other countries in the EU as well as the US with an ‘implicit Deutsche Mark’ that is grossly undervalued. Source: Financial Times, January 31, 2017
Peter Navarro National Trade Council Adviser
Reality of Global Competition Workers in South Carolina are not competing with Mexican labor, Mexican capital and Mexican technology as they did in the 1970s. They are competing with a nearly unbeatable combination of US know-how and Mexican wages. Production & Jobs in Manufacturing Sector Index, Jan 1979 = 100
Richard Baldwin President Center for Economic Policy Research
240.0 220.0 200.0 180.0 160.0 140.0 120.0 100.0 80.0 60.0 40.0 20.0 0.0
NAFTA begins 1994 China joined WTO
1980
1983
1986
1989
1992
1995
1998
2001
Manufacturing Employment Source: Financial Times, November 23, 2016
2004
2007
2010
Manufacturing Production
2013
2016
Making of a Modern Automobile (1993)
Source: Principles of Macroeconomics by Joseph E. Stiglitz, 2nd Edition
Making of an Automatic Seat-Control Unit Mississauga, Ont.
Canada
5
(Final Use)
U.S.
Centennial, Colo. 1
Asia
Arlington, Texas
Capacitors; Resistors etc.
(Final Use)
5
El Paso (Warehoused to avoid VAT in Mexico)
3
U.S. Mexico
2
Ciudad Juárez Into circuit board Source: Businessweek, January 2017
4
Assembly
Matamoros (Norwegian owned)
Are Trump and Congress in Sync? Any time I hear ‘border adjustment,’ I don’t love it. “too complicated”…(don’t) like the term. Donald Trump 45th President United States of America
Trump calls for a “Big border tax” that narrowly targets companies that outsource production for goods sold in the U.S.
The only power that we have with China is massive trade. I would tax China on products coming in. I would do a tariff, yes……let me tell you what the tax should be … the tax should be 45 percent.
Source: The Wall Street Journal, February 8, 2017
Tariff History in Modern Times aka 1970 Onwards 1971 ‐ Richard Nixon
On 15 August 1971, President Richard Nixon closed the gold window (ending the ability of foreign central banks to convert their dollar holdings into gold) and imposed a 10% surcharge on all dutiable imports in an effort to force other countries to revalue their currencies against the dollar. These policies were designed to prevent a run on US gold reserves and reverse the deterioration in the US balance of payments by getting other countries to revalue their currencies, as well as head off Trade Act of 1974 says: “Whenever fundamental international payments problems require special import measures to protectionist pressures in Congress. restrict imports to: (1) deal with large and serious United States balance of-payments deficits; 1987 – Ronald Reagan (2) prevent an imminent and significant depreciation of the dollar in foreign exchange markets; or (3) cooperate with other countries in correcting an international balance-of-payments disequilibrium President Reagan imposed tariffs of 100% on medium-sized Japanese color televisions, powerful lap-top and desk computers and certain hand powerfor tools, to retaliate Japan's failure to allow more American products into its markets the President shall proclaim, a period not for exceeding 150 days: and totemporary halt the underpriced "dumping" ofnot Japanese semiconductor computer chips in nations. (A) a import surcharge, to exceed 15 percent ad valorem, inother the form of duties on articles imported into the U.S.; 2002 ‐ George W. Bush (B) temporary limitations through the use of quotas on the importation of articles into the U.S.; or (C) both a temporary import surcharge described in subparagraph (A) and temporary limitations described in subparagraph (B).” In March 2002, President Bush imposed an average 30% tariff on selected foreign steel entering the United States.' This trade law was ostensibly enacted to temporarily protect the domestic steel industry. 2009 ‐ Barrack Obama
The Obama administration set steep import duties of 35% on Chinese passenger and light truck tires, responding to what the U.S. International Trade Commission determined to be a surge of Chinese tire exports that has rocked the domestic U.S. tire industry and displaced thousands of jobs. Source: Wikipedia.com; http://legcounsel.house.gov/Comps/TRADE74.PDF;
U.S. Forecast: Dollar, Bond Yield, and GDP (% Ch. Dollar Index)
(%)
30.0
4.0
25.0
3.5
20.0
3.0
15.0
2.5
10.0 2.0 5.0 1.5
0.0
1.0
-5.0 -10.0
0.5
-15.0
0.0 Q1-2017
Q2-2017
Q3-2017
Q4-2017
Dollar Index Growth (Left) GDP Growth (Right)
Q1-2018
Q2-2018
Q3-2018
Q4-2018
10-Yr. Bond Yield (Right)
Corporate Sector’s Cash Position Cash Investment Balances of Selected S&P 500 Companies with balance of Earnings Stashed Abroad Billions
250
237.6
200
147.3
150
88.8
100 50
93
108 57
71.0 56
0
Source: USA Today Money, November 25, 2016
57.0 104
41.0 56
Fed Moves this June & then Stands Pat Until 2018 Feb’17 Forecast
Federal Funds Rate (%)
2017Q2 2017Q3 2017Q4 2018Q1 2018Q2 2018Q3 2018Q4 2019Q1 2019Q2 2019Q3 June Lower Bound
1.00
1.00
1.00
1.25
1.50
1.75
1.75
2.00
2.25
2.25
Upper Bound
1.25
1.25
1.25
1.25
1.50
1.75
1.75
2.00
2.25
2.25
History
Forecast
2014
2015
2016
2017
2018
2019
Real GDP
2.4
2.6
1.6
2.1
2.3
2.5
Monthly Job Additions
213
240
208
180
142
150
Consumption
2.9
3.2
2.7
2.6
2.9
2.9
Auto Sales (Mil.)
16.5
17.4
17.5
17.0
16.6
16.3
Housing Starts (Mil.)
1.00
1.11
1.17
1.19
1.22
1.27
Inflation (CPI)
1.6
0.1
1.3
2.4
2.0
2.4
10 Yr. Rate
2.5
2.1
1.8
2.9
3.4
4.1
(‘000s)
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