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Thoughts on GOP Tax Cuts & China’s Faltering Economy

FORECASTS & TRENDS E-LETTER
by Gary D. Halbert
December 5, 2017

1. Larry Kudlow: GOP Tax Cuts Will Benefit Everyone

2. China to Challenge US Superpower Status, Right? Wrong!

3. Another China Misnomer: Its Population is Aging Rapidly

4. China’s Economic Juggernaut May Have Peaked Already

Overview

I veer from our usual roster of topics this week to bring you an update on China and its prospects for continued hot economic growth, or lack thereof. China is the second largest economy on the planet, behind the US, and many (if not most) Americans believe that it won’t be too long before China overtakes the US as the largest economy in the world.

This thinking is taught in many US public schools, colleges and elsewhere. According to this theory, China will become the largest economy in the world as early as the next decade or by 2030 at the latest, so we’re told.

The Chinese government claims that its economy has been growing by 6% or better a year for the last decade. Yet there is a growing body of evidence that suggests China’s economy has grown by less than half that amount in the last few years. Likewise, there is growing evidence that China’s population growth rate has peaked and is now in decline.

If just these two trends are true, then there is virtually no chance that China will overtake the US as the world’s largest economy in the next decade, if ever, despite the mainstream media narrative that it’s only a matter of time.

But before we get to that topic, I want to reprint an excellent article written by Larry Kudlow, one of my favorite columnists, late last week regarding the tax cut plans approved by the House and Senate. Larry has some interesting insights that the media will not address. Here it is.

“Tax Plan Will Spark an Investment
Boom That Benefits Everyone


Warts and all, if I were a voting member of Congress, I would certainly cast a “yea” vote for the tax-cut plan passed by the Senate and House and headed for conference (to work out minor differences) in the weeks ahead.

These bills are not perfect, especially on the individual side. But the business tax cuts will generate an investment boom in the years ahead. And those cuts will bring economic growth back to its historical norm of 3 to 4 percent.

Incredibly, the Joint Tax Committee (JTC) scored growth for the Senate plan at less than 1 percent. So much for their “dynamic” model. The Tax Foundation estimates 3 to 5 percent growth over the next ten years. That’s more like it, but it’s still too low.

Look, the central cause of the 2 percent real-GDP growth slump over the past 17 years has been a lack of capital formation, with virtually no real business investment, flattened productivity, and barely any increase in real workforce wages.

Yet the tax plans under discussion -- which go back to the work of Steve Moore, Steven Mnuchin, Stephen Miller, Art Laffer, Steve Forbes, and myself -- are remarkably similar to the Trump campaign draft on the business side.

So I can say with confidence that the current tax package is directly aimed at reducing the current high tax cost of capital and increasing after-tax returns from investment.

Incentives matter. If it pays more after tax to build new capital stock and generate more business-equipment investment, people will do so. This is standard economics.

There may be disagreements on the numerical effects, but the principle has worked in the past (JFK and Reagan) and will work in the future.

Larry KudlowA 20 percent corporate tax rate, immediate full expensing, repatriation of U.S. corporate cash overseas, and a 23 percent discount for sub-chapter S pass-throughs… will generate way more growth and investment than mainstream forecasters suggest.

At various times, President Trump has talked about 3 percent, 4 percent, and even 5 percent growth. Despite the dreary mainstream models, I believe the president will turn out to be correct.

What’s more, faster economic growth will generate much higher tax revenues. From businesses to investors to entrepreneurial startups, less tax avoidance and sheltering will raise revenues far beyond the standard consensus estimate...

Assuming about $3 trillion coming back home at an average tax rate of 10 percent, that’s $300 billion in new revenues -- way beyond the JTC estimate. And that’s conservative. It could be $350 billion in the first year or two -- substantially more revenue and a way bigger pay-for than the JTC predicts.

And there’s more on the dynamic side. Booming stock market gains of roughly $6 trillion of late could generate another $600 billion or $700 billion in revenues from capital gains, and hundreds of billions of dollars more in dividends, which generate massive revenue increases…

Sure, there are things on the individual side that should be changed. Personal tax rates should be much lower. A backdoor capital-gains tax hike on individual investors must be erased. And the proliferation of tax credits is inefficient and complex, with no marginal incentives to promote growth.

Yes, everybody likes kids. But not everyone has them. And a lot of people like dogs and cats. Shouldn’t they get tax credits, too? No. If you’re looking for more money in your pocket -- more take-home pay -- the best prescription is to slash personal tax rates for everyone…

But here’s the crux of the matter: An investment boom generating much faster growth will benefit everyone. Small businesses, new businesses, investors, and wage earners will all prosper from a tax-cut-led investment boom.

Yes, a rising tide will lift all boats. The great news is that President Trump, the Senate, and the House are absolutely moving in the right direction, and gathering momentum on the way.” END QUOTE

China to Challenge US Superpower Status, Right? Wrong!

The subtitle above, I assume, will come as a surprise to most of my readers. Like me, most of you probably assume the media narrative that China will overtake the US as the world’s largest economy in the not-too-distant future is correct. Yet there is growing evidence that China’s economic juggernaut may have peaked already. Here’s why.

To explain this, we need to look at some simple facts. First, China’s population is 1.4 billion people versus only 323 million in the US. So our population is less than one-fourth of China’s. Second, China’s annual Gross Domestic Product – the sum of all goods and services created – is $11.2 trillion versus $18.6 trillion in the US.

Given their enormous advantage in the size of populations, it is easy to believe that China could overtake the US as the world’s largest economy in the next decade or so. But this assumption overlooks a number of troubling economic and demographic trends developing in China in recent years.

First, more and more forecasters argue that China’s reported 6% or more GDP growth has been exaggerated for at least the last several years, and believe that it now could be much less. If true, that would be a stunning contradiction to the mainstream media’s narrative that China is on-track to oust the US as the world’s strongest economy.

While it’s hard to ascertain when Beijing started cooking its books, more economists are coming to agree that China has only grown at somewhere between 2-3% in the last few years. This is despite the fact that China did not suffer from the same economic crunch the West did during the 2008 financial crisis. China was able to keep growing relatively fast during the Great Recession. But not for the right reasons.

China's growth is slowing

During the global recession, China continued to spend so much money collectively across the country on new cities (some now ghost towns), roads, bridges, tunnels, airports, high-speed rail, etc., etc. – and much of it was a complete waste. As a result Beijing’s total outstanding credit is now at an alarming 260% of GDP. It is so high that Moody’s downgraded China’s sovereign debt rating, not exactly the sign of an aspiring nation that will surpass America in power and influence.

Another China Misnomer: Its Population is Aging Rapidly

China’s 1.4 billion population is much older than most people realize and is aging rapidly. China has an extremely low fertility rate – the number of children women on average give birth to in their lifetime – of only 1.2 per woman. This is very much below the 2.1 rate needed just to replace the population.

While much of this demographic shortfall is due to China’s “one-child per family” policy Beijing instituted decades ago to avoid over-population – combined with global demographic trends that have embraced smaller families – China looks destined to get old faster than any other nation on the planet.

As a result, China is facing having to spend hundreds of billions of dollars a year on caring for a rapidly aging population in the years just ahead. That’s spending that won’t go towards the drivers of traditional economic growth and national power. In fact, such numbers could be conservative when you consider that China will have 300 million or more people over age 60 by 2030 – nearly the size of America’s total population today.

China’s Economic Juggernaut May Have Peaked Already

If Beijing’s rapid economic growth – the basis for its rise in East Asia and globally – is slowly coming to an end, we must readjust our own thinking when it comes to China’s eventual place in the global pecking order. Put differently, China is not likely to overtake the US as the world’s most powerful superpower anytime soon, if ever.

Take military spending, for example, which is key to China becoming the world’s largest superpower. If Chinese economic growth will be constrained due to issues of debt and demography, the massive increases in military spending China has implemented in recent years to dominate Asia, and eventually America, will have to slow dramatically in coming years.

While China is likely to continue its aggressive expansion in regional areas such as the Indian Ocean, Central Asia and parts of Africa, it will have little ability to challenge America in areas outside of Asia. The mainstream media ignores this reality. Keep that in mind.

This raises another important question: The legitimacy of the Chinese Communist Party is based on delivering strong economic growth, a better standard of living and upward mobility for most of its society. Yet the population of China is controlled by what can only be described as an authoritarian regime offering very little freedoms or rights.

China’s citizens put up with this because of perceived strong economic growth delivered by the Communist Party. But what happens when the citizens realize the economy is not nearly as strong as they were led to believe? It could cause an internal revolt. Of course, who knows when that might occur.

In conclusion, while a “peaked” China likely does not have the power to dominate the globe or replace the US as the world’s superpower anytime soon, if ever, it will continue to present challenges to its Asian neighbors and in-turn the US.

Webinar: Niemann Capital Management, Wednesday 3:00 Eastern

Tomorrow, December 6th at 3:00 PM Eastern, we will have a live webinar with Alan Alpers, CFA, Senior Portfolio Manager of Niemann Capital Management. Alan will describe how Niemann’s strategies manage for risk, which is very important now as the markets seem to reach new highs just about every day.

Their tactical allocation process puts risk management first, while also attempting to achieve attractive returns. They have several different programs with different investment strategies recommended by Halbert Wealth Management.

Register today – I highly recommend you join us for the webinar. Even if you are unable to attend the live webinar, be sure to sign up. We’ll send you a recorded version of the webinar you can watch at your convenience.

You can also call Phil Denney or Spencer Wright at 800-348-3601 to get more information.

All the best,

Gary D. Halbert

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Read Gary’s blog and join the conversation at garydhalbert.com.

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