Washington Republicans want to lower Americans’ taxes without bringing spending down, and President Donald Trump appears to be completely on board with this plan despite having complained about the same practice in the past. But this policy has a series of other unintended consequences (or perhaps intended, just not publicized).
By: Alice Salles
This article first appeared at ANTIMEDIA
One of them, as the Washington Post‘s “Wonkblog” explains, is that Trump’s tax plan will give China even more power over the U.S. economy, as additional Treasury bonds will have to be issued for decades to come to cover for the tax cuts. Since less revenue will come in from taxpayers, the U.S. will have a gap to fill, and the government will have to make ends meet by issuing additional bonds.
According to the St. Louis Federal Reserve, there are more foreign banks, corporations, and investors who hold U.S. Treasury bonds than private domestic investors. And to Trump’s likely horror, over a third of the foreign investors are from China and Japan, meaning that in combination with Hong Kong, China held $1.38 trillion in bonds in September, making it the country’s largest foreign creditor.
To nations like China, purchasing U.S. Treasury bonds makes sense because the dollar still holds its position as the world’s main reserve currency.
By purchasing Treasury bonds and notes, foreign investors actually help the United States government delay the dollar’s eventual collapse. The bonds help to maintain the dollar’s value even as the Federal Reserve, until very recently, has continued to increase the money supply, bringing the overall purchasing power of the dollar down. The obvious result of having a higher supply of Treasury notes than what the market demands, and unfortunately, our reality ever since President Richard Nixon destroyed the dollar by bringing an end to the gold standard.
With the Trump administration’s support, Congress is raising the debt as they also cut revenue (read: taxation), and the necessity to press investors to buy more bonds is becoming all too real. The result is that, despite having displayed a tough, anti-China stance during his campaign, Trump is actually putting the very survival of the dollar in China’s hands.
Further, the Trump administration is also walking away from its nationalist tone, as its tax plan will actually help Americans purchase more foreign goods and services.
From a balanced, unbiased point of view, that in itself isn’t bad. But from a nationalist point of view, it’s blasphemy.
By keeping Americans from paying more taxes, they will have more money to purchase products coming from abroad. Foreign companies and governments will then, as a result, have more capital to invest in U.S. Treasury bonds. To middle-of-the-road and establishment economists, this phenomenon known as a “trade deficit” is detrimental to Americans as domestic businesses aren’t exporting as much as Americans are buying from abroad. Nationalists like Trump and his supporters also agree, as noted by the Washington Post. So it is surprising that the administration is now attempting to downplay the inevitable trade deficit increase by claiming instead that his tax plan will increase domestic investment, keeping the money within U.S. borders and eventually increasing exports.
To anyone who truly understands how the economy works, the notion that trade deficits are damaging to the economy in any real sense is ludicrous. As Austrian economist Murray Rothbard noted, instead of crying because we’re not exporting “enough,” “we should rejoice that foreign investors are willing to finance our cheap imports.”
Even so, on the campaign trail, Trump accused his opponent, Hillary Clinton, of “[unleashing]a trade war against the American worker” by supporting trade deals that, in his view, benefited China and crushed the United States.
Promising that “[t]he era of economic surrender [would]finally be over,” he energized his nationalist base by promising to get America to export more than it imports again. Except now, he’s supporting the trade deficit, which is a boogeyman to his base. Unfortunately, to the president’s legacy, it will come back to bite him if this plan eventually makes its way to his desk.
With a tax bill that both continues to give China incentives to help maintain the dollar’s strength and increases the trade deficit — making America not that great again the eyes of Trump’s supporters — it’s clear that the president and Republicans aren’t being as consistent, or even as conservative, as they may have claimed in the past.
This article first appeared at ANTIMEDIA