There are three main factors in our calling for the US economy to stall in the coming months, which will give China the upper hand in trade negotiations:

1 – Government Spending Tax Cuts Stimulation Has Run Its Course

The US economy has been booming for the last two years because of historic federal government spending under President Trump:

Trump May Be The Most Fiscally Reckless President In American History.  Trump’s behavior on everything and anything having to do with the federal budget has become blatantly predictable and painfully obvious. It always includes some combination of:

1. Proposing whatever he wants on revenues and spending regardless of whether it is the right policy for the economy.
2. Making up his own rules of economics, mathematics and budgeting to justify what’s being proposed and make them politically palatable…
5. Paying no attention whatsoever to the budget deficit and national debt.

Trump’s big tax cut demonstrates every ingredient of this witches’ brew.  First, the bill’s $1.5 trillion revenue loss, debt increase and stimulus was the absolute wrong fiscal policy with the economy so strong.

President Trump correctly states that US Stock Markets have had their longest upward run since World War II, but he fails to mention that it is all debt driven.  It is easy for you to live large on a credit card.

Economic GROWTH means that you are spending more in the future.  However if what you were spending in the (near) past was beyond your means, it is difficult enough to just maintain that higher spending level of spending, never mind increase it.

2 – US Economy Is Overdue for a Correction

Like it or not, Business Cycles are real and it is absolutely inevitable that the longer a “bull run” the more likely that run will come to and.

Trump’s giant tax cuts that were not matched with cuts in government services has two negative impacts:

  1. artificially inflating the economy
  2. massively increasing the debt… which the government must pay staggering interest payments on… which reduces the amount of money the government has to spend on programs

This means that when the stimulus ends, as it now, the government has a debt hangover that kills future growth.

3 – Banks Are Betting on an Economic Drop

US yield curve May 2019This can be seen in what is called the “Yield Curve”.  The Yield Curve is nothing more than a chart showing interest rates for varying lengths of time. Normally, it costs more to borrow money for a longer period of time as lenders want to get paid a premium for up longer term risk.  If the chart if flat it means that lenders expect interest rates not to change much or even slightly decrease.  If he chart is “negative” that means lenders expect interest rates to decline in the future.

Interest rate go up when times are good and down when times are bad.  The idea being that lower interest rates makes it easier to spend more and boost the economy.

The US Yield Curve is now negative, meaning that lenders expect interest rates to decline in the future.  That means the banks think the economy will be in trouble.

How A US Recession Affects Trade Negotiations With China:

If the US economy falls into recession, as is likely, the US negotiating position is weakened.  American politicians will want to free up as much economic activity as possible and that means reducing growth sucking tariffs.

More importantly, China is playing long game.  They know that US imports will not drop to zero regardless of what tariffs are imposed.  China just needs to buy a few years to replace US consumption of their products with domestic consumption as nearly 1 BILLION more Chinese move into the middle class in the coming decades.

If the US economy has wasted most of its economic growth triggers during the good times for short term political gain, they will have few levers to pull in the bad times.  For instance, another set of giant tax cuts (which just add more the debt) is extremely unlikely.

Economic strength is a relative matter.  The US will likely be headed into negative territory by the end of the summer while the Chinese economy will still be booming at near 5%.


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