Fight with China by tax cuts and trade wars

After Trump took over the U.S. administration, within about 1 year he has implemented two major policies: tax cuts and trade wars. These two actions are not random. They are systematically planned to fight with China.

Before we begin, one background information is that the United States of America has an insane amount of debts, e.g., via treasury bonds. Who is the largest creditor? China, owning about USD $1.2 trillion U.S. bonds.

Since China is the largest bond holder, an easy way to hammer China is to hammer the bond prices. As long as the Fed raises interest rates, the bond prices will drop, causing significant loss for China. However, the Fed cannot increase interest rates by its own discretion, but it has to take into account inflation. In fact, there was no (or very little) inflation in the past 2 years, so the Fed was hard to hike interest rates up. Thus, tax cuts were in place to let individuals hold extra money to spend. The tax cuts also allow companies to earn additional cash inflow to increase wages and make investments.

Nevertheless, tax cuts will take time to become effective. Worse, many companies misread Trump’s mind, but instead take the fresh cash inflow to buy back treasury stocks (Tax cuts become stock cuts). Trade wars become the second step. When a tariff is imposed on imported steel and aluminum, the Trump administration not only discourages material import and stimulates transactions within the U.S. markets, but also induces another benefit: inflation, due to upping prices in consumer products. When inflation comes, the Fed has to raise interest rates. Again, the more interest rates, the lower bond prices and the more loss China incurs.

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