Most economic forecasts suggest that a recession in China will hurt everyone, but that the pain would be more regionally confined than would be the case for a deep recession in the United States. Unfortunately, that may be wishful thinking.
CAMBRIDGE – When China finally has its inevitable growth recession – which will almost surely be amplified by a financial crisis, given the economy’s massive leverage – how will the rest of world be affected? With US President Donald Trump’s trade war hitting China just as growth was already slowing, this is no idle question.
.. First, the effect on international capital markets could be vastly greater than Chinese capital market linkages would suggest. However jittery global investors may be about prospects for profit growth, a hit to Chinese growth would make things a lot worse. Although it is true that the US is still by far the biggest importer of final consumption goods (a large share of Chinese manufacturing imports are intermediate goods that end up being embodied in exports to the US and Europe), foreign firms nonetheless still enjoy huge profits on sales in China.
Investors today are also concerned about rising interest rates, which not only put a damper on consumption and investment, but also reduce the market value of companies (particularly tech firms) whose valuations depend heavily on profit growth far in the future. A Chinese recession could again make the situation worse.
.. High Asian saving rates over the past two decades have been a significant factor in the low overall level of real (inflation-adjusted) interest rates in both the United States and Europe, thanks to the fact that underdeveloped Asian capital markets simply cannot constructively absorb the surplus savings.
.. instead of leading to lower global real interest rates, a Chinese slowdown that spreads across Asia could paradoxically lead to higher interest rates elsewhere – especially if a second Asian financial crisis leads to a sharp draw-down of central bank reserves. Thus, for global capital markets, a Chinese recession could easily prove to be a double whammy.
.. a significant rise in global interest rates would be much worse. Eurozone leaders, particularly German Chancellor Angela Merkel, get less credit than they deserve for holding together the politically and economically fragile single currency against steep economic and political odds. But their task would have been well-nigh impossible but for the ultra-low global interest rates
.. Today, however, debt levels have risen significantly, and a sharp rise in global real interest rates would almost certainly extend today’s brewing crises beyond the handful of countries (including Argentina and Turkey) that have already been hit.
.. Nor is the US immune. For the moment, the US can finance its trillion-dollar deficits at relatively low cost. But the relatively short-term duration of its borrowing – under four years if one integrates the Treasury and Federal Reserve balance sheets – means that a rise in interest rates would soon cause debt service to crowd out needed expenditures in other areas. At the same time, Trump’s trade war also threatens to undermine the US economy’s dynamism.
.. Its somewhat arbitrary and politically driven nature makes it at least as harmful to US growth as the regulations Trump has so proudly eliminated. Those who assumed that Trump’s stance on trade was mostly campaign bluster should be worried.
.. A recession in China, amplified by a financial crisis, would constitute the third leg of the debt supercycle that began in the US in 2008 and moved to Europe in 2010. Up to this point, the Chinese authorities have done a remarkable job in postponing the inevitable slowdown. Unfortunately, when the downturn arrives, the world is likely to discover that China’s economy matters even more than most people thought.
The president has long sold himself as a self-made billionaire, but a Times investigation found that he received at least $413 million in today’s dollars from his father’s real estate empire, much of it through tax dodges in the 1990s.
.. Fred and Mary Trump, transferred well over $1 billion in wealth to their children, which could have produced a tax bill of at least $550 million under the 55 percent tax rate then imposed on gifts and inheritances.
The Trumps paid a total of $52.2 million, or about 5 percent, tax records show.
.. The Times’s findings raise new questions about Mr. Trump’s refusal to release his income tax returns, breaking with decades of practice by past presidents. According to tax experts, it is unlikely that Mr. Trump would be vulnerable to criminal prosecution for helping his parents evade taxes, because the acts happened too long ago and are past the statute of limitations. There is no time limit, however, on civil fines for tax fraud.
.. Most notably, the documents include more than 200 tax returns from Fred Trump, his companies and various Trump partnerships and trusts.
.. What emerges from this body of evidence is a financial biography of the 45th president fundamentally at odds with the story Mr. Trump has sold in his books, his TV shows and his political life. In Mr. Trump’s version of how he got rich, he was the master dealmaker who broke free of his father’s “tiny” outer-borough operation and parlayed a single $1 million loan from his father (“I had to pay him back with interest!”) into a $10 billion empire
.. In Mr. Trump’s version, it was always his guts and gumption that overcame setbacks. Fred Trump was simply a cheerleader.
.. “I built what I built myself,” Mr. Trump has said, a narrative that was long amplified by often-credulous coverage from news organizations, including The Times.
.. They described how Mr. Trump piggybacked off his father’s banking connections to gain a foothold in Manhattan real estate. They poked holes in his go-to talking point about the $1 million loan, citing evidence that he actually got $14 million. They told how Fred Trump once helped his son make a bond payment on an Atlantic City casino by buying $3.5 million in casino chips.
.. The reporting makes clear that in every era of Mr. Trump’s life, his finances were deeply intertwined with, and dependent on, his father’s wealth.
.. By age 3, Mr. Trump was earning $200,000 a year in today’s dollars from his father’s empire. He was a millionaire by age 8. By the time he was 17, his father had given him part ownership of a 52-unit apartment building. Soon after Mr. Trump graduated from college, he was receiving the equivalent of $1 million a year from his father. The money increased with the years, to more than $5 million annually in his 40s and 50s.
.. In one six-year span, from 1988 through 1993, Fred Trump reported $109.7 million in total income, now equivalent to $210.7 million. It was not unusual for tens of millions in Treasury bills and certificates of deposit to flow through his personal bank accounts each month.
.. Fred Trump was relentless and creative in finding ways to channel this wealth to his children. He made Donald not just his salaried employee but also his property manager, landlord, banker and consultant. He gave him loan after loan, many never repaid. He provided money for his car, money for his employees, money to buy stocks, money for his first Manhattan offices and money to renovate those offices. He gave him three trust funds. He gave him shares in multiple partnerships. He gave him $10,000 Christmas checks. He gave him laundry revenue from his buildings.
.. Much of his giving was structured to sidestep gift and inheritance taxes using methods tax experts described to The Times as improper or possibly illegal. Although Fred Trump became wealthy with help from federal housing subsidies, he insisted that it was manifestly unfair for the government to tax his fortune as it passed to his children.
When he was in his 80s and beginning to slide into dementia, evading gift and estate taxes became a family affair, with Donald Trump playing a crucial role, interviews and newly obtained documents show.
.. There is no shortage of clever tax avoidance tricks that have been blessed by either the courts or the I.R.S. itself. The richest Americans almost never pay anything close to full freight. But tax experts briefed on The Times’s findings said the Trumps appeared to have done more than exploit legal loopholes. They said the conduct described here represented a pattern of deception and obfuscation, particularly about the value of Fred Trump’s real estate, that repeatedly prevented the I.R.S. from taxing large transfers of wealth to his children.
“The theme I see here through all of this is valuations: They play around with valuations in extreme ways,” said Lee-Ford Tritt, a University of Florida law professor and a leading expert in gift and estate tax law. “There are dramatic fluctuations depending on their purpose.”
.. The Trumps dodged hundreds of millions in gift taxes by submitting tax returns that grossly undervalued the properties, claiming they were worth just $41.4 million.
The same set of buildings would be sold off over the next decade for more than 16 times that amount.
.. All told, The Times documented 295 streams of revenue that Fred Trump created over five decades to enrich his son.
.. as Donald Trump careened from one financial disaster to the next, his father found ways to give him substantially more money, records show. Even so, in 1990, according to previously secret depositions, Mr. Trump tried to have his father’s will rewritten in a way that Fred Trump, alarmed and angered, feared could result in his empire’s being used to bail out his son’s failing businesses.
Of course, the story of how Donald Trump got rich cannot be reduced to handouts from his father. Before he became president, his singular achievement was building the brand of Donald J. Trump, Self-Made Billionaire, a brand so potent it generated hundreds of millions of dollars in revenue through TV shows, books and licensing deals.
Constructing that image required more than Fred Trump’s money. Just as important were his son’s preternatural marketing skills and always-be-closing competitive hustle. While Fred Trump helped finance the accouterments of wealth, Donald Trump, master self-promoter, spun them into a seductive narrative. Fred Trump’s money, for example, helped build Trump Tower, the talisman of privilege that established his son as a major player in New York. But Donald Trump recognized and exploited the iconic power of Trump Tower as a primary stage for both “The Apprentice” and his presidential campaign.
.. on May 4, 2004, when Mr. Trump and his siblings sold off the empire their father had spent 70 years assembling with the dream that it would never leave his family.
Donald Trump’s cut: $177.3 million, or $236.2 million in today’s dollars.
They were both fluent in the language of half-truths and lies, interviews and records show. They both delighted in transgressing without getting caught. They were both wizards at manipulating the value of their assets, making them appear worth a lot or a little depending on their needs.
.. Emblematic of their audacity was Park Briar, a 150-unit building in Queens. As it happened, 18 days before Fred Trump Jr.’s death, the Trump siblings had submitted Park Briar’s co-op conversion plan, stating under oath that the building was worth $17.1 million. Yet as Fred Trump Jr.’s executors, Donald Trump and his fatherwhen Fred Trump Jr. died.
.. This fantastical claim — that Park Briar should be taxed as if its value had fallen 83 percent in 18 days — slid past the I.R.S. with barely a protest. An auditor insisted the value should be increased by $100,000, to $3 million.
.. During the 1980s, Donald Trump became notorious for leaking word that he was taking positions in stocks, hinting of a possible takeover, and then either selling on the run-up or trying to extract lucrative concessions from the target company to make him go away. It was a form of stock manipulation with an unsavory label: “greenmailing.” The Times unearthed evidence that Mr. Trump enlisted his father as his greenmailing wingman.
On Jan. 26, 1989, Fred Trump bought 8,600 shares of Time Inc. for $934,854, his tax returns show. Seven days later, Dan Dorfman, a financial columnist known to be chatty with Donald Trump, broke the news that the younger Trump had “taken a sizable stake” in Time. Sure enough, Time’s shares jumped, allowing Fred Trump to make a $41,614 profit in two weeks.
.. Later that year, Fred Trump bought $5 million worth of American Airlines stock. Based on the share price — $81.74 — it appears he made the purchase shortly before Mr. Dorfman reported that Donald Trump was taking a stake in the company. Within weeks, the stock was over $100 a share.
.. Fred Trump could be cantankerous and cruel, according to sworn testimony by his relatives. “This is the stupidest thing I ever heard of,” he’d snap when someone disappointed him. He was different with his son Donald. He might chide him — “Finish this job before you start that job,” he’d counsel — but more often, he looked for ways to forgive and accommodate.
.. By 1987, for example, Donald Trump’s loan debt to his father had grown to at least $11 million. Yet canceling the debt would have required Donald Trump to pay millions in taxes on the amount forgiven. Father and son found another solution, one never before disclosed, that appears to constitute both an unreported multimillion-dollar gift and a potentially illegal tax write-off.
.. Most, if not all, of his investment, which totaled $15.5 million, was made by exchanging his son’s unpaid debts for Trump Palace shares, records show.
.. Under I.R.S. rules, selling shares worth $15.5 million to your son for $10,000 is tantamount to giving him a $15.49 million taxable gift. Fred Trump reported no such gift.
.. Fred Trump evaded the 55 percent tax on gifts, saving about $8 million. At the same time, he declared to the I.R.S. that Trump Palace was almost a complete loss — that he had walked away from a $15.5 million investment with just $10,000 to show for it.
Federal tax law prohibits deducting any loss from the sale of property between members of the same family, because of the potential for abuse. Yet Fred Trump appears to have done exactly that, dodging roughly $5 million more in income taxes.
.. At its heart lay a more ambitious project, executed to perfection over decades — to create that origin story, the myth of Donald J. Trump, Self-Made Billionaire.
.. Donald Trump built the foundation for the myth in the 1970s by appropriating his father’s empire as his own.
.. Through it all, Fred Trump played along. Never once did he publicly question his son’s claim about the $1 million loan.
.. Fred Trump believed that the document potentially put his life’s work at risk.
.. did many things. It protected Donald Trump’s portion of the inheritance from his creditors and from his impending divorce settlement with his first wife, Ivana Trump. It strengthened provisions in the existing will making him the sole executor of his father’s estate. But more than any of the particulars, it was the entirety of the codicil and its presentation as a fait accompli that alarmed Fred Trump
.. He confided to family members that he viewed the codicil as an attempt to go behind his back and give his son total control over his affairs. He said he feared that it could let Donald Trump denude his empire, even using it as collateral to rescue his failing businesses. (It was, in fact, the very month of the $3.5 million casino rescue.)
.. The lawyers quickly drafted a new codicil stripping Donald Trump of sole control over his father’s estate. Fred Trump signed it immediately.
.. Yet for all the financial support he had lavished on his children, for all his abhorrence of taxes, Fred Trump had stubbornly resisted his advisers’ recommendations to transfer ownership of his empire to the children to minimize estate taxes.
.. With every passing year, the actuarial odds increased that Fred Trump would die owning apartment buildings worth many hundreds of millions of dollars, all of it exposed to the 55 percent estate tax. Just as exposed was the mountain of cash he was sitting on.
.. Even after he paid himself $109.7 million from 1988 through 1993, his companies were holding $50 million in cash and investments
‘A DISGUISED GIFT’
A family company let Fred Trump funnel money to his children by effectively overcharging himself for repairs and improvements on his properties.
.. All County’s main purpose, The Times found, was to enable Fred Trump to make large cash gifts to his children and disguise them as legitimate business transactions, thus evading the 55 percent tax.
.. All County’s invoices were padded, marked up by 20 percent, or 50 percent, or even more, records show.
.. Years later, in his deposition during the dispute over Fred Trump’s estate, Robert Trump would say that All County actually saved Fred Trump money by negotiating better deals. Given Fred Trump’s long experience expertly squeezing better prices out of contractors, it was a surprising claim. It was also not true.
.. In 1991 and 1992, Fred Trump bought 78 refrigerator-stove combinations for Beach Haven from Long Island Appliance Wholesalers. The average price was $642.69. But in 1993, when he began paying All County for refrigerator-stove combinations, the price jumped by 46 percent.
.. Likewise, the price he paid for trash-compacting services at Beach Haven increased 64 percent. Janitorial supplies went up more than 100 percent. Plumbing repairs and supplies rose 122 percent.
.. While All County was all upside for Donald Trump and his siblings, it had an insidious downside for Fred Trump’s tenants.
.. One way to justify a rent increase was to make a major capital improvement. It did not take much to get approval; an invoice or canceled check would do if the expense seemed reasonable.
.. As Robert Trump acknowledged in his deposition, “The higher the markup would be, the higher the rent that might be charged.”
.. the Trumps got approval to raise rents on thousands of apartments by claiming more than $30 million in major capital improvements.
.. By 1998, records show, All County and Apartment Management were generating today’s equivalent of $2.2 million a year
.. According to Fred Trump’s 1995 gift tax return, obtained by The Times, the Trumps claimed that properties including 25 apartment complexes with 6,988 apartments — and twice the floor space of the Empire State Building —
.. The Trumps used Robert Von Ancken, a favorite of New York City’s big real estate families. Over a 45-year career, Mr. Von Ancken has appraised many of the city’s landmarks
.. buildings in the same neighborhood as Trump buildings sold for two to four times as much per square foot as Mr. Von Ancken’s appraisals
.. Of all Fred Trump’s properties, Patio Gardens was one of the least profitable, which may be why he decided to use it as a tax deduction. In 1992, he donated Patio Gardens to the National Kidney Foundation of New York/New Jersey, one of the largest charitable donations he ever made. The greater the value of Patio Gardens, the bigger his deduction. The appraisal cited in Fred Trump’s 1992 tax return valued Patio Gardens at $34 million, or $61.90 a square foot.
By contrast, Mr. Von Ancken’s GRAT appraisals found that the crown jewels of Fred Trump’s empire, Beach Haven and Shore Haven, with five times as many apartments as Patio Gardens, were together worth just $23 million, or $11.01 per square foot.
.. Mr. Von Ancken claimed that they were worth less than nothing — negative $5.9 million, to be exact.
.. a bank would value at $106.6 million in 2004.
..The I.R.S. has long accepted the idea that ownership with control is more valuable than ownership without control. Someone with a controlling interest in a building can decide if and when the building is sold, how it is marketed and what price to accept
.. the Trumps set out to create the fiction that Fred Trump was a minority owner. All it took was splitting the ownership structure of his empire. Fred and Mary Trump each ended up with 49.8 percent of the corporate entities that owned his buildings. The other 0.4 percent was split among their four children.
.. That enabled the Trumps to slash Mr. Von Ancken’s valuation in a way that was legally dubious. They claimed that Fred and Mary Trump’s status as minority owners, plus the fact that a building couldn’t be sold as easily as a share of stock, entitled them to lop 45 percent off Mr. Von Ancken’s $93.9 million valuation. This claim, combined with $18.3 million more in standard deductions, completed the alchemy of turning real estate that would soon be valued at nearly $900 million into $41.4 million.
.. The I.R.S. determined that the Trumps’ assets were worth $57.1 million, 38 percent more than the couple had claimed. From the perspective of an I.R.S. auditor, pulling in nearly $5 million in additional revenue could be considered a good day’s work. For the Trumps, getting the I.R.S. to agree that Fred Trump’s properties were worth only $57.1 million was a triumph.
.. The next year, 1998, Donald Trump’s share amounted to today’s equivalent of $9.6 million, The Times found.
This sudden influx of wealth came only weeks after he had published “The Art of the Comeback.”
.. “I learned a lot about myself during these hard times,” he wrote. “I learned about handling pressure. I was able to home in, buckle down, get back to the basics, and make things work. I worked much harder, I focused, and I got myself out of a box.”
Over 244 pages he did not mention that he was being handed nearly 25 percent of his father’s empire.
.. The man who paid himself $50 million in 1990 died with just $1.9 million in the bank.
.. According to his estate tax return, his most valuable asset was a $10.3 million I.O.U. from Donald Trump, money his son appears to have borrowed the year before Fred Trump died.
..In 2003, the Trump siblings gathered at Trump Tower for one of their periodic updates on their inherited empire.
.. Donald Trump insisted that the real estate market had peaked and that the time was right
.. He was also, once again, in financial trouble. His Atlantic City casinos were veering toward another bankruptcy. His creditors would soon threaten to oust him unless he committed to invest $55 million of his own money.
.. Schron paid $705.6 million for most of the empire, which included paying off the Trumps’ mortgages.
.. Within a year of the sale, Mr. Trump spent $149 million in cash on a rapid series of transactions that bolstered his billionaire bona fides. In June 2004 he agreed to pay $73 million to buy out his partner in the planned Trump International Hotel & Tower in Chicago.
.. The first season of “The Apprentice” was broadcast in 2004, just as Donald Trump was wrapping up the sale of his father’s empire.
.. Had Mr. Trump done nothing but invest the money his father gave him in an index fund that tracks the Standard & Poor’s 500, he would be worth $1.96 billion today.
International Monetary Fund Managing Director Christine Lagarde is raising alarm bells about the health of the global economy, saying international growth may have plateaued.
“For most countries, it has become more difficult to deliver on the promise of greater prosperity, because the global economic weather is beginning to change,” Ms. Lagarde said in a speech in Washington on Monday.
.. While other emerging-market currencies, from Indonesia’s to South Africa’s, have also experienced difficult declines this year, most emerging markets have avoided the acute turmoil of Turkey and Argentina.
If the crisis spreads, as some fear, capital could flood out of emerging markets, Ms. Lagarde warned, saying that IMF economists had estimated emerging markets could face up to $100 billion in portfolio outflows. In recent years, about $240 billion per year had flowed into those countries, so a $100 billion outflow would be a dramatic reversal.
.. Ms. Lagarde said another mounting concern is that threats to impose new trade restrictions have been carried out in a number of countries.
“A key issue is that rhetoric is morphing into a new reality of actual trade barriers,” Ms. Lagarde said. “This is hurting not only trade itself, but also investment and manufacturing as uncertainty continues to rise.”
.. countries have continued to pile on debt, which has tended to foretell slower growth in years ahead as the burden of debt service mounts. The total debt of the private sector has reached an “all-time high of $182 trillion,” Ms. Lagarde said, noting that the figure was 60% higher than in 2007.
So is Trumponomics working? With one significant caveat, the answer is no. For one thing, Trump’s trade policy is turning out to be worse than expected. For another, the growth surge mostly reflects a temporary sugar high from last December’s tax cut. Economists are already penciling in a recession for 2020.
.. At a time of toxic inequality and declining intergenerational mobility, inheritance taxes ought to be increased, but Trump cut them. However, the reduction in the corporate tax rate, coupled with incentives for businesses to invest more, has boosted spending on R&D, information technology and other machinery. Extra investment should make workers more productive. It might even shift U.S. growth to a higher trajectory.
.. you can’t rule out the possibility that the Trump investment incentives are hitting the economy just as a new wave of IT innovations is ripe for deployment.
.. The question is whether the expected productivity boost will outweigh the drag from the tax cut’s other consequence: a huge rise in federal debt.
.. The extra $1 trillion or so of federal debt will have to be serviced: Today’s sugary tax cuts imply tax hikes in the future. Likewise, the corporate investment incentives are temporary: They may simply bring investment forward, depriving tomorrow’s economy of its tech caffeine jolt.
.. many Wall Streeters expect a recession once the sugar high dissipates. The Tax Policy Center estimates that gross domestic product in 2027 will be the same as it would have been without the tax cut.
.. There will be no growth to compensate for extra inequality and debt.
.. And that is without considering the harm from Trump’s trade wars. In Europe, Trump has browbeaten U.S. allies and reserves the right to beat them up further; the only “gain” is a discussion of a new trade deal that was on offer anyway before Trump’s election. In the Americas, Trump has arm-twisted Mexico into accepting a new version of NAFTA that is worse than the old one, and demands that Canada sign on.
.. But the greatest damage stems from Trump’s trade war with China. His opening demand — that China abandon its subsidies for strategic high-tech industries — was never going to be met by a nationalistic dictatorship committed to industrial policy.
.. His bet that tariffs will drive companies to shift production to the United States is equally forlorn. If manufacturers pull out of China, they are more likely to go elsewhere in Asia.
And even if some manufacturing does come to the United States, this gain will be outweighed by the job losses stemming from Trump’s tariffs, which raise costs for industries that use Chinese inputs.
.. In short, Trump isn’t helping the American workers he claims to speak for. Instead, he is battering the rules-based international system that offers the best chance of constraining China.
.. do not be surprised if the populists are temporarily popular: Popularity is what they crave most, after all. But recall that, everywhere and throughout history, the populists’ folly is unmasked in the end.