- 4 months ago
- #woosays
Over the Fourth of July holiday, US President Donald Trump signed into law what he calls the “One Big Beautiful Bill”, a massive tax-and-spending package meant to supercharge the American economy. In this episode of #WooSays Professor Emeritus Datuk Woo Wing Thye and Melisa Idris explore what this bill really signals about America’s direction and how it might shake up the global economy.
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00:00hello folks welcome back to another episode of wu says this is where we get real about the u.s
00:18china everywhere and everything in between it is two global superpowers but one global story
00:25this week we're turning our attention to the u.s where it was all fireworks and fiscal policy
00:33because over the 4th of july holiday u.s president donald trump had signed into law what he calls
00:41the one big beautiful bill a massive tax and spending package meant to supercharge the american
00:49economy but will it it is definitely big but is it beautiful joining us on the show to help us
00:56unpack all of this is professor wu wingtai who will help us explore what this bill really signals
01:04about america's direction and how it might shake up the global economy um hi prof wu let's start with
01:12the big picture so we are looking at this bill um but i i'm curious to know what you think about
01:20how this bill reflects uh donald trump's economic priorities in his second term what is he trying
01:28to achieve with this one big beautiful bill well the two things that are definitely top of his mind
01:36one is to show that he's a friend of the common folks and one and one of the common disdain in america
01:47is towards the government the government is often portrayed as out of control wasteful and ineffective
01:58in his mission so giving that depiction of course did not originate with donald trump that was ronald
02:08reagan's message when he when he successfully won the election in 1980. ronald reagan's uh campaign
02:19consists of getting the government out of your way and and getting government of the way means that
02:27instead of the government spending your money for you you go and invest your money and make the
02:34economy grow so the depiction of the government that donald trump is exploiting is the depiction of
02:45government as tax and spend organization because it's the ability to tax and so it does it taxes and it
02:55expands so the way to do to to risk to eliminate that tendency is to do what ronald reagan says staff
03:07the beast how do you staff the beast you don't give it food and what is his food revenue so you take
03:14away its revenue and prevent it from spending so in this particular this is what uh ronald reagan started
03:24followed by george bush jr when he came to power in 2000 and now by donald trump in his first term and
03:37second term let us talk about the specific package of staff the beast this round the first thing is
03:47he has cut taxes and the largest proportion of the tax cuts go to the richer segments of the population
03:59the poor there are tax cuts for uh that there'll be for for the lower classes in terms of there'll be no
04:08more taxation of tips and overtime and people who are retired there are social security payments
04:16will have bigger tax deductions okay so it is a package that there's something for everybody but the
04:23biggest portion went to the richest people and there were some cuts and the cuts were particularly aimed at
04:34two classes of people the biggest cuts occurred in medical assistance to the poorer classes
04:44they make it much harder to qualify for medical aid by the poor and the second place where he cuts are
04:55programs that were prioritized by the biden administration number one the biden administration seeks to
05:04uh increase the supply of green energy in the us so giving tax credits to people who buy electric cars put on
05:15solar panels he's eliminating all of them and the other thing that he's doing is to attack the p the
05:25purveyors of progressive liberal ideas specifically the elite universities so he's cutting with such
05:34funding to the universities now the popular thing tax cut is certainly popular even though you may get
05:45a small part of their cuts rather than the large part tax cuts is popular but cutting spending is never
05:54popular because cutting spending means that someone is getting a benefit removed so inevitably in all of
06:03these exercises under reagan under bush jr and under donald trump the tax cuts greatly exceed
06:13the cuts in expenditure so it means that the deficit goes up in each round
06:21now that is the that and so if you look at the deficit as a share of gdp it's been going up over time yeah and
06:35of course how what happens when the government runs a deficit what happens when you spend more than you earn
06:42well you borrow money so the government has to go borrow the money uh for the deficit
06:51and the question is can a government always borrow money one thing for sure is that
07:00when a government wants to borrow money but is unable to borrow it two things happen one
07:08it certainly cannot spend more basically it has to cut its expenditure to match its revenue
07:18the bad news is when it is known that the government wanted to borrow but the markets refuse to lend to the
07:26government the private sector in each of the countries will say hey the government needs money
07:36so it's going to come after my money so the first thing that happens when the government is having
07:43trouble to borrow money is that money start running out of the country and when money starts running out
07:50the country that means that the stock market in the country will crash because people are redeeming
07:57their stocks to take the money out and the most dramatic part is their currency will crash because that's
08:05this huge money that is trying to leave the country so uh that's why governments in general do uh regard
08:17uh deficits uh management very gingerly but the united states is very lucky in that it faces less
08:31less difficulties in borrowing than most other countries of the world okay i want to come back to the um
08:41the consequences of this um of adding to an already massive national debt or adding to the deficit
08:49and maybe the consequences for the global economy but before we get international can we continue looking
08:55domestically what this big beautiful bill might mean for the domestic economy you talked about the tax cuts
09:02but any part of this bill that you think will actually boost boost growth or boost investment is
09:11or is this more um politics than economics well the question is when the government cuts
09:24uh revenue does investment go up investments generally react to the new discoveries in other words like a the
09:40investments in ai are continuing to increase regardless of whether there are tax rates or not
09:47so the u.s boom that we see is less the results of the tax cuts than the fact that there has just been
09:58a tremendous acceleration in technological innovation who is not talking about ai we are of course talking
10:08about very positive aspects in that it will greatly raise productivity
10:14and uh there are frightening aspects of ai but we they that's not getting attention now so the result is the
10:25economy is on a roll and the tax cuts is coming at a time when the stock market are really excited by
10:36by the improvements in digitalization robotics and uh uh and ai all right do you do you think that this
10:52could um exacerbate or what do you think this could mean for inequality in america you talked a little bit
10:59about some of the um the cuts and i i think the critics to this bill have highlighted the kind of gutting of the
11:09healthcare and social safety nets in america do you think that this could be um this could widen the
11:17inequality in america amongst american society well the fact that most of the tax cuts go towards
11:28the rich certainly increases the inequality and high tech usually results in displacement of low skill
11:41jobs in other words instead of having someone answer the phone to and to sell you airplane tickets you have
11:51got a chat bot selling you air tickets so you could see that the the displacement of jobs definitely does not
12:04favor uh the lower income what is disturbing here are the cuts to education uh programs especially uh
12:18uh funding programs for b for the poor to go to college so cutting the funding of the poor to get more educated
12:31i think can only hurt the economy and unless of course that uh the rich people spend so much money on
12:40restaurants that there's a shortage of waiters and the waiters salaries go skyrocketing but that is
12:48unlikely to happen your food will be delivered by a robot that you already see in the clank valley
12:57or a drone could deliver it right to your doorstep um prafu let's look at the global consequences and
13:05you talked about how um this might um you know create a uh currency drop because capital because money might run
13:16given given the um whenever the u.s runs huge deficits it could be uh consequential to the rest of the
13:24global economy what ripple effects do you see for other countries countries like malaysia for instance
13:32when the u.s runs huge deficits um or retreats from you know uh multilateralism while still influencing
13:42the global markets well one thing for sure is the u.s would get into trouble only if the people that's
13:52been traditionally lending money to the u.s gets more cautious about lending money to the u.s there is
14:01the for the people who are traditionally learning lending money to the u.s their first consideration
14:08is how risky are u.s government bonds compared to japanese government bonds compared to german government
14:18bonds because you have to put your money in some place well the u.s is very lucky in that all the
14:27governments in the world are running larger than normal deficits and so even though u.s deficits
14:36has gone up so have they in the rest of the world so you cannot run from u.s government bonds to
14:49german government bond because deficit is going up there too so that is to the u.s favor the second thing
14:57that is in the u.s favor is that the u.s dollar is effectively the currency that other countries use
15:10when they trade among themselves like when malaysia buys something from argentina the malaysian business
15:20will all consumer will have to pay in dollars and when the argentinian wants to buy our durians they
15:28would also have to settle in dollars so both sites so the people who want to hold dollars are not just
15:35americans the malaysians want to have some dollars the argentinians want to have some dollars and how
15:42do they get the dollars in the first place they got the dollars in the first place two ways one is
15:50they had uh sold some goods to the u.s and they hold on to the u.s dollar but since the u.s dollar does
16:02not pay interest you get you you use it to buy an american government bond because an american government
16:09bond can be quickly sold into dollars so what happened is the rest of the world has been accumulating
16:17u.s government debt because they need to use they need to use u.s dollars in global trade
16:27and as the global economy expands and as and so with it along with it international trade
16:34because when we get richer we buy more argentinian goods and argentinians eat more durians and so the
16:40result is our holdings of dollars what we want to our inventory will go up so that is a natural growth
16:49in the demand for dollars because the economy that grows but if the u.s government were to unload more
17:00government bonds than this natural growth rate in demand for u.s government bonds then they risk
17:11uh upsetting the market people get nervous about would the u.s be able to pay me back and this is not
17:21an idle comment because in 2011 way back in 2011 s p had downgraded u.s government bonds from aaa aaa aaa
17:37means the highest possible grade the lowest default probability to aa plus and in 2023 fitch
17:48the second of the three well-known agencies downgraded it to aa plus and when donald trump announced his big
18:00beautiful bill moody's has now downgraded it to aa1 which is down so in other words the united states
18:11at the beginning of 2010 had aaa rating but that has dropped but
18:22the thing is so have the rating for many european government bonds
18:29so they have been saved by that it's just like during covid everybody ran huge deficit
18:37and as long as everyone else is running huge deficit it is okay for you to run huge government
18:43deficit that you mustn't be the lone guy out of the you know okay so but what happens now the important
18:52thing is while there is a natural demand for dollars people seeing that is now also
19:06three tendencies for people to move away from dollars and let me tell you what those three
19:14natural tendencies are to move away from dollar and the worry is that what trump has done may accelerate
19:22these three tendencies to move faster away from the dollar the first reason you want to move away
19:30from the dollar is that it's a simple diversity diversify your risk why should you hold all your
19:39savings in u.s common bonds why don't you hold some in euro some in yen malaysian ringgit perhaps
19:51and singapore dollars certainly but the good news from america is that
19:58only the euro is a credible substitute all the other countries like the yen the singapore dollar the
20:11swiss franc their amounts are too small they are unable to meet that demand for foreign currency and
20:21because europe is a multiple country entity because greek bonds for example are rated a lot lower than
20:33german government bonds and lower than finnish government bonds so there's no one european bond there are
20:40a multitude out of it and so that is not seen as a reliable storage of wealth but now
20:49that is one likely competitor on the horizon and that is the chinese yen the chinese yuan so but that
21:01cannot be a big substitute for the dollar yet largely because the yuan is not freely tradable you cannot just
21:11take money into and out of china very quickly they have capital controls so the first natural tendency to
21:17move away to move away from the dollar is simple diversification of risk the second reason to move away
21:27from the dollar is that you feel that the u.s
21:34is getting to be irresponsible uh fiscally and potentially inflation would come why would the inflation
21:49come because once people stop buying as much dollars the value of the dollar would drop and if the value of
22:00the dollar drop you don't want to be left holding it and and and and so that is the natural tendency
22:10given what trump has done to think that the dollar is less the value of the dollar is less guaranteed than
22:19before the third reason why people are moving away from dollar is that the americans have been using as a
22:28weapon in their geopolitical competition like for example it froze the assets of governments that it doesn't like
22:46because you must understand that these countries have held their
22:52uh the u.s bonds and these u.s bonds are usually uh held on their behalf by uh american investment house
23:05and when the u.s government grabs it hence taking away the funds of countries that it doesn't like
23:15these countries naturally want to move away but how about other countries who which might say i don't
23:23know which day that donald trump is not going to like my face and so i better hold less u.s dollars now
23:31so the weaponization of the dollar as a geostrategic instrument is undermining the role of the dollar
23:40but of course the biggest uh erosion of dollar would occur when there comes a credible substitute to the
23:51dollar i had identified the roman b but then the roman b is not tradable there is one now on the
24:02the environment which it could potentially be a substitute for the dollar but it is not at that
24:12stage yet until it has become big enough i'm talking about cryptocurrencies right now cryptocurrencies
24:23can be killed by all the governments of the world if they cooperate and ban it
24:29that will kill it right now but however there's no such coordination in fact donald trump right before
24:39his inauguration introduced his own cryptocurrency now what is currency currency is a medium of exchange
24:49that people are willing to accept from each other in the old days it was gold bars silver bars
24:58and seashells in some in some old societies so it is something that we are all willing to accept
25:06when we do transactions if crypto gets widely used enough then it cannot possibly be made illegitimate
25:19and there's no way to stop it so right now if crypto continues to grow it will become a credible
25:34substitute to the dollar until the renminbi becomes a freely tradable currency and that in a way may
25:45prompt the chinese to hasten up and accelerate their reform of the financial markets and introduce the renminbi
25:56renminbi as a freely tradable currency it is beginning because we can see it uh that the chinese government is
26:05promoting the use of renminbi like for example in its trade with malaysia we are having uh direct
26:13clearing houses that could clear trade between malaysia and china without using dollars so
26:24donald trump's tax cuts if it undermines faith in the in the ability of the government to services that
26:36the the u.s would lose one of the big benefits that it now enjoys which is george washington
26:49is now the favorite pinup boy in the world i don't know whether he would appreciate being called a
27:00pinup boy but brafu thank you so much that was so interesting the way you took us from this big
27:05beautiful bill to essentially the prospects of de-dollarization it was interesting thank you for
27:12getting real about the u.s about china and everywhere and everything in between that's it from this
27:19episode of who says we will be back next week i'm melissa adris i'll see you then goodbye
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