It took them a while, but you knew they’d eventually make their mark on our economy. This administration seems intent on dismantling every legacy of the Obama Era. Chief among Obama’s achievements was a long period of consistent economic expansion, job growth, and an epic bull market in equities. This economy continued to chug along for almost a year with only minor slippage. So much for that. We are beginning to witness the economic consequences of placing crooks and morons in charge.
First, a look at the stats. Across the first year of the Trump administration we saw a continuation of recent years’ momentum, but at a slower pace. New jobs grew at the lowest rate in the last six years. Unemployment rates are low, but declines have stalled out. GDP growth was good, but much slower than Obama’s big years of 2014 and 2011.
Stocks soared in 2017, but still at a slower pace than Obama and Clinton’s first years. More importantly for context, US stocks lagged growth elsewhere in the world by a significant margin. And GDP unexpectedly softened in Q4 of last year. Where Obama’s first year was a turnaround from a collapse, Trump’s first year represents an economy nearing the peak of the business cycle, beginning to overheat from an extended period of full employment and the early signals of inflation.
How do you maintain healthy growth under these conditions? A high school economics course teaches the basics.
Relieve some of the inflationary pressure by allowing interest rates to carefully tick upward. Raise taxes, especially on income from speculative activities, to tamp down the dumb-money fever that can signal the end of a bull market. Ramp up international trade to provide new outlets for growth and spending. Attract immigrants to feed continued entrepreneurship and fuel the labor market.
With tax revenues relatively high, this is an ideal moment to address any lingering debt concerns. With a tight labor market, new infrastructure investments should probably wait for an economic downturn. Reducing public debt can help cool an overheated capital market by limiting competition for borrowing. This strategy should also feed gradual increases in the value of your currency, which helps cool the kind of exotic capital speculation that can precipitate a crash, while reducing consumer prices for ordinary goods. This approach to currency and trade during a boom makes life easier for ordinary people while dampening the disruptive get-rich-quick schemes of wealthy investors.
Naturally, Trump’s Idiocrats aren’t doing these things. They’ve launched a trade war unconnected to any identifiable strategic purpose. Badly needed immigrants are in the crosshairs of a comprehensive campaign of harassment. Potential new trade deals have been scrapped and lucrative existing trade deals are being undermined. Oversight of financial markets is being removed. And for some reason they’re doing everything possible to weaken our currency.
They’ve decided to pour almost $2tr of borrowed stimulus onto an already overheated economy. By handing almost 90% of that money to the wealthy and corporations, they have basically constructed an economic crash machine. The overwhelming bulk of that borrowed cash will pour into unproductive speculative engines, which will soar and then crash, or be parked in treasury bonds. Our government is borrowing a ton of money so we can pour it down a hole.
Damage began to appear almost a month ago, thanks to a surprise spike in Treasury bond yields. New borrowing necessary to fund the Trump tax cuts began driving up lending costs and undermining the attractiveness of equities. Across January even before the crash, Treasury yields were growing faster than the stock market. Stocks in the housing sector were among the first to slip, amid worries that our era of cheap credit was coming to an end. The HGX index of housing industry stocks is down more than 12% from its peak three weeks ago.
Rising interest rates aren’t necessarily a problem if that increase is connected to a broader plan, with compensatory mechanisms and an integrated fiscal strategy. On the other hand, if bond yields are rising because of chaotic, unpredictable mismanagement, they can spark panic. In this case, that panic was accompanied by unplanned crazytalk from the Treasury secretary about monetary policy and surprisingly scary news about the epic scale of new government borrowing. Filling out the picture was news of an escalating trade dispute with Canada which is headed to the WTO, and a strange, pointless new tariff on solar panels.
Obama is long gone and his legacy is more fragile than we realized. Critical economic decisions are being made by a monkey pulling random levers.
We have lived through a thirty-year period of global economic expansion beyond anything human beings have ever seen. That expansion has been driven by a wave of accelerating technological innovation, the expansion of liberal democracy and capitalism, and a period of relative peace. During that time, we experienced a few steep economic downturns, but they were all brief.
Fundamentals underlying this long expansion remain mostly intact. Further, our current market correction may not extend too deeply into the core economy, at least not yet. So far, we’ve seen none of the secondary shocks (like the collapse of Lehman Brothers) that convert a “correction” into a “crash.” However, as this band of nitwits continues to exercise power, the more pointless damage we’ll incur. Every system has its limits. We are exploring ours.