There’s a big demand for government debt, but it comes from the government, not the private sector. Over the last seven years, the Federal Reserve, as a result of the aforementioned “money printing,” has accumulated around $2.5 trillion in U.S. Treasurys. Low rates and the weak dollar, a result of the Fed’s policies, have caused further demand for Treasurys from foreign central banks due to their efforts to peg their currencies to the dollar and induce export-oriented growth. The Fed’s price controls on interest rates, setting them below the market rate, also cause excessive demand for debt, generally.
Furthermore, much of the demand for government debt found in the private sector is due to government regulations, like the new “liquidity coverage ratio” (LCR) rules, which you can be very sure Weissmann and Yglesias know nothing about. Weissmann and Yglesias would probably instantly love these rules, but this is the same type of regulation—where government, not business, determines what is “risky” and what is not—that induced U.S. financial institutions to hold lots of “AAA rated” MBS (mortgage backed securities) before the housing bust.
Next, let’s deal with the fallacy—even widely held on Wall Street even—that increased government spending causes sustainable growth. Increasing federal spending as a share of GDP actually cannibalizes the finite amount of resources within the American economy at the expense of the private sector, where those resources would be used to boost wages and living standards.
The prime example is after World War II, where federal spending fell from around 45 percent of GDP, to under 10 percent, almost overnight. Keynesians predicted another Great Depression. Rather, a very short recession was followed by economic boom, as resources were reallocated to their most productive uses that best aligned with consumer preferences.
Keynesians like to peddle the fiction the war-driven large boost in spending finally moved us out of depression. Actually, it was a large boost in private savings that led us out of the depression, as combined household and business debt dropped from 150 percent of GDP on the eve of war to 60 percent of GDP by the time the war ended. Keep in mind, the recovery didn’t take off until after government spending was downsized. During this recovery, heavy war-time taxes were largely kept in place, and the U.S. federal budget deficit turned into a surplus until the Korean War.
This post was edited by WM BARR . =ABSOLUTE TRASH at August 15, 2019 4:58 PM MDT
By the time Trump assumes office, we'll be 91 months in, and there will be another 48 to go before his first term is over. No post-war expansion has lasted longer than 120 months. It seems unlikely the current one will last 139.
Politics aside, the U.S. is overdue for a recession.
Uncertainty plus miserable growth equals risk. Trump's win wasn't even official yet and it had begun a series of economic shocks across the world. As the last votes trickled in, Asian stocks fell, the peso dropped 8 percent and Dow Jones futures briefly lost as much as 700 points, though the Dow's losses were soon erased.
Bankrate.com's chief financial analyst, Greg McBride, still believes Trump's victory could send reverberations through the stock market.
"The markets hate uncertainty and a Trump win means a whole lot more uncertainty," McBride says. "I still think we'll see the market pull back 10 percent, which is more than Brexit."
But uncertainty over what kind of a president Trump will be doesn't simply mean higher volatility over the next couple of months. It can actually lead to serious economic hardship.
Protectionism. Beyond the specters of uncertainty and timing, there are some very real, glaring issues with the policies that Trump said he would champion as president. Protectionism in particular is arguably the policy that could most easily lead Trump to directly cause a recession.
Trump has repeatedly threatened to start trade wars with overseas partners – most notably China – by assigning large tariffs to foreign-made goods, which he sees as taking away American jobs.
"Forcing manufacturing jobs back to the U.S. will raise the production cost. While it may provide jobs temporarily, the rest of the country will have to subsidize the new job creations by paying higher prices. The rest of the world will not buy the U.S. products due to the higher prices," says K C Ma, professor of finance at Stetson University. "Therefore, protectionism is not sustainable."
In the case of a trade war, American-made products would not only be more expensive due to higher labor costs, but because foreign trade partners would likely impose tariffs on American exports in response, making them more expensive.
The Smoot-Hawley Tariff Act of 1930 is often credited with both contributing to and exacerbating the Great Depression, something most Americans would rather read about than experience.
The elimination of the estate tax would contribute to a long-term deficit. Trump could also help cause a recession by repealing the estate tax, which currently is assessed upon death at a 40 percent rate on estates worth more than $5.45 million.
Trump's policy would replace that with a far smaller revenue stream for the government: capital gains tax on estates more than $10 million – and only when those assets are sold, not upon death.
Aaron Klein, an economics fellow at The Brookings Institution, is worried about this proposal. "In the long-run, deficits do matter," Klein says.
"I'm very concerned about a radical, deficit-financed tax cut that will exacerbate income inequality, create a massive transfer of wealth to elites and fail to stimulate real economic growth," he says. "Repealing the estate tax would be quite a windfall for wealthy families, paid for by my children. And my children's children. I'm very worried about that."
Repealing Dodd-Frank simply re-creates the incentives for large banks to lend to the under-qualified in pursuit of a quick buck. And if their house of cards comes falling down at some point, who cares? The government will bail them out.
That's not the lesson you'd hope the financial crisis would teach our next president.
At the end of the day, any one of these five factors in isolation poses a real chance of bringing on the next recession. The fact that all five exist at once is fairly damning for Trump – and the country – in the next four years.
There's nothing that can be done about the timing issue. The last two presidents both experienced recessions during their first year in office.
But the other four issues are all Trump-specific. If he's not careful, his quest to "make America great again" could take something pretty good – 80 consecutive months of private sector job growth – and turn it into a problem that actually needs fixing.
my2cents 